<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
-----------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
GLOBAL FIXED INCOME PORTFOLIO
MUNICIPAL BOND PORTFOLIO
MORTGAGE-BACKED SECURITIES PORTFOLIO
HIGH YIELD PORTFOLIO
MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-seven portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and the Class B
shares of the Fixed Income, Global Fixed Income, Municipal Bond, Mortgage-Backed
Securities and High Yield Portfolios (the "Non-Money Portfolios") and to the
Class A shares of the Money Market and Municipal Money Market Portfolios (the
"Money Portfolios") (collectively, the "Portfolios"). On January 2, 1996, the
Non-Money Portfolios began offering two classes of shares, the Class A shares
and the Class B shares. All shares of the Portfolios owned prior to January 2,
1996 were redesignated Class A shares on January 2, 1996. The Class A and Class
B shares currently offered by the Non-Money Portfolios have different minimum
investment requirements and fund expenses. Shares of the portfolios are offered
with no sales charge or exchange or redemption fee (with the exception of one of
the portfolios).
THE HIGH YIELD PORTFOLIO INVESTS PREDOMINANTLY IN LOWER RATED BONDS,
COMMONLY REFERRED TO AS "JUNK BONDS." BONDS OF THIS TYPE ARE CONSIDERED TO BE
SPECULATIVE WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL.
INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THIS PORTFOLIO. SEE "RISK FACTORS RELATING TO INVESTING IN HIGH YIELD
SECURITIES."
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.
INVESTORS SHOULD NOTE THAT THE GLOBAL FIXED INCOME PORTFOLIO MAY INVEST UP
TO 10% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES. INVESTMENTS IN RESTRICTED
SECURITIES IN EXCESS OF 5% OF A PORTFOLIO'S TOTAL ASSETS MAY BE CONSIDERED A
SPECULATIVE ACTIVITY, MAY INVOLVE GREATER RISK AND MAY INCREASE THE PORTFOLIO'S
EXPENSES.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator, (the "Adviser" and the
"Administrator") and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, China Growth, Emerging Markets,
European Equity, Global Equity, Gold, International Equity, International Small
Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity, U.S.
Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME --
Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income,
Global Fixed Income, High Yield, Mortgage-Backed Securities and Municipal Bond
Portfolios; and (v) MONEY MARKET -- Money Market and Municipal Money Market
Portfolios. Additional information about the Fund is contained in a "Statement
of Additional Information" dated January 2, 1996, which is incorporated herein
by reference. The Statement of Additional Information and the prospectuses
pertaining to the other portfolios of the Fund are available upon request and
without charge by writing or calling the Fund at the address and telephone
number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY 2, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Portfolios indicated below will incur:
<TABLE>
<CAPTION>
GLOBAL MORTGAGE-
FIXED FIXED MUNICIPAL BACKED MUNICIPAL
SHAREHOLDER TRANSACTION INCOME INCOME BOND SECURITIES HIGH YIELD MONEY MARKET MONEY MARKET
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------- ------------- ------------- ------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Load
Imposed on Purchases
Class A................ None None None None None None None
Class B................ None None None None None N/A N/A
Maximum Sales Load
Imposed on Reinvested
Dividends
Class A................ None None None None None None None
Class B................ None None None None None N/A N/A
Deferred Sales Load
Class A................ None None None None None None None
Class B................ None None None None None N/A N/A
Redemption Fees
Class A................ None None None None None None None
Class B................ None None None None None N/A N/A
Exchange Fees
Class A................ None None None None None None None
Class B................ None None None None None None None
<CAPTION>
GLOBAL MORTGAGE-
FIXED FIXED MUNICIPAL BACKED MUNICIPAL
ANNUAL FUND OPERATING INCOME INCOME BOND SECURITIES HIGH YIELD MONEY MARKET MONEY MARKET
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------- ------------- ------------- ------------- ------------- ------------ ------------ -------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fee (Net of Fee Waivers)***
Class A................ 0.20% 0.15% 0.04% 0.20% 0.38% 0.30%* 0.30%*
Class B................ 0.20% 0.15% 0.04% 0.20% 0.38% N/A N/A
12b-1 Fees
Class A................ None None None None None None None
Class B................ 0.15%** 0.15%** 0.25% 0.25% 0.25% N/A N/A
Other Expenses
Class A................ 0.25% 0.35% 0.41% 0.25% 0.37% 0.19% 0.22%
Class B................ 0.25% 0.35% 0.41% 0.25% 0.37% N/A N/A
Total Operating Expenses
(Net of Fee
Waivers)***
Class A................ 0.45% 0.50% 0.45% 0.45% 0.75% 0.49%* 0.52%*
Class B................ 0.60% 0.65% 0.70% 0.70% 1.00% N/A N/A
</TABLE>
- ------------------
* No fee waiver or expense reimbursement is in effect for this Portfolio.
** The Distributor has agreed to waive 0.10% of the 0.25% distribution fee it
is entitled to receive from this Portfolio.
*** The Adviser has agreed to waive its management fees and/or reimburse each
Portfolio, if necessary, if such fees would cause any of the total annual
operating expenses of the Portfolios to exceed a specified percentage of
their respective average daily net assets. Set forth
2
<PAGE>
below, for each Portfolio as applicable, are the management fees and total
operating expenses absent such fee waivers and/or expense reimbursements as
a percent of average daily net assets of the Class A shares of the
Portfolios and Class B shares of the Non-Money Portfolios, respectively.
<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT FEES ----------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- ------------------------------------------------------------------- --------------------- -------------- ------------
<S> <C> <C> <C>
Fixed Income....................................................... 0.35% 0.60% 0.75%
Global Fixed Income................................................ 0.40% 0.75% 0.90%
Municipal Bond..................................................... 0.35% 0.76% 1.01%
Mortgage-Backed Securities......................................... 0.35% 0.60%+ 0.85%+
High Yield......................................................... 0.50% 0.87% 1.12%
Money Market....................................................... 0.30% 0.49%++ N/A
Municipal Money Market............................................. 0.30% 0.52%++ N/A
</TABLE>
- ----------------
+Estimated.
++No fee waiver or expense reimbursement is in effect for this Portfolio.
These reductions became or will become effective as of the inception of each
Portfolio. As a result of these reductions, the Investment Advisory Fees stated
above are lower than the contractual fees stated under "Management of the Fund."
For further information on Fund expenses see "Management of the Fund."
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Fund will bear directly or
indirectly. The Class A fees and expenses for the Money Market and Municipal
Money Market Portfolios are based on actual figures for the fiscal year ended
December 31, 1994. The Class A fees and expenses for the Municipal Bond
Portfolio are estimated using actual figures for the period ended June 30, 1995.
The Class A fees and expenses for each of the other Portfolios have been
restated to reflect current fees. The Class A fees and expenses for the
Mortgage-Backed Securities Portfolio are based on estimates and assume that the
average daily net assets of the Class A shares of the Mortgage-Backed Securities
Portfolio will be $50,000,000. The Class B fees and expenses of each Non-Money
Portfolio are based on estimates, assuming that the average daily net assets of
the Class B shares of each Non-Money Portfolio will be $50,000,000. "Other
Expenses" include Board of Directors' fees and expenses, amortization of
organizational costs, professional fees, filing fees, and costs for shareholders
reports. Due to the continuous nature of Rule 12b-1 fees, long term Class B
shareholders may pay more than the equivalent of the maximum front-end sales
charges otherwise permitted by the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD").
3
<PAGE>
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The following example is based on total
operating expenses of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fixed Income Portfolio
Class A........................................................ $ 5 $ 14 $ 25 $ 57
Class B........................................................ $ 6 $ 19 $ 33 $ 75
Global Fixed Income
Class A........................................................ $ 5 $ 16 $ 28 $ 63
Class B........................................................ $ 7 $ 21 $ 36 $ 81
Municipal Bond Portfolio
Class A........................................................ $ 5 $ 14 * *
Class B........................................................ $ 7 $ 22 $ * $ *
Mortgage-Backed Securities Portfolio
Class A........................................................ $ 5 $ 14 * *
Class B........................................................ $ 7 $ 22 $ * $ *
High Yield Portfolio
Class A........................................................ $ 8 $ 24 $ 42 $ 93
Class B........................................................ $ 10 $ 32 $ 55 $ 122
Money Market Portfolio
Class A........................................................ $ 5 $ 16 $ 27 $ 62
Municipal Money Market Portfolio
Class A........................................................ $ 5 $ 16 $ 29 $ 64
</TABLE>
- ----------------
*Because the Municipal Bond and Mortgage-Backed Securities Portfolios were not
operational as of the Fund's fiscal year end, the Fund has not projected
expenses beyond the three-year period shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Fund intends to continue to comply with all state laws that restrict
investment company expenses. Currently, the most restrictive state law requires
that the aggregate annual expenses of an investment company shall not exceed two
and one-half percent (2 1/2%) of the first $30 million of average net assets,
two percent (2%) of the next $70 million of average net assets, and one and
one-half percent (1 1/2%) of the remaining net assets of such investment
company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse any Portfolio, if necessary, if in any fiscal year the sum of the
Portfolio's expenses exceeds the limit set by applicable state law.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A shares of
the Fixed Income, Global Fixed Income, Municipal Bond, High Yield, Money Market
and Municipal Money Market Portfolios for each of the periods presented. The new
Class B shares of the Non-Money Portfolios were not offered prior to the date of
this Prospectus. The audited financial highlights for the Class A shares for the
fiscal year ended December 31, 1994 and the unaudited financial highlights for
the Class A shares for the six months ended June 30, 1995 are part of the Fund's
financial statements which appear in the Fund's December 31, 1994 Annual Report
to Shareholders and June 30, 1995 Semi-Annual Report to Shareholders,
respectively, and which are included in the Fund's Statement of Additional
Information. The Portfolios' financial highlights for each of the periods
presented, except for the six months ended June 30, 1995, have been audited by
Price Waterhouse LLP, whose unqualified report thereon is also included in the
Statement of Additional Information. Additional performance information for the
Class A shares of the Fixed Income, Global Fixed Income, High Yield, Money
Market and Municipal Money Market Portfolios is included in the Annual Report.
The Annual Report, Semi-Annual Report and the financial statements therein,
along with the Statement of Additional Information, are available at no cost
from the Fund at the address and telephone number noted on the cover page of
this Prospectus. The Mortgage-Backed Securities Portfolio was not operational as
of June 30, 1995. Subsequent to October 31, 1992 (the Fund's prior fiscal year
end), the Fund changed its fiscal year end to December 31. The following
information should be read in conjunction with the financial statements and
notes thereto.
5
<PAGE>
FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
SIX MONTHS
TWO MONTHS ENDED
MAY 15, 1991 YEAR ENDED ENDED YEAR ENDED YEAR ENDED JUNE 30,
TO OCTOBER OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995
31, 1991 1992 1992 1993 1994 (UNAUDITED)
------------- ------------- ------------- ------------- ------------- -------------
<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 0.36
Net Realized and Unrealized Gain/
(Loss) on Investments............ 0.49 0.39 0.01 0.41 (0.92) 0.71
------------- ------------- ------------- ------------- ------------- -------------
Total from Investment
Operations....................... 0.71 1.08 0.11 0.95 (0.33) 1.07
------------- ------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income............. (0.16) (0.69) (0.10) (0.56) (0.53) (0.35)
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) (0.35)
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD...... $ 10.55 $ 10.92 $ 10.93 $ 11.05 $ 9.82 $ 10.54
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
TOTAL RETURN........................ 7.12% 10.61% 1.02% 9.07% (3.10)% 11.14%
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)...................... $72,326 $146,546 $154,210 $240,668 $209,331 $166,018
Ratio of Expenses to Average Net
Assets (1)(2).................... 0.45%** 0.45% 0.45%** 0.45% 0.45% 0.45%**
Ratio of Net Investment Income to
Average Net Assets (1)(2)........ 7.29%** 6.59% 5.56%** 4.97% 5.73% 7.00%
Portfolio Turnover Rate........... 48% 105% 15% 240% 388% 109%
- ---------------------
(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% 0.60%**
Net Investment Income to Average
Net Assets.................... 6.93%** 6.45% 5.26%** 4.82% 5.60% 6.85%
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.35% of the
average daily net assets of the Fixed Income Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 0.45% of the average daily net assets of the Class A shares and 0.70%
of the average daily net assets of the Class B shares. In the period ended
October 31, 1991, the year ended October 31, 1992, the two month period
ended December 31, 1992, the years ended December 31, 1993 and 1994, and the
six months ended June 30, 1995, the Adviser waived management fees and/or
reimbursed expenses totalling $69,000, $165,000, $74,000, $307,000, $276,000
and $142,000, respectively, for the Fixed Income Portfolio.
* Commencement of Operations.
** Annualized.
6
<PAGE>
GLOBAL FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
TWO MONTHS
MAY 1, 1991* YEAR ENDED ENDED YEAR ENDED YEAR ENDED
TO OCTOBER OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
31, 1991 1992 1992 1993 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 10.00 $ 10.61 $ 11.41 $ 11.26 $ 11.68
------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)............. 0.16 0.53 0.14 0.69 0.70
Net Realized and Unrealized Gain
(Loss) on Investments................ 0.45 0.55 (0.29) 0.90 (1.38)
------------- ------------- ------------- ------------- -------------
Total from Investment Operations........ 0.61 1.08 (0.15) 1.59 (0.68)
------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income................. -- (0.27) -- (0.79) (0.40)
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)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD.......... $ 10.61 $ 11.41 $ 11.26 $ 11.68 $ 10.29
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
TOTAL RETURN............................ 6.10% 10.29% (1.31)% 15.34% (6.08)%
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)... $28,236 $94,847 $92,897 $172,468 $130,675
Ratio of Expenses to Average Net Assets
(1)(2)................................. 0.50%** 0.50% 0.50%** 0.50% 0.50%
Ratio of Net Investment Income to
Average Net Assets (1)(2).............. 7.24%** 6.92% 6.99%** 5.99% 6.34%
Portfolio Turnover Rate................. 20% 144% 9% 108% 171%
- ---------------------
(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
Ratios before expense limitation:
Expenses to Average Net Assets...... 1.62%** 0.86% 0.90%** 0.70% 0.66%
Net Investment Income to
Average Net Assets............... 6.12%** 6.56% 6.59%** 5.79% 6.18%
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1995
(UNAUDITED)
-------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 10.29
-------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)............. 0.39
Net Realized and Unrealized Gain
(Loss) on Investments................ 0.87
-------------
Total from Investment Operations........ 1.26
-------------
DISTRIBUTIONS
Net Investment Income................. (0.40)
In Excess of Net Investment Income.... --
Net Realized Gain..................... --
-------------
Total Distributions..................... (0.40)
-------------
NET ASSET VALUE, END OF PERIOD.......... $ 11.15
-------------
-------------
TOTAL RETURN............................ 12.55%
-------------
-------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)... $88,866
Ratio of Expenses to Average Net Assets
(1)(2)................................. 0.50%**
Ratio of Net Investment Income to
Average Net Assets (1)(2).............. 7.27%**
Portfolio Turnover Rate................. 97%
- ---------------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income.............. $ 0.01
Ratios before expense limitation:
Expenses to Average Net
Assets......................... 0.75%**
Net Investment Income to
Average Net Assets............... 7.03%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.40% of the
average daily net assets of the Global Fixed Income Portfolio. The Adviser
has agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 0.50% of the average daily net assets of the Class A shares and 0.75%
of the average daily net assets of the Class B shares. In the fiscal period
ended October 31, 1991, the year ended October 31, 1992, the two months
ended December 31, 1992, the years ended December 31, 1993 and 1994, and the
six months ended June 30, 1995, the Adviser waived management fees and/or
reimbursed expenses totalling $67,000, $201,000, $64,000, $260,000 $238,000
and $115,000, respectively, for the Global Fixed Income Portfolio.
* Commencement of Operations.
** Annualized.
7
<PAGE>
MUNICIPAL BOND PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 18, 1995
TO JUNE 30, 1995
-------------------------------
(UNAUDITED)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................................................. $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)(2)....................................................... 0.21
Net Realized and Unrealized Gain on Investments.................................... 0.21
------
Total from Investment Operations................................................... 0.42
------
DISTRIBUTIONS
Net Investment Income.............................................................. (0.16)
------
NET ASSET VALUE, END OF PERIOD....................................................... $ 10.26
------
------
TOTAL RETURN......................................................................... 4.22%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands).............................................. $43,830
Ratio of Expenses to Average Net Assets (1)(2)..................................... 0.45%**
Ratio of Net Investment Income to Average Net Assets (1)(2)........................ 4.55%**
Portfolio Turnover Rate............................................................ 124%
- ---------------------
</TABLE>
<TABLE>
<S> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income....................................... $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets................................................... 0.76%**
Net Investment Income to Average Net Assets...................................... 4.24%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.35% of the
average daily net assets of the Municipal Bond Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 0.45% of the average daily net assets of the Class A shares and 0.70%
of the average daily net assets of the Class B shares. In the period ended
June 30, 1995, the Adviser waived management and/or reimbursed expenses
totalling $62,000 for the Municipal Bond Portfolio.
* Commencement of Operations.
** Annualized.
8
<PAGE>
HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 28, SIX MONTHS
1992 TWO MONTHS ENDED
TO OCTOBER ENDED YEAR ENDED YEAR ENDED JUNE 30,
31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995
1992 1992 1993 1994 (UNAUDITED)
------------- ------------- ------------- ------------- -------------
<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 0.57
Net Realized and Unrealized Gain/
(Loss) on Investments............ (0.31) 0.19 1.21 (1.40) 0.76
------------- ------------- ------------- ------------- -------------
Total from Investment
Operations....................... (0.23) 0.33 2.11 (0.43) 1.33
------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income............. -- (0.15) (0.90) (0.97) (0.58)
Net Realized Gain................. -- -- -- (0.21) --
------------- ------------- ------------- ------------- -------------
Total Distributions............... -- (0.15) (0.90) (1.18) (0.58)
NET ASSET VALUE, END OF PERIOD...... $ 9.77 $ 9.95 $ 11.16 $ 9.55 $ 10.30
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
TOTAL RETURN........................ (2.30)% 3.41% 22.11% (4.18)% 14.43%
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)...................... $16,950 $20,194 $74,500 $97,223 $63,281
Ratio of Expenses to Average Net
Assets (1)(2).................... 0.75%** 0.75%** 0.75% 0.75% 0.75%**
Ratio of Net Investment Income to
Average Net Assets (1)(2)........ 9.89%** 8.96%** 8.70% 9.42% 11.33%**
Portfolio Turnover Rate........... 9% 24% 104% 74% 40%
- ---------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
(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% 0.87%**
Net Investment Income to Average
Net Assets.............................. 9.41%** 8.09%** 8.49% 9.41% 11.21%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.50% of the
average daily net assets of the High Yield Portfolio. The Adviser has agreed
to waive a portion of this fee and/or reimburse expenses of the Portfolio to
the extent that the total operating expenses of the Portfolio exceed 0.75%
of the average daily net assets of the Class A shares and 1.00% of the
average daily net assets of the Class B shares. In the period ended October
31, 1992, the two months ended December 31, 1992, and the years ended
December 31, 1993 and 1994, and the six months ended June 30, 1995, the
Adviser waived management fees and/or reimbursed expenses totalling $22,000,
$27,000, $82,000, $7,000 and $44,000, respectively, for the High Yield
Portfolio.
* Commencement of Operations.
** Annualized.
9
<PAGE>
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
NOVEMBER 15, TWO MONTHS
1988* TO YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1989 1990 1991 1992 1992 1993 1994
------------- ------------ ------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------- ------------ ------------ ------------ ------------- ------------- -------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)................... 0.085 0.079 0.062 0.039 0.005(1) 0.027(1) 0.040
------------- ------------ ------------ ------------ ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income.. (0.085) (0.079) (0.062) (0.039) (0.005) (0.027) (0.040)
In Excess of Net
Investment Income..... -- -- -- -- -- (0.000) --
------------- ------------ ------------ ------------ ------------- ------------- -------------
Total Distributions.... (0.085) (0.079) (0.062) (0.039) (0.005) (0.027) (0.040)
------------- ------------ ------------ ------------ ------------- ------------- -------------
NET ASSET VALUE, END OF
PERIOD.................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------- ------------ ------------ ------------ ------------- ------------- -------------
------------- ------------ ------------ ------------ ------------- ------------- -------------
TOTAL RETURN............. 8.81% 8.16% 6.37% 3.77% 0.50% 2.76% 3.84%
------------- ------------ ------------ ------------ ------------- ------------- -------------
------------- ------------ ------------ ------------ ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands)............. $ 158,582 $516,182 $607,087 $612,968 $ 599,172 $ 657,163 $ 690,503
Ratio of Expenses to
Average Net Assets
(1)(2).................. 0.55%** 0.55% 0.53% 0.52% 0.55%** 0.53% 0.49%
Ratio of Net Investment
Income to Average Net
Assets (1)(2)........... 8.80%** 7.87% 6.11% 3.74% 3.11%** 2.71% 3.77%
Portfolio Turnover
Rate.................... N/A N/A N/A N/A N/A N/A N/A
- ------------------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit
to net investment
income.............. $ 0.001 $ 0.000 N/A N/A $ 0.000 $ 0.000 N/A
Ratios before expense limitation:
Expenses to
Average Net Assets.. 0.64%** 0.58% N/A N/A 0.59%** 0.54% N/A
Net Investment
Income to
Average Net
Assets.............. 8.71%** 7.85% N/A N/A 3.07%** 2.70% N/A
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1995
(UNAUDITED)
-------------
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 1.000
-------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)................... 0.030
-------------
DISTRIBUTIONS
Net Investment Income.. (0.030)
In Excess of Net
Investment Income..... --
-------------
Total Distributions.... (0.030)
-------------
NET ASSET VALUE, END OF
PERIOD.................. $ 1.000
-------------
-------------
TOTAL RETURN............. 2.75%
-------------
-------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands)............. $ 826,990
Ratio of Expenses to
Average Net Assets
(1)(2).................. 0.49%**
Ratio of Net Investment
Income to Average Net
Assets (1)(2)........... 5.49%**
Portfolio Turnover
Rate.................... N/A
- ------------------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit
to net investment
income..............
N/A
Ratios before expense limitation:
Expenses to
Average Net Assets.. N/A
Net Investment
Income to
Average Net
Assets.............. N/A
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.30% of the
average daily net assets of the Money Market Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 0.55% of the average daily net assets of the Class A shares and 0.80%
of the average daily net assets of the Class B shares. The Adviser did not
waive fees or reimburse expenses for the years ended October 31, 1991,
October 31, 1992 and December 31, 1994 and the six months ended June 30,
1995. In the period ended October 31, 1989, the year ended October 31, 1990,
the two months ended December 31, 1992 and the year ended December 31, 1993,
the Adviser waived management fees and/or reimbursed expenses totalling
approximately $110,000, $75,000, $37,000 and $18,000, respectively, for the
Money Market Portfolio.
* Commencement of Operations.
** Annualized.
10
<PAGE>
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FEBRUARY 10, TWO MONTHS
1989* TO YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1989 1990 1991 1992 1992 1993 1994
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------- ------------- ------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1).................. 0.046 0.054 0.043 0.026 0.004 0.019 0.020
------------- ------------- ------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment
Income............... 0.046 (0.054) (0.043) (0.026) (0.004) (0.019) (0.020)
In Excess of Net
Investment Income.... -- -- -- -- -- (0.000) --
------------- ------------- ------------- ------------- ------------- ------------- -------------
Total Distributions... (0.046) (0.054) (0.043) (0.026) (0.004) (0.019) (0.020)
------------- ------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF
PERIOD................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------- ------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- ------------- -------------
TOTAL RETURN............ 4.6% 5.51% 4.35% 2.74% 0.37% 1.91% 2.44%
------------- ------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands)..... $ 38,540 $ 102,195 $ 166,953 $ 206,691 $ 208,866 $ 266,524 $ 359,444
Ratio of Expenses to
Average Net Assets
(1)(2)................. 0.32%** 0.51% 0.56% 0.55% 0.57%** 0.54% 0.51%
Ratio of Net Investment
Income to Average Net
Assets (1)(2).......... 6.05%** 5.38% 4.18% 2.66% 2.31%** 1.89% 2.42%
Portfolio Turnover
Rate................... N/A N/A N/A N/A N/A N/A N/A
- ------------------------
(1) Effect of voluntary expense limitation during the period:
- ------------------------
Per share benefit
to net investment
income............ $ 0.002 $ 0.001 N/A N/A $ 0.000 $ 0.000 N/A
- ------------------------
Ratios before expense limitation:
- ------------------------
Expenses to
Average
Net Assets........ 0.74%** 0.63% N/A N/A 0.67%** 0.56% N/A
Net Investment
Income to
Average Net
Assets............. 5.63%** 5.26% N/A N/A 2.21%** 1.87% N/A
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1995
(UNAUDITED)
-------------
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $ 1.000
-------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1).................. 0.020
-------------
DISTRIBUTIONS
Net Investment
Income............... (0.020)
In Excess of Net
Investment Income.... --
-------------
Total Distributions... (0.020)
-------------
NET ASSET VALUE, END OF
PERIOD................. $ 1.000
-------------
-------------
TOTAL RETURN............ 1.72%
-------------
-------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands)..... $ 354,548
Ratio of Expenses to
Average Net Assets
(1)(2)................. 0.52%**
Ratio of Net Investment
Income to Average Net
Assets (1)(2).......... 3.43%**
Portfolio Turnover
Rate................... N/A
- ------------------------
(1) Effect of voluntary expense limitation during the period:
- ------------------------
Per share benefit
to net investment
income............ N/A
- ------------------------
Ratios before expense limitation:
- ------------------------
Expenses to
Average
Net Assets........ N/A
Net Investment
Income to
Average Net
Assets............. N/A
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.30% of the
average daily net assets of the Municipal Money Market Portfolio. The
Adviser has agreed to waive a portion of this fee and/or reimburse expenses
of the Portfolio to the extent that the total operating expenses of the
Portfolio exceed 0.57% of the average daily net assets of the Class A shares
and 0.82% of the average daily net assets of the Class B shares. The Adviser
did not waive fees or reimburse expenses for the years ended October 31,
1991, October 31, 1992 and December 31, 1994 and the six months ended June
30, 1995. In the period ended October 31, 1989, the year ended October 31,
1990, the two months ended December 31, 1992 and the year ended December 31,
1993, the Adviser waived management fees and/or reimbursed expenses
totalling approximately $75,000, $92,000, $36,000 and $46,000, respectively,
for the Municipal Money Market Portfolio.
* Commencement of Operations.
** Annualized.
11
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-seven portfolios, offering institutional and
high net worth individual investors a broad range of investment choices coupled
with the advantages of a no-load mutual fund with Morgan Stanley and its
affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except the International
Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class
B shares. Each portfolio has its own investment objective and policies designed
to meet its specific goals. The investment objective of each Portfolio described
in this Prospectus is as follows:
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
-The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and telephone number noted on the
cover page of this Prospectus. The objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in the equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
12
<PAGE>
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $500 million.
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and debt
securities issued or guaranteed by Latin American governments or
governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of medium and
large capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
-The U.S. REAL ESTATE 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 VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high current income, and
secondarily, capital appreciation, by investing primarily in debt
securities of government, government-related and corporate issuers located
in emerging countries.
13
<PAGE>
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at September 30, 1995 had approximately $55.2 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares, offered
only by the Non-Money Portfolios, are offered at net asset value with no sales
commission, but with a 12b-1 fee, which is accrued daily and paid quarterly,
equal to 0.25% of the Class B shares' average daily net assets on an annualized
basis. While each Money Portfolio expects to maintain a net asset value per
share of $1.00, there can be no assurance that either Money Portfolio can
maintain such net asset value per share. Share purchases may be made by sending
investments directly to the Fund or through the Distributor. Shares in a
Portfolio account opened prior to January 2, 1996 were designated Class A shares
on January 2, 1996. For a Non-Money Portfolio account opened on or after January
2, 1996 (a "New Non-Money Account"), the minimum initial investment is $500,000
for Class A shares and $100,000 for Class B shares. The minimum initial
investment for each Money Portfolio is $50,000. Certain exceptions to the
foregoing minimums apply to (1) shares in a Non-Money Portfolio account opened
prior to January 2, 1996 (each, a "Pre-1996 Non-Money Account") with a value of
$100,000 or more on March 1, 1996 (a "Grandfathered Class A Account"); (2)
Portfolio accounts held by officers of the Adviser and its affiliates; and (3)
certain advisory or asset allocation accounts, such as Total Funds Management
accounts, managed by Morgan Stanley or its affiliates, including the Adviser
("Managed Accounts"). The Adviser reserves the right in its sole discretion to
determine which of such advisory or asset allocation accounts shall be Managed
Accounts. For information regarding Managed Accounts please contact your Morgan
Stanley account representative or the Fund at the telephone number provided on
the cover of this Prospectus. Shares in a Pre-1996 Non-Money Account with a
value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account")
convert to Class B shares on March 1, 1996. See "Purchase of Shares -- Minimum
Investment and Account Sizes; Conversion from Class A to Class B Shares."
The minimum subsequent investment for each Portfolio account is $1,000
(except for automatic reinvestment of dividends and capital gains distributions
for which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
HOW TO REDEEM
Class A shares or Class B shares of the Portfolios may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions may cause
involuntary redemption or automatic conversion. Class A or Class B shares held
in New Non-Money Accounts are subject to involuntary redemption if shareholder
redemption(s) of such shares reduces the value of such account to less than
$100,000 for a continuous 60-day period. Involuntary redemption does not apply
to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B
Accounts, regardless of the value of such accounts. Class A shares in a New
Non-Money Account will convert to Class B shares if shareholder redemption(s) of
such shares reduces the value of such account to less than $500,000 for a
continuous 60-day period. Class B shares in a
14
<PAGE>
New Non-Money Account will convert to Class A shares if shareholder purchases of
additional Class B shares or market activity cause the value of the Class B
shares in the New Non-Money Account to increase to $500,000 or more. If a
shareholder reduces its total investment in Class A shares of a Money Portfolio
to less than $10,000, the investment may be subject to redemption. See "Purchase
of Shares -- Minimum Account Sizes and Involuntary Redemption of Shares" and
"Redemption of Shares."
RISK FACTORS
The investment policies of each of the Portfolios entail certain risks and
considerations of which an investor should be aware. The Fixed Income, Global
Fixed Income, High Yield, Real Yield and Money Market Portfolios may invest in
securities of foreign issuers, which are subject to certain risks not typically
associated with U.S. securities. In addition, the High Yield Portfolio may
invest in lower rated and unrated securities which are subject to risk factors.
In particular: (1) adverse economic and corporate changes and changes in
interest rates may have a greater impact on issuers of such securities and may
lead to greater price volatility, and (2) such securities may be more difficult
to value accurately or sell in the secondary market. See "Investment Objectives
and Policies" and "Additional Investment Information." In addition, each
Portfolio may invest in repurchase agreements, lend its portfolio securities and
purchase securities on a when-issued or delayed delivery basis. The Money Market
Portfolio may invest in reverse repurchase agreements. Each Portfolio, except
the Global Fixed Income Portfolio, may invest in futures contracts and options
on futures contracts. The Fixed Income, Global Fixed Income and High Yield
Portfolios may invest in forward foreign currency exchange contracts to hedge
currency risks associated with investment in non-U.S. dollar denominated
securities. The Municipal Money Market Portfolio may invest in "puts" on
municipal bonds or notes and the Municipal Bond and Municipal Money Market
Portfolios may invest up to 20% of such Portfolios' total assets in taxable
securities. Each of these investment strategies involves specific risks which
are described under "Investment Objectives and Policies" and "Additional
Investment Information" herein and under "Investment Objectives and Policies" in
the Statement of Additional Information.
15
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies the Fund employs in its efforts to achieve these objectives. Each
Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolio will attain its objectives.
The investment policies described below are not fundamental policies unless
otherwise noted and may be changed without shareholder approval.
THE FIXED INCOME PORTFOLIO
The Portfolio seeks to produce a high total return consistent with the
preservation of capital by investing 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,
such as certificates of deposit and short-term money market instruments. Short-
and intermediate-term bonds form the core of the Portfolio, and long-term bonds
(i.e., those with maturities over ten years) are purchased on a short-term
opportunistic basis when the Adviser believes they will enhance return without
significantly increasing risk. The Adviser sets an annual target rate of return
for the Portfolio based on current and projected market and economic conditions
and manages the Portfolio conservatively -- primarily through gradual shifts in
maturities in attempting to achieve this target rate.
Emphasis in the Portfolio will be on U.S. Government and mortgage-backed
securities. Typically, between 50% and 75% of the Portfolio's total assets will
be invested in these securities. When corporate bonds are purchased, they will
generally be rated in the two highest rating categories by Moody's Investors
Service, Inc. ("Moody's") (Aaa or Aa) or Standard & Poor's Corporation ("S&P")
(AAA or AA). The Portfolio will not invest in a corporate security if at the
time of investment the security is not rated at least investment grade by either
rating agency. Although U.S. dollar-denominated securities will represent the
major portion of the Portfolio, up to 15% of the Portfolio may be invested in
foreign currency obligations of corporate and governmental issuers when the
Adviser feels that the currency component and underlying market characteristics
of such obligations will add value to the Portfolio.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE GLOBAL FIXED INCOME PORTFOLIO
The Global Fixed Income Portfolio seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities of
U.S. and foreign issuers denominated in U.S. dollars and in other currencies.
The Portfolio seeks to achieve its objectives by investing in U.S. government
securities, foreign government securities, securities of supranational entities,
Eurobonds, and corporate bonds with varying maturities denominated in various
currencies. In selecting portfolio securities, the Adviser evaluates the
currency, market, and individual features of the securities being considered for
investment. At least 65% of the total assets of the Portfolio will be invested
in fixed income securities under normal circumstances.
The Adviser seeks to minimize investment risk by investing only in high
quality debt securities. U.S. Government securities that the Portfolio may
invest in include obligations issued or guaranteed by the U.S. Government, such
as U.S. Treasury securities, as well as those backed by the full-faith and
credit of the U.S., such as obligations of the Government National Mortgage
Association and The Export-Import Bank. The Portfolio may also invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities where the Portfolio must look principally to the issuing or
guaranteeing agency for ultimate repayment. The Portfolio may
16
<PAGE>
invest in obligations issued or guaranteed by foreign governments and their
political subdivisions, authorities, agencies or instrumentalities, and by
supranational entities (such as the World Bank, The European Economic Community,
The Asian Development Bank and the European Coal and Steel Community).
Investment in foreign government securities will be limited to those of
developed nations which the Adviser believes to pose limited credit risk. These
countries currently include Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand,
Norway, Spain, Sweden, Switzerland, The United Kingdom and Germany. Corporate
and supranational obligations which the Portfolio will invest in will be limited
to those rated A or better by Moody's Investors Service, Inc., Standard & Poor's
Corporation or IBCA Ltd., or if unrated, to those that are of comparable quality
in the determination of the Board of Directors and the Adviser.
The Adviser's approach to multicurrency fixed-income management is strategic
and value-based and designed to produce an attractive real rate of return. The
Adviser's assessment of the bond markets and currencies is based on an analysis
of real interest rates. Current nominal yields of securities are adjusted for
inflation prevailing in each currency sector using an analysis of past and
projected inflation rates. The Portfolio's aim is to invest in bond markets
which offer the most attractive real returns relative to inflation.
The Portfolio will have a neutral investment position in medium-term
securities (I.E., those with a remaining maturity of between three and seven
years) and will respond to changing interest rate levels by shortening or
lengthening portfolio maturity through investment in longer or shorter term
instruments. For example, the Portfolio will respond to high levels of real
interest rates through a lengthening in portfolio maturity. Current and
historical yield spreads among the three main market segments -- the Government,
Foreign and Euro markets -- guide the Adviser's selection of markets and
particular securities within those markets. The analysis of currencies is made
independent of the analysis of markets. Value in foreign exchange is determined
by relative purchasing power parity of a given currency. The Portfolio seeks to
invest in currencies currently undervalued based on purchasing power parity. The
Adviser analyzes current account and capital account performance and real
interest rates to adjust for shorter-term currency flows.
The Portfolio seeks to maintain portfolio turnover at a low level. Although
the Portfolio's primary objective is not to invest for short-term trading, the
Portfolio will seek to take advantage of trading opportunities as they arise to
the extent that they are consistent with the Portfolio's objectives. It is
anticipated that the Portfolio's annual turnover rate will not exceed 100% in
normal circumstances, but the Portfolio's annual turnover rate may exceed 100%.
An annual turnover rate that exceeds 100% involves correspondingly greater
brokerage commissions or transaction costs which will be borne directly by the
Portfolio. In addition, high portfolio turnover may result in more capital gains
which would be taxable to the shareholders of the Portfolio.
The Portfolio will occasionally enter into forward currency exchange
contracts. These are used to hedge foreign currency exchange exposures when
required. See "Forward Currency Exchange Contracts" in this Prospectus and
"Investment Objectives and Policies -- Forward Currency Exchange Contracts" in
the Statement of Additional Information.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE MUNICIPAL BOND PORTFOLIO
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
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interest on which is exempt from federal income tax. "Municipal Obligations"
include notes, bonds and other securities issued by or on behalf of states,
territories and possessions of the U.S. and the District of Columbia, and their
political subdivisions, agencies and instrumentalities, the interest on such
Obligations, in the opinion of counsel for the issuer or the Portfolio, is
exempt from federal income tax. See the Statement of Additional Information for
a further description of Municipal Obligations.
The Portfolio will only invest in Municipal Obligations that are "investment
grade securities." Investment grade securities are (i) bonds rated within one of
the four highest rating categories of Moody's (Aaa, Aa, A or Baa) or S&P (AAA,
AA, A or BBB); (ii) notes rated within one of the two highest rating categories
of Moody's (MIG1 or MIG2) or one of the two highest rating categories of S&P
(SP-1 or SP-2); (iii) commercial paper rated P-1 or P-2 by Moody's or A-1 or A-2
by S&P; (iv) variable rate securities rated VMIG1 or VMIG2 by Moody's; and (iv)
unrated Municipal Obligations that the Adviser believes are of comparable
quality to securities in the foregoing rating categories. See the Statement of
Additional Information for a further description of these rating categories.
Bonds rated Baa by Moody's or BBB by S&P have speculative characteristics.
Under normal market conditions, the Portfolio will invest at least 80% of
its net assets in Municipal Obligations (or futures contracts or options on
futures relating thereto), which at the time of investment are "investment grade
securities." This policy is fundamental and may not be changed without the
approval of a majority of the Portfolio's outstanding voting securities. In
addition, under normal market conditions, at least 65% of the Portfolio's net
assets will be invested in such Municipal Obligations having an initial maturity
of more than one year.
Although there are no maturity restrictions on the Municipal Obligations in
which the Portfolio invests, it is currently anticipated that the average
maturity of the Portfolio will range between 7 and 20 years. The Adviser will
actively manage the Portfolio, and adjust the average maturity thereof
(including the use of futures contracts and options on futures), depending on
its assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates. During
periods of rising interest rates and declining prices, the average maturity of
the Portfolio may be shorter, while during periods of declining interest rates
and rising prices, the Portfolio may have a longer average maturity.
The Portfolio may also invest up to 20% of its net assets in cash, cash
equivalents, U.S. Government Securities and taxable corporate "investment grade
securities." U.S. Government Securities consist of direct obligations of the
U.S. Treasury and securities issued or guaranteed by agencies or
instrumentalities of the U.S. Government. Securities issued or guaranteed by
agencies or instrumentalities may be backed by the full faith and credit of the
United States (such as securities issued by the Government National Mortgage
Association), or supported by the issuing agency's right to borrow from the U.S.
Treasury (such as Federal Home Loan Banks), or backed only by the credit of the
issuing instrumentality (e.g., the Federal National Mortgage Association). In
addition, for temporary defensive purposes, the Portfolio may invest part or all
of its assets in cash or in short-term securities, including certificates of
deposit, commercial paper, U.S. Government Securities and repurchase agreements
involving such government securities. The Portfolio will not invest more than
20% of its net assets in Municipal Obligations the interest on which is subject
to alternative minimum tax.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
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THE MORTGAGE-BACKED SECURITIES PORTFOLIO
The Portfolio seeks to produce as high a level of current income as is
consistent with preservation of capital by investment primarily in
mortgage-backed securities either (i) issued or guaranteed by the U.S.
Government or (ii) rated A or higher by Moody's or S&P, or if unrated,
determined by the Adviser to be of comparable quality.
"Mortgage-backed securities" are securities that, directly or indirectly,
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including governmental pass-through securities such as those
issued or guaranteed by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). Unlike GNMA certificates, FNMA and FHLMC
obligations are not backed by the full faith and credit of the U.S. government;
they are supported by the issuing instrumentality's right to borrow from the
U.S. Treasury. Each of GNMA, FNMA and FHLMC guarantees timely distributions of
interest to certificate holders and GNMA and FNMA also guarantee timely
distributions of scheduled principal. Mortgage-backed securities also include
collateralized mortgage obligations ("CMOs") and pass-through securities issued
or guaranteed by private sector entities. CMOs are debt obligations or
pass-through certificates issued by agencies or instrumentalities of the U.S.
government or by private originators or investors in mortgage loans. CMOs are
backed by mortgage pass-through securities or whole loans and are evidenced by a
series of bonds or certificates issued in multiple classes or tranches. Private
pass-through securities are issued by private originators of or investors in
mortgage loans and are structured similarly to governmental pass-through
securities. Because private pass-throughs typically lack a guarantee by an
entity having the credit status of a governmental agency or instrumentality,
they are generally structured with one or more types of credit enhancement. See
the Statement of Additional Information for a further description of
Mortgage-Backed Securities.
The Portfolio will only invest in mortgage-backed securities that are either
(i) issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities or (ii) at the time of investment rated within one of the
three highest rating categories of Moody's (Aaa, Aa or A) or S&P (AAA, AA or A),
or if unrated, determined by the Adviser to be of comparable quality. Under
normal market conditions, the Adviser expects that at least 75% of the
Portfolio's net assets will be invested in mortgage-backed securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or rated
Aaa by Moody's or AAA by S&P. Up to 15% of the Portfolio's net assets may be
invested in mortgage-backed securities rated A by Moody's or S&P.
The Adviser expects that short- and intermediate-term mortgage-backed
securities will form the core of the Portfolio, with long-term securities (i.e.,
with maturities over ten years) being purchased when the Adviser believes that
they will enhance return without significantly increasing risk. The Adviser sets
an annual target rate of return for the Portfolio based on current and projected
market and economic conditions and manages the Portfolio conservatively --
primarily through gradual shifts in maturities -- in attempting to achieve this
target rate.
The Portfolio may also invest up to 25% of its net assets in cash, cash
equivalents or other short-term securities, including certificates of deposit,
commercial paper and money market instruments, U.S. Government securities and
repurchase agreements involving such government securities. In addition, the
Portfolio may invest up to all of its assets in cash and such instruments for
temporary defensive purposes.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
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THE HIGH YIELD PORTFOLIO
The Portfolio seeks to maximize total return by investing in a diversified
portfolio of high yield fixed income securities that offer a yield above that
generally available on debt securities in the three highest rating categories of
the recognized rating services. The Portfolio normally invests between 80% and
100% of its total assets in these higher yielding securities, which generally
entails increased credit and market risk. To mitigate these risks the Portfolio
will diversify its holdings by issuer, industry and credit quality, but
investors should carefully review the section below entitled "Risk Factors
Relating to Investing in High Yield Securities."
Appendix A to this Prospectus sets forth a description of the corporate bond
rating categories of Moody's and S&P. Corporate bonds rated below Baa by Moody's
or BBB by S&P are considered speculative. Securities in the lowest rating
categories may have predominantly speculative characteristics or may be in
default. Ratings of S&P and Moody's represent their opinions of the quality of
bonds and other debt securities they undertake to rate at the time of issuance.
However, ratings are not absolute standards of quality and may not reflect
changes in an issuer's creditworthiness. Accordingly, although the Adviser will
consider ratings, it will perform its own analysis and will not rely principally
on ratings. The Adviser will consider, among other things, the price of the
security, and the financial history and condition, the prospects and the
management of an issuer in selecting securities for the Portfolio. The Portfolio
may buy unrated securities that the Adviser believes are comparable to rated
securities and are consistent with the Portfolio's objective and policies. The
Adviser may vary the average maturity of the securities in the Portfolio without
limit and there is no restriction on the maturity of any individual security.
The Portfolio may acquire fixed income securities of both U.S. and foreign
issuers, including debt obligations (e.g., bonds, debentures, notes, equipment
lease certificates, equipment trust certificates, conditional sales contracts,
commercial paper and obligations issued or guaranteed by the U.S. Government,
any foreign government with which the United States maintains relations or any
of their respective political subdivisions, agencies or instrumentalities) and
preferred stock. The Portfolio may not invest more than 5% of its total assets
at time of acquisition in either (1) equipment lease certificates, equipment
trust certificates and conditional sales contracts or (2) limited partnership
interests. The Portfolio may neither invest more than 10% of its total assets in
foreign securities nor invest more than 5% of its total assets in foreign
governmental issuers in any one country. The Portfolio's fixed income securities
may have equity features, such as conversion rights or warrants, and the
Portfolio may invest up to 10% of its total assets in equity securities other
than preferred stock (common stocks, warrants and rights and limited partnership
interests). The Portfolio may invest up to 20% of its total assets in fixed
income securities that are investment grade (i.e., rated in one of the top three
categories or comparable) and have maturities of one year or less. For temporary
defensive purposes, the Portfolio may invest part or all of its total assets in
cash or in short-term securities, including certificates of deposit, commercial
paper, notes, obligations issued or guaranteed by the U.S. Government or any of
its agencies or instrumentalities, and repurchase agreements involving such
government securities. The Portfolio may invest in or own securities of
companies in various stages of financial restructuring, bankruptcy or
reorganization which are not currently paying interest or dividends. The total
value, at time of purchase, of the sum of all such securities will not exceed
10% of the value of the Portfolio's total assets.
The Portfolio may also invest in zero coupon, pay-in-kind or deferred
payment securities. Zero coupon securities are securities that are sold at a
discount to par value and securities on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled to
receive the par value of the security. While interest payments are not made on
such securities, holders of such securities are deemed to have received
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"phantom income" annually. Because the Portfolio will distribute its "phantom
income" to shareholders, to the extent that shareholders elect to receive
dividends in cash rather than reinvesting such dividends in additional shares of
the Portfolio, it will have fewer assets with which to purchase income producing
securities. The Portfolio accrues income with respect to these securities prior
to the receipt of cash payments. Pay-in-kind securities are securities that have
interest payable by delivery of additional securities. Upon maturity, the holder
is entitled to receive the aggregate par value of the securities. Deferred
payment securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. Zero coupon, pay-in-kind and
deferred payment securities may be subject to greater fluctuation in value and
lesser liquidity in the event of adverse market conditions than comparably rated
securities paying cash interest at regular interest payment periods.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES. Fixed income
securities are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligations (credit risk), and may also be subject
to price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer and general market liquidity
(market risk). Lower rated or unrated (i.e., high yield) securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react to movements in the general level of
interest rates primarily. The market values of fixed-income securities tend to
vary inversely with the level of interest rates. Yields and market values of
high yield securities will fluctuate over time, reflecting not only changing
interest rates but the market's perception of credit quality and the outlook for
economic growth. When economic conditions appear to be deteriorating, medium to
lower rated securities may decline in value due to heightened concern over
credit quality, regardless of prevailing interest rates. Fluctuations in the
value of the Portfolio's investments will be reflected in the Portfolio's net
asset value per share. The Adviser considers both credit risk and market risk in
making investment decisions for the Portfolio. Investors should carefully
consider the relative risks of investing in high yield securities and understand
that such securities are not generally meant for short-term investing.
The high yield market is still relatively new and its recent growth
parallels a long period of economic expansion and an increase in merger,
acquisition and leveraged buyout activity. Adverse economic developments may
disrupt the market for high yield securities, and severely affect the ability of
issuers, especially highly leveraged issuers, to service their debt obligations
or to repay their obligations upon maturity. In addition, the secondary market
for high yield securities, which is concentrated in relatively few market
makers, may not be as liquid as the secondary market for more highly rated
securities. As a result, the Adviser could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices used in calculating the Portfolio's net asset value.
Prices for high yield securities may be affected by legislative and
regulatory developments. These laws could adversely affect the Portfolio's net
asset value and investment practices, the secondary market for high yield
securities, the financial condition of issuers of these securities and the value
of outstanding high yield securities. For example, federal legislation requiring
the divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
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Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Portfolio's investment portfolio
and increasing the exposure of the Portfolio to the risks of high yield
securities.
THE MONEY MARKET PORTFOLIO
The Portfolio's investment objectives are to maximize current income and
preserve capital while maintaining high levels of liquidity through investing in
the following 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. See "Valuation of Shares."
UNITED STATES GOVERNMENT OBLIGATIONS. The Money Market Portfolio may invest
in obligations issued or guaranteed by the United States Government, such as
U.S. Treasury securities and those backed by the full faith and credit of the
United States, such as obligations of GNMA, the Farmers Home Administration and
the Export-Import Bank. The Portfolio may also invest in obligations issued or
guaranteed by United States Government agencies or instrumentalities where the
Portfolio must look principally to the issuing or guaranteeing agency for
ultimate repayment; some examples of agencies or instrumentalities issuing these
obligations are the Federal Farm Credit System and the Federal Home Loan Banks.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities in which the Money
Market Portfolio may invest, such as GNMA securities, differ from other fixed
income securities in that the principal is paid back by the borrower over the
life of the loan rather than returned in a lump sum at maturity. When prevailing
interest rates rise, the value of a GNMA security may decrease as do other debt
securities. When prevailing interest rates decline, however, the value of GNMA
securities may not rise on a comparable basis with other debt securities because
of the prepayment feature of GNMA securities. Additionally, if a GNMA
certificate is purchased at a premium above its principal value because its
fixed rate of interest exceeds the prevailing level of yields, the decline in
price to par may result in a loss of the premium in the event of prepayment.
Funds received from prepayments may be reinvested at the prevailing interest
rates which may be lower than the rate of interest that had previously been
earned.
BANK OBLIGATIONS. The Money Market Portfolio may invest in high quality
U.S. dollar-denominated negotiable certificates of deposit, time deposits,
deposit notes and bankers' acceptances of (i) banks, savings and loan
associations and savings banks which have more than $2 billion in total assets
and are organized under United States Federal or state law, (ii) foreign
branches of these banks ("Euros") and (iii) U.S. branches of foreign banks of
equivalent size ("Yankees"). See "Additional Investment Information" for further
information on foreign investments. The Portfolio may also invest in obligations
of the International Bank for Reconstruction and Development ("World Bank").
These obligations are supported by appropriated but unpaid commitments of the
World Bank's member countries, and there is no assurance these commitments will
be undertaken or met in the future.
COMMERCIAL PAPER; CORPORATE BONDS. The Money Market Portfolio may invest in
high quality commercial paper and corporate bonds issued by U.S. corporations.
The Portfolio may also invest in commercial paper issued by foreign corporations
if the issuer is a direct subsidiary of a U.S. corporation, the obligation is
U.S.
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dollar-denominated and is not subject to foreign withholding tax, and the
aggregate of these foreign investments does not exceed 10% of the Portfolio's
net assets. For more information about foreign investments, see "Additional
Investment Information."
QUALITY INFORMATION. The Money Market Portfolio utilizes the amortized cost
method of valuation in accordance with regulations issued by the Securities and
Exchange Commission. See "Valuation of Shares." Accordingly, the Portfolio will
limit its portfolio investments to those instruments that present minimal credit
risks and are of "eligible quality" as determined by the Adviser under the
supervision of the Board of Directors in accordance with regulations of the
Securities and Exchange Commission, as they may from time to time be amended.
For this purpose, "eligible quality" means a security rated (i) in one of the
two highest rating categories by at least two nationally recognized statistical
rating organizations assigning a rating to the security or issuer or, (ii) if
only one rating organization assigned a rating, by that rating organization or
(iii) if unrated, of comparable quality as determined by the Board of Directors.
Among the criteria adopted by the Board of Directors, the Money Market Portfolio
will not purchase any bank or corporate obligation unless it is rated at least
Aa or Prime-1 by Moody's or AA or A-1 by S&P, or it is unrated, and in the
determination of the Board of Directors and the Adviser, it is of comparable
quality. Ratings, however, are not the only criteria utilized under the
procedures adopted by the Board of Directors. For a more detailed discussion of
other quality requirements applicable to the Portfolio, see "Description of
Securities and Ratings and Policies" in the Statement of Additional Information.
These standards must be satisfied at the time an investment is made. In the
event that an investment held by the Portfolio is assigned a lower rating or
ceases to be rated, the Adviser under the supervision of the Board of Directors
will promptly reassess whether such security presents minimal credit risk and
whether the Portfolio should continue to hold the security in its portfolio. If
a portfolio security no longer presents minimal credit risk or is in default,
the Portfolio will dispose of the security as soon as reasonably practicable
unless the Board of Directors determines that to do so is not in the best
interests of the Portfolio.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE MUNICIPAL MONEY MARKET PORTFOLIO
The 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 the following high quality municipal
money market instruments which, in the opinion of bond counsel for the issuer,
earn interest exempt from federal income tax. 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 the alternative
minimum tax. Interest on tax-exempt municipal securities may be subject to state
and local taxes. See "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. See "Valuation of Shares."
MUNICIPAL BONDS. The Portfolio may invest in bonds issued by or on behalf
of states, territories and possessions of the U.S. and its political
subdivisions, agencies, authorities and instrumentalities. These obligations may
be general obligation bonds secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest, or they may
be revenue bonds payable from specific revenue sources, but
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not generally backed by the issuer's taxing power. These obligations include
private activity bonds where payment is the responsibility of the private
industrial user of the facility financed by the bonds. The Portfolio may invest
more than 25% of its total assets in private activity bonds (provided that the
interest on such bonds is not subject to the alternative minimum tax), but may
not invest more than 25% of its total assets in these bonds in projects of
similar type or in the same state.
MUNICIPAL NOTES. The Portfolio may also invest in municipal notes of
various types, including notes issued in anticipation of receipt of taxes, the
proceeds of the sale of bonds, other revenues or grant proceeds and project
notes, as well as municipal commercial paper and municipal demand obligations.
There may be no secondary market for project notes, and it is the intention of
the Fund to hold such notes until maturity. There is no specific percentage
limitation on these investments. For more information about municipal notes, see
"Description of Securities and Ratings" in the Statement of Additional
Information.
QUALITY INFORMATION. The Portfolio utilizes the amortized cost method of
valuation in accordance with regulations issued by the Securities and Exchange
Commission. See "Valuation of Shares." Accordingly, the Portfolio will limit its
portfolio investments to those instruments which present minimal credit risk and
which are of "eligible quality" as determined by the Adviser under the
supervision of the Board of Directors in accordance with regulations of the
Securities and Exchange Commission, as they may from time to time be amended.
For this purpose, "eligible quality" means a security rated (i) in one of the
two highest rating categories by at least two nationally recognized statistical
rating organizations assigning a rating to the security or issuer or, (ii) if
only one rating organization assigned a rating, by that rating organization or
(iii) if unrated, of comparable quality as determined by the Board of Directors.
Among the criteria adopted by the Board of Directors, the Municipal Money Market
Portfolio will not purchase any municipal obligation unless it is rated at least
Aa, MIG-1 (or MIG-2 in the case of New York State municipal notes), or Prime-1
by Moody's, or AA, SP-1 or A-1 by S&P, or it is unrated, and in the
determination of the Board of Directors and the Adviser it is of comparable
quality. Ratings, however, are not the only criteria which must be utilized
under the procedures adopted by the Board of Directors. For a more detailed
discussion of quality requirements applicable to municipal commercial paper and
master demand obligations, see the "Description of Securities and Ratings" in
the Statement of Additional Information.
These standards must be satisfied at the time an investment is made. In the
event that an investment held by the Portfolio is assigned a lower rating or
ceases to be rated, the Adviser under the supervision of the Board of Directors
will promptly reassess whether such security presents minimal credit risk and
whether the Portfolio should continue to hold the security in its portfolio. If
a portfolio security no longer presents minimal credit risk or is in default,
the Portfolio will dispose of the security as soon as reasonably practicable
unless the Board of Directors determines that to do so is not in the best
interests of the Portfolio. The credit quality of municipal obligations is
frequently enhanced by various arrangements with domestic or foreign financial
institutions, such as letters of credit, guarantees and insurance, and these
arrangements are considered when investment quality is evaluated.
PUTS FOR THE MUNICIPAL MONEY MARKET PORTFOLIO. The Portfolio may purchase
without limit municipal bonds or notes together with the right to resell them at
an agreed price or yield within a specified period prior to maturity. This right
to resell is known as a "put". The aggregate price paid for securities with puts
may be higher than the price which otherwise would be paid. The purpose of this
practice is to permit the Portfolio to be fully invested in tax-exempt
securities while maintaining the necessary liquidity to purchase securities on a
when-issued basis, to meet unusually large redemptions, to purchase at a later
date securities other than those subject
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to the put and to facilitate the Adviser's ability to manage the Portfolio
actively. The principal risk of puts is that the put writer may default on its
obligation to repurchase. The Adviser will monitor each writer's ability to meet
its obligations under puts. Under the supervision of the Board of Directors, the
Adviser will purchase securities with puts only to the extent that such purchase
is consistent with the Portfolio's investment policies.
The amortized cost method is used by the Portfolio to value all municipal
securities; no value is assigned to any puts. The cost of any such put is
carried as an unrealized loss from the time of purchase until it is exercised or
expires.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
ADDITIONAL INVESTMENT INFORMATION
FOREIGN INVESTMENT. The Fixed Income and High Yield Portfolios may invest
in U.S. dollar-denominated securities of foreign issuers trading in U.S. markets
and in non-U.S. dollar-denominated obligations of foreign issuers. The Money
Market Portfolio may invest in U.S. dollar-denominated commercial paper issued
by a foreign corporation that is a direct parent or subsidiary of a U.S.
corporation. Investment in obligations of foreign issuers and in foreign
branches of domestic banks involves somewhat different investment risks than
those affecting obligations of U.S. issuers. There may be limited publicly
available information with respect to foreign issuers, and foreign issuers are
not generally subject to uniform accounting, auditing and financial standards
and requirements comparable to those applicable to domestic companies. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the U.S. Dividends and interest paid by foreign issuers
may be subject to withholding and other foreign taxes, which may decrease the
net return on foreign investments as compared to dividends and interest paid to
the Portfolio by domestic companies. It is not expected that a Portfolio or its
shareholders would be able to claim a credit for U.S. tax purposes with respect
to any such foreign taxes. See "Taxes." Additional risks include future
political and economic developments, the possibility that a foreign jurisdiction
might impose or change withholding taxes on income payable with respect to
foreign securities, possible seizure, nationalization or expropriation of the
foreign issuer or foreign deposits, and the possible adoption of foreign
governmental restrictions such as exchange controls. Many of the foreign
countries described above may have less stable political environments than more
developed countries. Also, it may be more difficult to obtain a judgment in a
court outside the United States.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies, and since the Portfolios may temporarily hold uninvested
reserves in bank deposits in foreign currencies. Therefore, the value of each
Portfolio's assets as measured in U.S. dollars may be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations,
and the Portfolios may incur costs in connection with conversions between
various currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fixed Income, Global Fixed
Income and High Yield Portfolios may enter into forward foreign currency
exchange contracts ("forward contracts") that provide for the purchase or sale
of an amount of a specified currency at a future date. Purposes for which such
contracts may be used include protecting against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells securities, locking in the U.S. dollar value of
dividends and interest on securities held by the Portfolio and generally
protecting the U.S. dollar value of securities held by a Portfolio declared
against exchange rate fluctuation. Such contracts may also be used as a
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protective measure against the effects of fluctuating rates of currency exchange
and exchange control regulations. While such forward contracts may limit losses
to a portfolio as a result of exchange rate fluctuations, they will also limit
any gains that may otherwise have been realized. See "Investment Objectives and
Policies -- Forward Currency Exchange Contracts" in the Statement of Additional
Information. Except in circumstances where segregated accounts are not required
by the 1940 Act and the rules adopted thereunder, the Portfolio's Custodian will
place cash, U.S. government securities, or high-grade debt securities into a
segregated account of a Portfolio in an amount equal to the value of such
Portfolio's total assets committed to the consummation of forward foreign
currency exchange contracts. If the value of the securities placed in the
segregated account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will be at least equal
to the amount of such Portfolio's commitments with respect to such contracts.
See "Investment Objectives and Policies -- Forward Foreign Currency Exchange
Contracts" in the Statement of Additional Information.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In order to remain
fully invested and to reduce transaction costs, each Portfolio, except the
Global Fixed Income Portfolio, may utilize appropriate stock futures contracts
and options on futures contracts to a limited extent. Because transaction costs
associated with futures and options may be lower than the costs of investing in
stocks directly, it is expected that the use of index futures and options to
facilitate cash flows may reduce a Portfolio's overall transaction costs. The
Portfolios will engage in futures and options on futures transactions only for
hedging purposes.
Each Portfolio may enter into futures contracts and options on futures
provided that not more than 5% of its total assets are required as deposit to
secure obligations under such contracts, and provided further that not more than
20% of its total assets are invested, in the aggregate, in futures contracts and
options on futures.
The primary risks associated with the use of futures and options on futures
are (i) imperfect correlation between the change in market value of the stocks
held by the Portfolio and the prices of futures and options relating to the
stocks purchased or sold by the Portfolio; and (ii) possible lack of a liquid
secondary market for a futures contract and the resulting inability to close a
futures position which could have an adverse impact on the Portfolio's ability
to hedge. In the opinion of the Board of Directors, the risk that the Portfolio
will be unable to close out a futures position or options contract will be
minimized by only entering into futures contracts or options transactions for
which there appears to be a liquid secondary market. For more detailed
information about futures transactions, see "Investment Objectives and Policies"
in the Statement of Additional Information.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. A Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets. For more detailed information about securities lending see
"Investment Objectives and Policies" in the Statement of Additional Information.
MONEY MARKET INSTRUMENTS. The Portfolios are permitted to invest in money
market instruments, although each Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
Each Portfolio may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. The money market
investments permitted for the Portfolios include obligations of the U.S.
Government and its agencies and instrumentalities, obligations of foreign
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<PAGE>
sovereignties, other debt securities, commercial paper including bank
obligations, certificates of deposit (including Eurodollar certificates of
deposit) and repurchase agreements. For more detailed information about these
money market investments, see "Description of Securities and Ratings" in the
Statement of Additional Information.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The High-Yield Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available securities market nor more than 10% of its total assets in
securities that are restricted from sale to the public without registration
("Restricted Securities") under the Securities Act of 1933 (the "1933 Act").
Nevertheless, subject to the foregoing limit on illiquid securities, the
Portfolio may invest up to 20% of its total assets in Restricted Securities that
can be offered and sold to qualified institutional buyers under Rule 144A under
that Act ("144A Securities"). The Board of Directors has adopted guidelines and
delegated to the Adviser, subject to the supervision of the Board of Directors,
the daily function of determining and monitoring the liquidity of 144A
securities. Rule 144A securities may become illiquid if qualified institutional
buyers are not interested in acquiring the securities. Investors should note
that investments in excess of 5% of the Portfolio's total assets may be
considered a speculative activity and may involve greater risk and expense to
the Portfolio.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines of the Fund's
Board of Directors. In a repurchase agreement, a Portfolio buys a security from
a seller that has agreed to repurchase it at a mutually agreed upon date and
price, reflecting the interest rate effective for the term of the agreement. The
term of these agreements is usually from overnight to one week and never exceeds
one year. Repurchase agreements may be viewed as a fully collateralized loan of
money by the Portfolio to the seller. The Portfolio always receives securities
with a market value at least equal to the purchase price (including accrued
interest) as collateral, and this value is maintained during the term of the
agreement. If the seller defaults and the collateral value declines, the
Portfolio might incur a loss. If bankruptcy proceedings are commenced with
respect to the seller, the Portfolio's realization upon the collateral may be
delayed or limited. The aggregate of certain repurchase agreements and certain
other investments is limited as set forth under "Investment Limitations."
REVERSE REPURCHASE AGREEMENTS FOR THE MONEY MARKET PORTFOLIO. The Money
Market Portfolio may enter into reverse repurchase agreements with brokers,
dealers, domestic and foreign banks or other financial institutions. In a
reverse repurchase agreement, the Portfolio sells a security and agrees to
repurchase it at a mutually agreed upon date and price, reflecting the interest
rate effective for the term of the agreement. It may also be viewed as the
borrowing of money by the Portfolio. The Portfolio's investment of the proceeds
of a reverse repurchase agreement is the speculative factor known as leverage.
The Portfolio may enter into a reverse repurchase agreement only if the interest
income from investment of the proceeds is greater than the interest expense of
the transaction and the proceeds are invested for a period no longer than the
term of the agreement. The Portfolio will maintain with the Custodian a separate
account with a segregated portfolio of securities at least equal to its purchase
obligations under these agreements. If interest rates rise during a reverse
repurchase agreement, it may adversely affect the Portfolio's ability to
maintain a stable net asset value. The aggregate of these agreements is limited
as set forth under "Investment Limitations." Reverse repurchase agreements are
considered to be borrowings and are subject to the percentage limitations on
borrowings set forth in "Investment Limitations."
TAXABLE INVESTMENTS FOR THE MUNICIPAL BOND AND MUNICIPAL MONEY MARKET
PORTFOLIOS. The Municipal Bond and Municipal Money Market Portfolios attempt to
invest 80% and 100%, respectively, of their assets in
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<PAGE>
tax-exempt municipal securities. However, the Portfolios are permitted to invest
up to 20% of the value of their total assets in securities, the interest income
of which is subject to federal income tax. Either Portfolio may make taxable
investments pending investment of proceeds from sales of its shares or portfolio
securities or pending settlement of purchases of portfolio securities in order
to maintain liquidity to meet redemptions or when it is advisable in the
Adviser's opinion because of adverse market conditions. The taxable investments
permitted for either Portfolio include obligations of the U.S. Government and
its agencies and instrumentalities, bank obligations, commercial paper and
repurchase agreements. Fees from loans of tax-exempt securities will also be
taxable income of the Portfolio. See "Taxes."
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. Each Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of
high-grade debt securities or cash in an amount at least equal to these
commitments. The payment obligation and the interest rates that will be received
are each fixed at the time a Portfolio enters into the commitment and no
interest accrues to the Portfolio until settlement. Thus, it is possible that
the market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed. It is a
fundamental policy of the Money Market Portfolio and a current policy of the
Municipal Money Market Portfolio not to enter into when-issued commitments
exceeding, in the aggregate, 15% of the market value of the Portfolio's total
assets less liabilities other than the obligations created by these commitments.
INVESTMENT LIMITATIONS
As a diversified investment company, each Portfolio, except the Global Fixed
Income Portfolio, is subject to the following limitations: (a) as to 75% of its
total assets, a Portfolio may not invest more than 5% of its total assets in the
securities of any one issuer, except obligations of the U.S. Government and its
agencies and instrumentalities, and (b) a Portfolio may not own more than 10% of
the outstanding voting securities of any one issuer.
The Global Fixed Income Portfolio is a non-diversified investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), which
means the Global Fixed Income Portfolio is not limited by the 1940 Act in the
proportion of its total assets that may be invested in the obligations of a
single issuer. Thus, the Global Fixed Income Portfolio may invest a greater
proportion of its total assets in the securities of a smaller number of issuers
and, as a result, will be subject to greater risk with respect to its portfolio
securities. The Global Fixed Income Portfolio, however, intends to comply with
the diversification requirements imposed by the Internal Revenue Code of 1986,
as amended (the "Code"), for qualification as a regulated investment company.
See "Taxes."
Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, each
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. Each Portfolio
may not (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 15% of the market value of the Portfolio's
total assets would be invested in such repurchase agreements and other
investments for which market quotations are not readily available or which are
28
<PAGE>
otherwise illiquid, except that the limitation is 5% for the Municipal Money
Market Portfolio; (ii) borrow money, except from banks for extraordinary or
emergency purposes, and then only in amounts up to 10% (which includes reverse
repurchase agreements) of the value of the Portfolio's total assets, taken at
cost at the time of borrowing; or purchase securities while borrowings exceed 5%
(which includes reverse repurchase agreements) of its total assets; (iii) or
mortgage, pledge or hypothecate any assets except in connection with any such
borrowing in amounts up to 10% of the value of the Portfolio's net assets at the
time of borrowing; (iv) invest in fixed time deposits with a duration of over
seven calendar days; or (v) invest in fixed time deposits with a duration of
from two business days to seven calendar days if more than 5% of the Portfolio's
total assets would be invested in these deposits. Furthermore, the Money Market
Portfolio may not enter into reverse repurchase agreements exceeding, in the
aggregate, one-third of the market value of the Portfolio's total assets, less
liabilities other than obligations created by these agreements; and the
Municipal Money Market Portfolio may not purchase private activity bonds if, as
a result, more than 5% of the Portfolio's total assets would be invested in
private activity bonds where payment of principal and interest are the
responsibility of companies with fewer than three years of operating history
(including predecessors).
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment
Adviser and Administrator of the Fund and each of its portfolios. The Adviser
provides investment advice and portfolio management services pursuant to an
Investment Advisory Agreement and, subject to the supervision of the Fund's
Board of Directors, makes the portfolio's day-to-day investment decisions,
arranges for the execution of portfolio transactions and generally manages the
portfolio's investments. The Adviser is entitled to receive from each Portfolio
an annual management fee, payable quarterly, equal to the percentage of average
daily net assets of the respective Portfolio set forth in the table below.
However, the Adviser has agreed to a reduction in the fees payable to it as
Adviser, and to reimburse the Portfolios, if necessary, if such fees would cause
the total annual operating expenses of any Portfolio to exceed the maximum set
forth in the table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING EXPENSES
AFTER FEE WAIVERS
MANAGEMENT FEE --------------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- ------------------------------ ------------------- --------------- ---------------
<S> <C> <C> <C>
Fixed Income 0.35% 0.45% 0.70%
Global Fixed Income 0.40% 0.50% 0.75%
Municipal Bond 0.35% 0.45% 0.70%
Mortgage-Backed Securities 0.35% 0.45% 0.70%
High Yield 0.50% 0.75% 1.00%
Money Market 0.30% 0.55% N/A
Municipal Money Market 0.30% 0.57% N/A
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
U.S. and abroad. At September 30, 1995, the Adviser, together with its
affiliated asset management companies, managed investments totaling
approximately $55.2 billion, including approximately $40.1 billion under active
management and $15.1 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
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<PAGE>
PORTFOLIO MANAGERS. The following persons have primary responsibility for
managing the Portfolios indicated.
FIXED INCOME PORTFOLIO -- WARREN ACKERMAN, III. Warren Ackerman is a
Principal of the Advisor and a Senior Fixed Income Portfolio Manager. Mr.
Ackerman joined the Advisor in December 1993. Prior to joining the Advisor, Mr.
Ackerman spent over 14 years with Bankers Trust Company as a Managing Director
responsible for institutional active fixed income management. Prior to Bankers,
he spent almost seven years as a Vice President with Irving Trust Company in the
Trust Investment Division. Mr. Ackerman is a graduate of Monmouth College with a
BS in Economics. Mr. Ackerman has had primary responsibility for managing the
Portfolio's assets since March 1994.
GLOBAL FIXED INCOME PORTFOLIO -- MICHAEL J. SMITH AND ROBERT M.
SMITH. Michael Smith joined the Adviser as a Fixed Income Manager in 1990. Mr.
Smith became a Vice President of Morgan Stanley in 1992 and has been primarily
responsible for managing the Portfolio's assets since January 1993. He was
previously employed by Gartmore Investment Management where he had day-to-day
responsibility for the management of global and European fixed-income and money
market funds. Prior to his three years at Gartmore, Mr. Smith spent four years
with Legal & General Investment as an analyst and fund manager responsible for
the fixed-income portion of several large segregated funds. Mr. Smith is a
graduate of Exeter University, England. Robert Smith joined the Adviser as Vice
President in June 1994 and has been primarily responsible for managing the
Portfolio's assets since July 1994. Prior to joining the Adviser he spent eight
years as Senior Portfolio Manager -- Fixed Income at the State of Florida
Pension Fund. Mr. Smith's responsibilities included active total-rate-of-return
management of long term portfolios and supervision of other fixed income
managers. A graduate of Florida State University with a BS in Business, Mr.
Smith also received an MBA -- Finance from Florida State and holds a Chartered
Financial Analyst (CFA) designation.
MUNICIPAL BOND PORTFOLIO -- LORI A. COHANE. Lori A. Cohane joined the
Adviser in 1994 as a Vice President and Municipal Bond Portfolio Manager. Prior
to joining the Adviser, Ms. Cohane spent eight years with Salomon Brothers Asset
Management as a Vice President, Portfolio Manager and Senior Credit Analyst of
municipal bond accounts managing portfolios for high net worth individuals,
open- and closed-end bond funds and institutional accounts. Ms. Cohane is a
magna cum laude graduate of the State University of New York at Albany with a
B.S. degree in Finance and Economics. Ms. Cohane has had primary responsibility
for managing the Portfolio's assets since its inception.
MORTGAGE-BACKED SECURITIES PORTFOLIO -- WARREN ACKERMAN, III. Information
about Mr. Ackerman is included under Fixed Income Portfolio above. Mr. Ackerman
has had primary responsibility for managing the Portfolio's assets since its
inception.
HIGH YIELD PORTFOLIO -- ROBERT ANGEVINE. Robert Angevine is a Principal of
the Adviser and the Portfolio Manager for high yield investments. Prior to
joining the Adviser in October 1988, he spent over eight years at Prudential
Insurance where he was responsible for the largest open-end high yield mutual
fund in the country. Mr. Angevine also manages high yield assets for one of the
largest corporate pension funds in the country. His other experience includes
international treasury operations at a major pharmaceutical company and
commercial banking. Mr. Angevine received an M.B.A. from Fairleigh Dickinson
University and a B.A. in Economics from Lafayette College. He served two years
as a Lieutenant in the U.S. Army. Mr. Angevine has had primary responsibility
for managing the Portfolio's assets since September, 1992.
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<PAGE>
MONEY MARKET PORTFOLIO -- GERALD BARTH, ABIGAIL JONES FEDER AND KENNETH R.
HOLLEY. Gerald P. Barth joined the Adviser in 1987 to establish the short to
intermediate-term taxable cash management area and to manage the tax-exempt
municipal bond portfolio. He became a Vice President in 1989 and a Principal in
1991. He has had primary management responsibility for the Investment Fund since
its inception. Prior to joining the Adviser, Mr. Barth was Director of
Investments at Subaru of America for five years, where he managed both the short
and intermediate-term corporate cash portfolios. He began his career at Arthur
Andersen in the audit department and spent two years in the tax department. He
earned a B.S. in Accounting from LaSalle College and became a Certified Public
Accountant in 1977. Abigail Feder is a Vice President in the Adviser's Fixed
Income Group. She is responsible for managing short-term taxable and tax-exempt
portfolios. Ms. Feder joined Morgan Stanley's Corporate Finance Department in
1985. In 1987 she joined the Adviser as a Marketing Analyst and was promoted to
a Marketing Director in 1988. She joined the Fixed Income Group as a Portfolio
Manager in 1989 and she became a Vice President in 1992. Ms. Feder holds a BA
from Vassar College. Kenneth R. Holley joined the Adviser as a short-term fixed
income portfolio manager in July, 1993. Prior thereto, he worked for 2 1/2 years
as a Finance Officer for the African Development Bank implementing trading
strategies for the bank's $1 billion short to intermediate US dollar portfolio.
Prior to joining the ADB, Mr. Holley spent 1 1/2 years with Ward and Associates
Asset Management as a Vice President responsible for fixed income strategy.
Before Ward and Associates he worked in the fixed income department of Salomon
Brothers, Inc. Mr. Holley holds a BS degree in Engineering from University of
Pennsylvania and an MBA from the Wharton School. Mr. Barth and Ms. Feder have
had primary responsibility for managing the Portfolio's assets since inception.
Mr. Holley has shared primary responsibility for managing the Portfolio's assets
since August, 1993.
MUNICIPAL MONEY MARKET PORTFOLIO -- GERALD P. BARTH AND ABIGAIL JONES
FEDER. Information about Mr. Barth and Ms. Feder is included under Money Market
Bond Portfolio above. Mr. Barth and Ms. Feder have shared primary responsibility
for managing the Portfolio's assets since inception.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
the Board of Directors of the Fund, and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under Federal and State laws. The Administration Agreement also
provides that the Administrator through its agents will provide the Fund with
dividend disbursing and transfer agent services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals .15% of the average daily net assets of each Portfolio.
In a merger completed on September 1, 1995, The Chase Manhattan Bank, N.A.
("Chase") succeeded to all of the rights and obligations under the U.S. Trust
Administration Agreement between the Adviser and the United States Trust Company
of New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide
certain administrative services to the Fund. Pursuant to a delegation clause in
the U.S. Trust Administration Agreement, U.S. Trust delegated its administration
responsibilities to Chase Global Funds Services Company ("CGFSC"), formerly
known as Mutual Funds Service Company, which after the merger with Chase is a
subsidiary of Chase and will continue to provide certain administrative services
to the Fund. The Adviser supervises and monitors such administrative services
provided by CGFSC. The services provided under the Administration Agreement and
the U.S. Trust Administration Agreement are also subject to the supervision of
the Board of Directors of the Fund. The Board of Directors of the Fund has
approved the provision of services described above pursuant to the
Administration Agreement and the U.S. Trust Administration Agreement as
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<PAGE>
being in the best interests of the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. For additional information regarding
the Administration Agreement or the U.S. Trust Administration Agreement, see
"Management of the Fund" in the Statement of Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each of the Non-Money Portfolios pursuant to Rule 12b-1 under the 1940
Act (each, a "Plan"). Under each Plan, the Distributor is entitled to receive
from each of the Non-Money Portfolios a distribution fee, which is accrued daily
and paid quarterly, of 0.25% of the Class B shares' average daily net assets on
an annualized basis. The Distributor expects to reallocate most of its fee to
its investment representatives. The Distributor may, in its discretion,
voluntarily waive from time to time all or any portion of its distribution fee
and each of the Distributor and the Adviser is free to make additional payments
out of its own assets to promote the sale of Fund shares, including payments
that compensate financial institutions for distribution services or shareholder
services.
The Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of the Non-Money Portfolios and Class A shares of
the Money Portfolios may be purchased, without sales commission, at the net
asset value per share next determined after receipt of the purchase order by the
Non-Money Portfolio and, in the case of the Money Portfolios, at the price next
determined after Federal Funds are available to the Money Portfolio. See
"Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For an account for a Non-Money Portfolio opened on or after January 2, 1996
(a "New Non-Money Account"), the minimum initial investment and minimum account
size are $500,000 for Class A shares and $100,000 for Class B shares. The
minimum initial investment for each Money Portfolio is $50,000. Managed Accounts
may purchase Class A shares without being subject to any minimum initial
investment or minimum
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<PAGE>
account size requirements for a Portfolio account. Officers of the Adviser and
its affiliates are subject to the minimums for a Portfolio account, except they
may purchase Class B shares subject to a minimum initial investment and minimum
account size of $5,000 for a Portfolio account.
If the value of a New Non-Money Account containing Class A shares falls
below $500,000 (but remains at or above $100,000) because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $500,000 (but remains at or above $100,000) for a continuous
60-day period, the Class A shares in such account will convert to Class B shares
and will be subject to the distribution fee and other features applicable to the
Class B shares. The Fund, however, will not convert Class A shares to Class B
shares based solely upon changes in the market that reduce the net asset value
of shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 were
designated Class A shares on January 2, 1996. Shares in a Non-Money Portfolio
account opened prior to January 2, 1996 (each, a "Pre 1996 Non-Money Account")
with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A
Account") remain Class A shares regardles of account size thereafter. Except for
shares in a Managed Account, shares in a Pre-1996 Non-Money Account with a value
of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account")
convert to Class B shares on March 1, 1996. Grandfathered Class A Accounts and
Managed Accounts are not subject to conversion from Class A shares to Class B
shares.
The Fund reserves the right to modify or terminate the conversion features
of the shares as stated above at any time upon 60-days' notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Non-Money Account falls below $100,000 because of
shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains below $100,000 for a continuous 60-day period, the shares
in such accounts are subject to redemption by the Fund and, if redeemed, the net
asset value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to New Non-Money Accounts containing Class B shares
held by officers of the Adviser or its affiliates. However, if the value of such
account held by an officer of the Adviser or its affiliates falls below $5,000
because of shareholder redemption(s), the Fund will notify the shareholder, and
if the account value remains $5,000 for a continuous 60-day period, the shares
in such account are subject to redemption by the Fund and, if redeemed, the net
asset value of such shares will be promptly paid to the shareholder.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption.
If a shareholder reduces its total investment in Class A shares of a Money
Portfolio to less than $10,000, the investment may be subject to redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Non-Money Portfolio account increases,
whether due to shareholder share purchases or market activity, to $500,000 or
more, the Class B shares will convert to Class A shares. Under
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<PAGE>
current tax law, such conversion is not a taxable event to the shareholder.
Class A shares converted from Class B shares are subject to the same minimum
account size requirements that are applicable to New Non-Money Accounts
containing Class A shares, as stated above. The Fund reserves the right to
modify or terminate this conversion feature at any time upon 60-days' notice to
shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of each Non-Money Portfolio, $100,000 minimum for Class B
shares of each Non-Money Portfolio, and $50,000 minimum for each Money
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers, including those who participate in the Automatic Purchase of
Portfolio Shares program described below) payable to "Morgan Stanley
Institutional Fund, Inc. -- [portfolio name]", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The Portfolio(s) to be
purchased should be designated on the Account Registration Form. For purchases
by check, the Fund is ordinarily credited with Federal Funds within one business
day. Thus your purchase of shares by check is ordinarily credited to your
account at the net asset value per share of the relevant Portfolio determined on
the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund
prior to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, NY 10081-1000
ABA#021000021
DDA#910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
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C. Complete the Account Registration Form and mail it to the address shown
thereon.
Purchase orders for shares of the Portfolio which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed
at the price computed on the date of receipt as long as the Transfer Agent
receives payment by check or in Federal Funds prior to the regular close of
the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Share purchases of the
Money Market Portfolio in Federal Funds received by 12:00 noon (Eastern Time),
and share purchases of the Municipal Money Market Portfolio in Federal Funds
received by 11:00 a.m. (Eastern Time) will begin to earn income on the day of
receipt. Your bank may charge a service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested.
For the Money Market and Municipal Money Market Portfolios, if money is not
converted the same day, it will be converted the next business day and shares
will be purchased at the net asset value next determined after such
conversion. Your bank may charge a service fee for wiring funds.
4) AUTOMATIC PURCHASE OF PORTFOLIO SHARES. Free cash balances, (i.e., any cash
that is available on demand at the close of the previous business day) which
are held in certain eligible accounts at Morgan Stanley Asset Management
Inc., Morgan Stanley or any other affiliated investment adviser or broker,
and which are selected at the discretion of the Adviser, will be
automatically invested on the next business day at net asset value in shares
of the Money Market Portfolio or the Municipal Money Market Portfolio. A
shareholder may elect in writing from time to time in which portfolio to
invest. This automatic purchase facility permits certain eligible investment
management and brokerage customers of Morgan Stanley to have their free cash
balances invested in portfolio shares on a daily basis pending other
investments.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000 for each portfolio, except for automatic reinvestment of dividends and
capital gains distributions for which there are no minimums) by purchasing
shares at net asset value by mailing a check to the Fund (payable to "Morgan
Stanley Institutional Fund, Inc. -- [Portfolio name]") at the above address or
by wiring monies to the Custodian Bank as outlined above. It is very important
that your account name, portfolio name and the class selected be specified in
the letter or wire to assure proper crediting to your account. In order to
ensure that your wire orders are invested promptly, you are requested to notify
one of the Fund's representatives (toll-free 1-800-548-7786) prior to the wire
date. Additional investments will be applied to purchase additional shares in
the same class held by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of each Non-Money
Portfolio is the net asset value next determined after the order is received.
See "Valuation of Shares." An order to purchase shares of the Fixed Income,
Municipal Bond, Mortgage-Backed Securities or High Yield Portfolios received
prior to the regular close of the New York Stock Exchange ("NYSE"), which is
currently 4:00 p.m. Eastern Time, will be executed at the price computed on the
date of receipt; an order received after the regular close of the NYSE will be
executed
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at the price computed the next day the NYSE is open as long as the Transfer
Agent receives payment by check or in Federal Funds prior to the regular close
of the NYSE on such day. Orders for the purchase of shares of the Money Market
Portfolio or Municipal Money Market Portfolio become effective on the business
day Federal Funds are received, and the purchase will be effected at the net
asset value next computed after receipt.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio(s)
will not be issued. All shares purchased are confirmed to you and credited to
your account on the Fund's books maintained by the Adviser or its agents. You
will have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of each Portfolio and each Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging Class
A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class
A shares of Portfolio B for Class A shares of Portfolio C and again exchanging
Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (1) trades exclusively between money market portfolios; and (2)
trades done in connection with an asset allocation service, such as TFM
Accounts, managed or advised by MSAM and/or any of its affiliates.
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REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase has been collected, which
may take up to eight business days after purchase. The Fund will redeem Class A
and Class B shares of each Non-Money Portfolio and Class A shares of each Money
Portfolio at the next determined net asset value of shares of the applicable
class. On days that both the NYSE and the Custodian Bank are open for business,
the net asset value per share of the Fixed Income, Global Fixed Income,
Municipal Bond, Mortgage-Backed Securities and High Yield Portfolios is
determined at the regular close of trading of the NYSE (currently 4:00 p.m.
Eastern Time), and the net asset value per share of the Municipal Money Market
Portfolio is determined at 11:00 a.m. (Eastern Time) and the net asset value per
share of the Money Market Portfolio is determined at 12:00 p.m. (Eastern Time).
Shares of a Portfolio may be redeemed by mail or telephone. No charge is made
for redemption. Any redemption may be more or less than the purchase price of
your shares depending on, among other factors, the market value of the
investment securities held by the Portfolio.
BY MAIL
Each Non-Money Portfolio will redeem its Class A and Class B shares and each
Money Portfolio will redeem its Class A shares at the net asset value next
determined after your request is received if the request is received in "good
order." Your request should be addressed to Morgan Stanley Institutional Fund,
Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798, except that deliveries by
overnight courier should be addressed to Morgan Stanley Institutional Fund,
Inc., c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension
and profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by mail or
overnight courier and will be implemented at the net asset value next determined
after it is received. Redemption requests sent to the Fund through overnight
courier must be sent to Morgan Stanley Institutional Fund, Inc., c/o Chase
Global Funds Services Company, 73 Tremont Street, Boston, Massachusetts 01208.
The Fund and the Fund's transfer agent (the "Transfer Agent") will employ
reasonable procedures to confirm that the
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<PAGE>
instructions communicated by telephone are genuine. These procedures include
requiring the investor to provide certain personal identification information at
the time an account is opened and prior to effecting each transaction requested
by telephone. In addition, all telephone transaction requests will be recorded
and investors may be required to provide additional telecopied written
instructions regarding transaction requests. Neither the Fund nor the Transfer
Agent will be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to be
genuine.
To change the name of the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Fund at the address
above. Requests to change the bank or account must be signed by each shareholder
and each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to 8 days after the date of purchase. The Fund may suspend the right of
redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution-in-kind of securities held by a Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of Portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in a Portfolio for shares of any other
available portfolio of the Fund (other than the International Equity Portfolio,
which is closed to new investors). In exchanging for shares of a portfolio with
more than one class, the class of shares you receive in the exchange will be
determined in the same manner as any other purchase of shares and will not be
based on the class of shares surrendered for the exchange. Consequently, the
same minimum initial investment and minimum account size for determining the
class of shares received in the exchange will apply. See "Purchase of Shares."
Shares of the portfolios may be exchanged by mail or telephone. The privilege to
exchange shares by telephone is automatic and made available without shareholder
election. Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. Because an exchange transaction is
treated as a redemption followed by a purchase, an exchange would be considered
a taxable event for shareholders subject to tax. The exchange privilege is only
available with respect to portfolios that are registered for sale in a
shareholder's state of residence. The exchange privilege may be modified or
terminated by the Fund at any time upon 60-days' notice to shareholders.
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BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the names of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, MA 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current portfolio, the name(s) of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the class of
the portfolios involved in the exchange of shares at the close of business.
Requests received after 4:00 p.m. are processed the next business day based on
the net asset value determined at the close of such day. For additional
information regarding responsibility for the authenticity of telephoned
instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolios' shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of each Non-Money
Portfolio is determined by dividing the total market value of the Non-Money
Portfolio's investments and other assets attributable to such class, less all
liabilities attributable to such class, by the number of total outstanding
shares of such a class of the Non-Money Portfolio. Net asset value is calculated
separately for each class of the Portfolio. Net asset value per share of the
Non-Money Portfolios is determined as of the regular close of the NYSE on each
day that the NYSE is open for business. Securities listed on a U.S. securities
exchange for which market quotations are available are valued at the last quoted
sale price on the day the valuation is made. Price information on listed
securities is taken from the exchange where the security is primarily traded.
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 not readily available are valued at a price within a
range not exceeding the current asked price nor less than the current bid price.
The current bid and asked prices are determined either based on the bid and
asked prices quoted on such valuation date by two reputable brokers or as
provided by a reliable pricing service.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily unless collection is in doubt. In addition, bonds and other fixed
income securities may be valued on the basis of prices provided by a pricing
service when such prices are believed to reflect the fair market value of such
securities. The prices provided by a pricing service are determined without
regard to bid or last sale prices, but take into account institutional size
trading in similar groups of securities and any developments related to the
specific securities. Securities not priced in this manner are valued at the most
recently quoted bid price, or, when securities exchange valuations are used, at
the latest quoted sale price on the
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day of valuation. If there is no such reported sale, the latest quoted bid price
will be used. Debt securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above-stated procedures are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. dollars at the mean of the bid price and
asked price for such currencies against the U.S. dollar last quoted by any major
bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of Class A shares as a result of the distribution expense charged to Class
B shares.
The net asset value per share of each of the Money Market and Municipal
Money Market Portfolios is determined by subtracting the Portfolio's liabilities
(including accrued expenses and dividends payable) from the total value of the
Portfolio's investments and other assets and dividing the result by the total
number of outstanding shares of the Portfolio. The net asset values per share of
the Municipal Money Market Portfolio and the Money Market Portfolio are
determined at 11:00 a.m. and 12:00 noon (Eastern Time), respectively, on the
days on which the NYSE is open. For the purpose of calculating each Portfolio's
net asset value per share, securities are valued by the "amortized cost" method
of valuation, which does not take into account unrealized gains or losses. This
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
the value, as determined by amortized cost, is higher or lower than the price
the Portfolio would receive if it sold the instrument.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Fixed Income, Global Fixed Income, Municipal Bond, Mortgage-Backed Securities
and High Yield Portfolios. In addition, from time to time the Fund may advertise
"yield" for the Global Fixed Income, Municipal Bond, High Yield, Money Market
and Municipal Money Market Portfolios and "effective yield" for the Money Market
and Municipal Money Market Portfolios. In addition to these yield figures, the
Municipal Bond and Municipal Money Market Portfolio may advertise a tax
equivalent yield. THESE FIGURES ARE BASED ON HISTORICAL PERFORMANCE AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an
investment in a class of the Portfolio would have earned over a specified period
of time (such as one, five or ten years) assuming that all distributions and
dividends by the Portfolio were reinvested in the same class on the reinvestment
dates during the period. Total return does not take into account any federal or
state income taxes that may be payable on dividends and distributions or upon
redemption. The "yield" of the Global Fixed Income, Municipal Bond and High
Yield Portfolios refers to the income generated by an investment in the
Portfolio over a one-month or 30-day period, while the "yield" of the Money
Market and Municipal Money Market Portfolios refers to the income generated
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by an investment in the Portfolio over a seven-day period (which period will be
stated in the advertisement). This income is then "annualized." That is, the
amount of income generated by the investment during that 30 or seven day period
is assumed to be generated each 30-day period for twelve periods or each week
over a 52-week period, and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but, when annualized, the income
earned on an investment in the Portfolio is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. A "tax equivalent yield" is the
"yield" of the Portfolio increased by an amount based on an assumed rate of tax
for a shareholder. For further information concerning these figures, see
"Calculation of Yield and Total Return" in the Statement of Additional
Information. The Fund may also use comparative performance information in
marketing the Portfolios' shares, including data from Lipper Analytical
Services, Inc., Donoghue's Money Fund Report, other industry publications,
business periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
FIXED INCOME, GLOBAL FIXED INCOME, MUNICIPAL BOND, MORTGAGE-BACKED SECURITIES
AND HIGH YIELD PORTFOLIOS
All income dividends and capital gains distributions for a class of shares
of each Non-Money Portfolio will automatically be reinvested in additional
shares of such class at net asset value, except that, upon written notice to the
Fund or by checking off the appropriate box in the Distribution Option Section
on the Account Registration Form, a shareholder may elect to receive income
dividends and capital gains distributions in cash.
Each Non-Money Portfolio, except the Global Fixed Income Portfolio, expects
to distribute substantially all of its net investment income in the form of
monthly dividends and the Global Fixed Income Portfolio expects to distribute
substantially all of its net investment income in the form of quarterly
dividends. Net realized gains of each Non-Money Portfolio, if any, after
reduction for any tax loss carryforwards will also be distributed annually.
Confirmations of the purchases of shares of the Non-Money Portfolios through the
automatic reinvestment of income dividends and capital gains distributions will
be provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act of
1934, as amended, on the next monthly client statement following such purchases
of shares. Consequently, confirmations of such purchases will not be provided at
the time of completion of such purchases as might otherwise be required by Rule
10b-10.
Undistributed net investment income is included in each Non-Money
Portfolio's net assets for the purpose of calculating net asset value per share.
Therefore, on the "ex-dividend" date, the net asset value per share excludes the
dividend (I.E., is reduced by the per share amount of the dividend). Dividends
paid shortly after the purchase of shares by an investor, although in effect a
return of capital, are taxable to shareholders.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of each Non-Money Portfolio will differ
at times. Expenses of each Non-Money Portfolio allocated to a particular class
of shares thereof will be borne on a pro rata basis by each outstanding share of
that class.
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MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS
Net investment income is computed and dividends declared as of 1:00 p.m.
(Eastern time), on each day. Such dividends are payable to Municipal Money
Market Portfolio shareholders of record as of 11:00 a.m. (Eastern time) on that
day and to Money Market Portfolio shareholders of record as of 12:00 noon
(Eastern time) on that day, if the Fund and Custodian Bank are open for
business. This means that shareholders whose purchase orders become effective as
of 12:00 noon (for the Money Market Portfolio) or 11:00 a.m. (for the Municipal
Money Market Portfolio) receive the dividend for that day. Dividends declared
for Saturdays, Sundays and holidays are payable to shareholders of record as of
4:00 p.m. on the last preceding day the Fund and its Custodian Bank were open
for business.
For the purpose of calculating dividends, net income of each Money Portfolio
shall consist of interest earned, including any discount or premium ratably
amortized to the date of maturity, minus estimated expenses of the Money
Portfolio.
Each Money Portfolio's daily dividends are accrued throughout the month and
are distributed on the fifteenth calendar day of each month (or next business
day if the fifteenth calendar day falls on a holiday or weekend). Dividends of
each Money Portfolio are payable in additional shares, except that, upon written
notice to the Fund or by checking off the appropriate box in the Distribution
Option Section on the Account Registration Form, a shareholder may elect to
receive income dividends and any capital gains distributions in cash.
Each shareholder receives a monthly statement summarizing activity in the
account. If at any time a shareholder wishes to withdraw all of the funds in an
account, the proceeds will be sent to the shareholder by wire or check,
according to the shareholder's instructions. If the withdrawal is by wire, a
check in the amount of the income to the shareholder's account through the day
of withdrawal will be mailed to the shareholder on the next business day.
Withdrawals by check will include accrued income through the date of withdrawal.
Net realized short-term capital gains, if any, of each Money Portfolio are
to be distributed whenever the Board of Directors determine that such
distributions would be in the best interest of shareholders, but in any event,
at least once a year. The Money Portfolios do not expect to realize any
long-term capital gains. Should any such gains be realized, they will be
distributed annually.
It is an objective of management to maintain the price per share of each
Money Portfolio as computed for the purpose of sales and redemptions at exactly
$1.00. In the event the Board of Directors determine that a deviation from the
$1.00 per share price may exist which may result in a material dilution or other
unfair results to investors or existing shareholders, they will take corrective
action they regard as necessary and appropriate, including the sale of
instruments from a Money Portfolio prior to maturity to realize capital gains or
losses; shortening average portfolio maturity; withholding dividends; making a
special capital distribution; or redemptions of shares in kind.
TAXES
GENERAL
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
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No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other Portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
Each Portfolio distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to shareholders.
Dividends from a Portfolio's net investment income (other than "exempt-interest
dividends," described below) are taxable to shareholders as ordinary income,
whether received in cash or in additional shares. Such dividends paid by a
Portfolio will generally not qualify for the 70% dividends-received deduction
for corporate shareholders. Each Portfolio will report annually to its
shareholders the amount of dividend income qualifying for such treatment.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares.
[Distributions of net investment income and net capital gain are not eligible
for the corporate dividends-received deduction.] Each Portfolio sends reports
annually to its shareholders of the federal income tax status of all
distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses) including any available capital loss carryforwards, prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale or redemption of shares may result in taxable gain or loss to the
redeeming shareholder, depending upon whether the fair market value of the
redemption proceeds exceeds or is less than the Shareholder's adjusted basis in
the redeemed or sold shares. If capital gain distributions have been made with
respect to shares that are sold at a loss after being held for six months or
less, then the loss is treated as a long-term capital loss to the extent of the
capital gain distributions.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
THE MUNICIPAL BOND AND MUNICIPAL MONEY MARKET PORTFOLIOS
The dividends payable by the Municipal Bond and the Municipal Money Market
Portfolios from net tax-exempt interest from municipal bonds and notes will
qualify as "exempt-interest dividends" if, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
securities the interest on
43
<PAGE>
which is excludable from gross income. Each of the Municipal Bond and Municipal
Money Market Portfolios intends to invest a sufficient portion of its assets in
municipal bonds and notes to qualify to pay "exempt interest dividends."
Exempt-interest dividends are excludable from a shareholder's gross income
for regular income tax purposes. However, the receipt of such dividends may have
collateral federal income tax consequences, including alternative minimum tax
consequences. In addition, the receipt of exempt-interest dividends may cause
persons receiving Social Security or Railroad Retirement benefits to be taxable
on a portion of such benefits. See the Statement of Additional Information.
Current federal tax law limits the types of volume of bonds qualifying for the
federal income tax exemption of interest, which may have an effect on the
ability of the Portfolios to purchase sufficient amounts of tax-exempt
securities to satisfy the Code's requirement for the payment of exempt-interest
dividends.
All or a portion of the interest on indebtedness incurred or continued by an
investor to purchase or carry shares is not deductible for federal income tax
purposes. Furthermore, entities or persons who are "substantial users" (or
persons related to "substantial users") of facilities financed by "private
activity bonds" or "industrial development bonds" should consult their tax
advisors before purchasing shares of the Portfolios. See the Statement of
Additional Information.
The Portfolios will report annually to their shareholders the portion of
dividends that is taxable and the portion that is tax-exempt based on income
received by the Portfolios during the year to which the dividends relate.
The exemption of dividends paid by the Municipal Bond and Municipal Money
Market Portfolio for Federal income tax purposes may not result in similar
exemptions under the laws of a particular state or local taxing authority. Each
of the Municipal Bond and Municipal Money Market Portfolio will report annually
to its shareholders the percentage and source, on a state-by-state basis, of
interest income earned on municipal bonds and municipal notes held by the
Portfolio during the preceding year.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolios and directs the Adviser to use its best efforts to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolios. The Fund has authorized the Adviser to pay
higher commissions in recognition of brokerage services which, in the opinion of
the Adviser, are necessary for the achievement of better execution, provided the
Adviser believes this to be in the best interest of the Fund.
Since shares of the Portfolios are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Fund's portfolios or who act as agents in the purchase of
shares of the Fund's portfolios for their clients.
44
<PAGE>
In purchasing and selling securities for the Portfolios, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolios may also be appropriate
for other clients served by the Adviser. If purchase or sale of securities
consistent with the investment policies of a Portfolio and one or more of these
other clients served by the Adviser is considered at or about the same time,
transactions in such securities will be allocated among the Portfolio and
clients in a manner deemed fair and reasonable by the Adviser. Although there is
no specified formula for allocating such transactions, the various allocation
methods used by the Adviser, and the results of such allocations, are subject to
periodic review by the Fund's Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of the Fund's portfolio brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Fund, the commissions, fees or other remuneration received by Morgan Stanley
or such affiliates must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of the Board of Directors who are
not "interested persons," as defined in the 1940 Act have adopted procedures
which are reasonably designed to provide that any commissions, fees or other
remuneration paid to Morgan Stanley or such affiliates are consistent with the
foregoing standard.
Portfolio securities will not be purchased from or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act, of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.
Although none of the Portfolios will invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. For each Portfolio, it is anticipated that, under
normal circumstances, the annual portfolio turnover rate will not exceed 100%.
High portfolio turnover involves correspondingly greater transaction costs which
will be borne directly by the respective Portfolio. In addition, high portfolio
turnover may result in more capital gains which would be taxable to the
shareholders of the respective Portfolio. The tables set forth in "Financial
Highlights" present the Portfolios' historical turnover rates.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by shareholders, the Board of Directors has the power to
designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with
45
<PAGE>
respect to such classes. The shares of common stock of each portfolio are
currently classified into two classes, the Class A shares and Class B shares,
except for the International Small Cap, Money Market and Municipal Money Market
Portfolio, which only offer Class A shares.
The shares of each Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Persons or organizations owning 25% or more
of the outstanding shares of a Portfolio may be presumed to "control" (as that
term is defined in the 1940 Act) that Portfolio. As of December 18, 1995,
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O. Box
92956, Chicago, Illinois 60675-2956 was presumed to "control" the High Yield
Portfolio based solely on their ownership of 25% or more of the outstanding
voting shares of such Portfolio. Under Maryland law, the Fund is not required to
hold an annual meeting of its shareholders unless required to do so under the
1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser, or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
As of September 1, 1995, domestic securities and cash are held by Chase,
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
46
<PAGE>
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE CORPORATE BOND RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers 1, 2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks at a higher end of
the rating category, modifier 2 indicates a mid-range rating and the modifier 3
indicates that the issue ranks at the lower end of the rating category.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contact over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
STANDARD & POOR'S CORPORATION'S CORPORATE BOND RATINGS:
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation and indicate an extremely strong capacity to pay principal
and interest.
47
<PAGE>
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only to a small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC -- Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C -- The rating C is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
48
<PAGE>
<TABLE>
<CAPTION>
<S><C>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
FIXED INCOME, GLOBAL FIXED INCOME, MORTGAGE-BACKED SECURITIES,
MUNICIPAL BOND, HIGH YIELD, MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
- -----------------------------------------------------------------------------------------------------------------------------------
NOTE: THIS REGISTRATION FORM SHOULD BE COMPLETED BY THOSE INVESTORS WITH EXISTING MORGAN STANLEY
ACCOUNTS DESIRING TO INVEST FREE CASH BALANCES AUTOMATICALLY.
- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT REGISTRATION FORM
- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, please contact your Morgan Stanley representative or call us
toll free 1-(800)-548-7786. Please print all items except signature, and mail to
the Fund at the address above.
- -----------------------------------------------------------------------------------------------------------------------------------
A) REGISTRATION
1. INDIVIDUAL 1.
------------------------------------------------------------------------------------------------
2. JOINT TENANTS First Name Initial Last Name
(RIGHTS OF SURVIVORSHIP 2.
PRESUMED UNLESS ------------------------------------------------------------------------------------------------
TENANCY IN COMMON First Name Initial Last Name
IS INDICATED)
------------------------------------------------------------------------------------------------
First Name Initial Last Name
- -----------------------------------------------------------------------------------------------------------------------------------
3. CORPORATIONS, 3.
TRUSTS AND OTHERS ------------------------------------------------------------------------------------------------
Please call the Fund
for additional documents ------------------------------------------------------------------------------------------------
that may be required
to set up account and ------------------------------------------------------------------------------------------------
to authorize Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/
transactions ASSOCIATION TRANSFER TO
MINOR (ONLY ONE
CUSTODIAN AND
MINOR PERMITTED)
/ / TRUST / / OTHER (Specify)
------------------------ -------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box
-------------------------------------------------------------------------------
Please fill in City State Zip
completely, including -------------------------------------- ---- --------------------------------------
telephone number(s). Home Telephone No. - - Business Telephone No. - -
------------ ------------
/ / United States Citizen / / Resident Alien / / Non-Resident Alien: Indicate Country of Residence
------------------
- -----------------------------------------------------------------------------------------------------------------------------------
C) TAXPAYER PART 1. Enter your Taxpayer IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For You (as a payee) are required by law to provide us
NUMBER most individual taxpayers, (as payer) with your correct taxpayer identification
If the account is in more than this is your Social Security number. Accounts that have a missing or incorrect taxpayer
one name, CIRCLE THE NAME OF Number. identification number will be subject to backup withholding
THE PERSON WHOSE TAXPAYER TAXPAYER IDENTIFICATION at a 31% rate on interest, dividends, distributions and other
IDENTIFICATION NUMBER IS NUMBER payments. If you have not provided us with your correct
PROVIDED IN SECTION A) ABOVE. taxpayer identification number, you may be subject to a $50
If no name is circled, the -------------------------- penalty imposed by the Internal Revenue Service.
number will be considered to OR Backup withholding is not an additional tax; the tax
be that of the last name SOCIAL SECURITY NUMBER liability of persons subject to backup withholding will be
listed. For Custodian account -------------------------- reduced by the amount of tax withheld. If withholding
of a minor (Uniform Gifts/ results in an overpayment of taxes, a refund may be
Transfers to Minors Acts), PART 2. BACKUP WITHHOLDING obtained.
give the Social Security / / Check this box if you are You may be notified that you are subject to backup
Number of the minor. NOT subject to Backup withholding under section 3406(a)(1)(C) of the Internal
Withholding under the Revenue Code because you have underreported interest or
provisions of Section dividends or you were required to but failed to file a return
3406(a)(1)(C) of the Internal which would have included a reportable interest or
Revenue Code. dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK
THE BOX IN PART 2 AT LEFT.
- -----------------------------------------------------------------------------------------------------------------------------------
D) PORTFOLIO AND CLASS For Purchase of the following Portfolio(s):
SELECTION Fixed Income Portfolio / / Class A Shares $_______ / / Class B Shares $_______
Global Fixed Income Portfolio / / Class A Shares $_______ / / Class B Shares $_______
(Class A shares minimum Mortgage-Backed Securities Portfolio / / Class A Shares $_______ / / Class B Shares $_______
$500,000 for each Municipal Bond Portfolio / / Class A Shares $_______ / / Class B Shares $_______
Portfolio and Class B High Yield Portfolio / / Class A Shares $_______ / / Class B Shares $_______
shares minimum $100,000 Money Market Portfolio / / Class A Shares $_______ / /
for each of the Fixed Municipal Money Market Portfolio / / Class A Shares $_______ / /
Income, Global Fixed Total Initial Investment $___________________________
Income, Municipal Bond,
Mortgage-Backed Securities
and High Yield Portfolios.
Minimum $50,000 for each
of the Money Market and
Municipal Money Market
Portfolios). Please
indicate Portfolio, class
and amount.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S><C>
- -----------------------------------------------------------------------------------------------------------------------------------
E) METHOD OF INVESTMENT Payment by:
Please indicate portfolio, / / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--PORTFOLIO NAME)
manner of payment.
/ / Exchange $ From -
---------------- ------------------------ ----------------------------
Name of Portfolio Account No.
/ / Account previously established by:
/ / Phone exchange / / Wire on -
--------------------------- ------------------------------
Date Account No. (Check
(Previously assigned Digit)
by the Fund)
- -----------------------------------------------------------------------------------------------------------------------------------
F) AUTHORIZATION OF I/we hereby authorize the Fund and Morgan Stanley Asset Management Inc. to transfer from my/our
AUTOMATIC PURCHASE account at Morgan Stanley & Co. Inc. all free cash balances (that is, any cash available on
AND REDEMPTION demand at the close of the previous day), which are held in such account and to invest such cash
(Available only for balances in the / / Money Market Portfolio or the / / Municipal Money Market Portfolio
Money Market and (check only one).
Municipal Money Market
Portfolios) -
------------------------------------------ -----------------------------
Account Title at Morgan Stanley & Co. Inc. Account Number
- -----------------------------------------------------------------------------------------------------------------------------------
G) DISTRIBUTION Income dividends and capital gains distributions (if any) will be reinvested in
OPTION additional shares unless either box below is checked.
/ / Income dividends to be paid in cash, capital gains distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if any) to be paid in cash.
- -----------------------------------------------------------------------------------------------------------------------------------
H) TELEPHONE / / I/we hereby authorize the Fund and its
REDEMPTION agents to honor any telephone requests to ------------------------- ------------------------
wire redemption proceeds to the Name of COMMERCIAL Bank Bank Account No.
Please select at time of commercial bank indicated at right and/or (Not Savings Bank)
initial application if mail redemption proceeds to the name ------------------------
you wish to redeem shares and address in which my/our fund account Bank ABA No.
by telephone. A SIGNATURE is registered if such requests are believed ---------------------------------------------------
GUARANTEE IS REQUIRED IF to be authentic. Name(s) in which your BANK Account is Established
BANK ACCOUNT IS NOT
REGISTERED IDENTICALLY TO TELEPHONE REQUESTS FOR REDEMPTIONS OR ---------------------------------------------------
YOUR FUND ACCOUNT. EXCHANGES WILL NOT BE HONORED UNLESS THE Bank's Street Address
BOX IS CHECKED. THE FUND AND THE FUND'S
TELEPHONE REQUESTS FOR TRANSFER AGENT WILL EMPLOY REASONABLE ---------------------------------------------------
REDEMPTIONS OR PROCEDURES TO CONFIRM THAT INSTRUCTIONS City State Zip
EXCHANGES WILL NOT BE COMMUNICATED BY TELEPHONE ARE GENUINE.
HONORED UNLESS THE THESE PROCEDURES INCLUDE REQUIRING THE
BOX AT INVESTOR TO PROVIDE CERTAIN PERSONAL
RIGHT IS CHECKED. IDENTIFICATION INFORMATION AT THE TIME
AN ACCOUNT IS OPENED AND PRIOR TO
EFFECTING EACH TRANSACTION REQUESTED BY
TELEPHONE. IN ADDITION, ALL TELEPHONE
TRANSACTION REQUESTS WILL BE RECORDED
AND INVESTORS MAY BE REQUIRED TO
PROVIDE ADDITIONAL TELECOPIED WRITTEN
INSTRUCTIONS OF TRANSACTION REQUESTS.
NEITHER THE FUND NOR THE TRANSFER AGENT
WILL BE RESPONSIBLE FOR ANY LOSS,
LIABILITY, COST OR EXPENSE FOR
FOLLOWING INSTRUCTIONS RECEIVED BY
TELEPHONE THAT IT REASONABLY BELIEVES
TO BE GENUINE.
- -----------------------------------------------------------------------------------------------------------------------------------
I) INTERESTED PARTY
OPTION ------------------------------------------------------------------------------------------------
Name
In addition to the ------------------------------------------------------------------------------------------------
account statement
sent to my/our
registered address, ------------------------------------------------------------------------------------------------
I/we hereby authorize Address
the fund to mail
duplicate statements ------------------------------------------------------------------------------------------------
to the name and City State Zip Code
address provided at
right.
- -----------------------------------------------------------------------------------------------------------------------------------
J) DEALER
INFORMATION -------------------- -------------------- --------------------
Representative Name Representative No. Branch No.
- -----------------------------------------------------------------------------------------------------------------------------------
K) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal capacity to purchase and
ALL HOLDERS redeem shares of the Fund and affirm that I/we have received a current Prospectus of the Morgan
AND TAXPAYER Stanley Institutional Fund, Inc. and agree to be bound by its terms. Under the penalties of
CERTIFICATION perjury, I/we certify that the information provided in Section C) above is true, correct and
complete.
Sign Here -- (X) (X)
-------------------------------------------- -------------------------------------------------
Signature Date Signature Date
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 5
Prospectus Summary................................ 12
Investment Objectives and Policies................ 16
Additional Investment Information................. 25
Investment Limitations............................ 28
Management of the Fund............................ 29
Purchase of Shares................................ 32
Redemption of Shares.............................. 37
Shareholder Services.............................. 38
Valuation of Shares............................... 39
Performance Information........................... 40
Dividends and Capital Gains Distributions......... 41
Taxes............................................. 42
Portfolio Transactions............................ 44
General Information............................... 45
Appendix A........................................ 47
Account Registration Form
</TABLE>
FIXED INCOME PORTFOLIO
GLOBAL FIXED INCOME PORTFOLIO
MUNICIPAL BOND PORTFOLIO
MORTGAGE-BACKED SECURITIES PORTFOLIO
HIGH YIELD PORTFOLIO
MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
BALANCED PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-seven portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and the Class B
shares of the Small Cap Value Equity Portfolio, the Value Equity Portfolio and
the Balanced Portfolio (the "Portfolios"). On January 2, 1996, the Portfolios
began offering two classes of shares, the Class A shares and the Class B shares.
All shares of the Portfolios owned prior to January 2, 1996 were redesignated
Class A shares on January 2, 1996. The Class A and Class B shares currently
offered by the Portfolios have different minimum investment requirements and
fund expenses. Shares of the portfolios are offered with no sales charge or
exchange or redemption fee (with the exception of one of the portfolios).
The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
corporations.
The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the stock
market in general at the time of purchase.
The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed income
securities.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional investors and high net
worth individual investors a series of portfolios which benefit from the
investment expertise and commitment to excellence associated with Morgan Stanley
and its Affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund also offers other portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, China Growth, Emerging Markets,
European Equity, Global Equity, Gold, International Equity, International Small
Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value
Equity, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and
Municipal Bond Portfolios; and (v) MONEY MARKET -- Money Market and Municipal
Money Market Portfolios. Additional information about the Fund is contained in a
"Statement of Additional Information", dated May 1, 1995, which is incorporated
herein by reference. The Statement of Additional Information and the
prospectuses pertaining to the other portfolios of the Fund are available upon
request and without charge by writing or calling the Fund at the address and
telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY 2, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
each Portfolio will incur:
<TABLE>
<CAPTION>
SMALL CAP
VALUE EQUITY VALUE EQUITY BALANCED
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------- ------------- ------------- -----------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A.................................................. None None None
Class B.................................................. None None None
Maximum Sales Load Imposed on Reinvested Dividends
Class A.................................................. None None None
Class B.................................................. None None None
Deferred Sales Load
Class A.................................................. None None None
Class B.................................................. None None None
Redemption Fees
Class A.................................................. None None None
Class B.................................................. None None None
Exchange Fees
Class A.................................................. None None None
Class B.................................................. None None None
<CAPTION>
SMALL CAP
VALUE EQUITY VALUE EQUITY BALANCED
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------- ------------- ------------- -----------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C> <C>
Management Fee (Net of Fee Waivers)*
Class A.................................................. 0.58% 0.38% 0.08%
Class B.................................................. 0.58% 0.38% 0.08%
12b-1 Fees
Class A.................................................. None None None
Class B.................................................. 0.25% 0.25% 0.25%
Other Expenses
Class A.................................................. 0.42% 0.32% 0.62%
Class B.................................................. 0.42% 0.32% 0.62%
------ ------ -----------
Total Operating Expenses (Net of Fee Waivers)*
Class A.................................................. 1.00% 0.70% 0.70%
Class B.................................................. 1.25% 0.95% 0.95%
------ ------ -----------
------ ------ -----------
</TABLE>
- --------------
*The Adviser has agreed to waive its management fee and/or reimburse each
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolios to exceed a specified percentage of their respective
average daily net assets. Set forth below, for each Portfolio, are the
management fees absent fee waivers and total operating expenses absent such fee
waivers and/or reimbursements as a percent of the average daily net assets of
the Class A shares and Class B shares, respectively.
2
<PAGE>
<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT FEE ------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- ------------------------------------------- --------------------- ----------- -----------
<S> <C> <C> <C>
Small Cap Value Equity..................... 0.85% 1.27% 1.52%
Value Equity............................... 0.50% 0.82% 1.07%
Balanced................................... 0.50% 1.12% 1.37%
</TABLE>
As a result of these reductions, the Management Fees stated above are lower
than the contractual fees stated under "Management of the Fund." The Adviser
reserves the right to terminate any of its fee waivers and/or expense
reimbursements at any time in its sole discretion. For further information on
Fund expenses, see "Management of the Fund."
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. The Class A expenses and fees for each Portfolio have been restated
to reflect current fees. The Class B expenses and fees for the Portfolios are
based on estimates, assuming that the average daily net assets of the Class B
shares of each Portfolio will be $50,000,000. "Other Expenses" include Board of
Directors' fees and expenses, amortization of organizational costs, filing fees,
professional fees and costs for shareholder reports. Due to the continuous
nature of Rule 12b-1 fees, long term Class B shareholders may pay more than the
equivalent of the maximum front-end sales charges otherwise permitted by the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
("NASD").
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The following example is based on total
operating expenses of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Small Cap Value Equity Portfolio
Class A........................................................ $ 10 $ 32 $ 55 $ 122
Class B........................................................ 13 40 69 151
Value Equity Portfolio
Class A........................................................ 7 22 39 87
Class B........................................................ 10 30 53 117
Balanced Portfolio
Class A........................................................ 7 22 39 87
Class B........................................................ 10 30 53 117
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Fund intends to comply with all state laws that restrict investment
company expenses. Currently, the most restrictive state law requires that the
aggregate annual expenses of an investment company shall not exceed two and
one-half percent (2 1/2%) of the first $30 million of average net assets, two
percent (2%) of the next $70 million of average net assets, and one and one-half
percent (1 1/2%) of the remaining net assets of such investment company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse any Portfolio, if necessary, if in any fiscal year the sum of the
Portfolio's expenses exceeds the limit set by applicable state laws.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Class A shares for
each of the Portfolios for the periods presented. The new Class B shares were
not offered prior to the date of this Prospectus. The audited financial
highlights for the Class A shares for the fiscal year ended December 31, 1994
and the unaudited financial highlights for the Class A shares for the six months
ended June 30. 1995 are part of the Fund's financial statements which appear in
the Fund's December 31, 1994 Annual Report to Shareholders and June 30, 1995
Semi-Annual Report to Shareholders, respectively, and which are included in the
Fund's Statement of Additional Information. The Portfolio's financial highlights
for each of the periods presented, except for the six months ended June 30,
1995, have been audited by Price Waterhouse LLP, whose unqualified report
thereon is also included in the Statement of Additional Information. Additional
performance information for the Class A shares is included in the Annual Report.
The Annual Report, Semi-Annual Report and the financial statements therein,
along with the Statement of Additional Information, are available at no cost
from the Fund at the address and telephone number noted on the cover page of
this Prospectus. Subsequent to October 31, 1992 (the Fund's prior fiscal year
end) the Fund changed its fiscal year end to December 31. The following
information should be read in conjunction with the financial statements and
notes thereto.
4
<PAGE>
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 17, 1992* TO YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, 1995
1992 1993 1994 (UNAUDITED)
--------------------- ------------- ------------- ----------------
<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 0.15
Net Realized and Unrealized
Gain/(Loss) on Investments...... 0.13 0.90 (0.01) 1.03
Total from Investment
Operations.................... 0.14 1.14 0.27 1.18
DISTRIBUTIONS
Net Investment Income............ -- (0.18) (0.27) (0.14)
Net Realized Gain................ -- -- (0.30) (0.33)
Total Distributions............ -- (.018) (0.57) (0.47)
NET ASSET VALUE, END OF PERIOD..... $10.14 $11.10 $10.80 $11.51
TOTAL RETURN....................... 1.40% 11.33% 2.53% 11.44%
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)....................... $5,974 $26,775 $40,033 $48,812
Ratio of Expenses to Average Net
Assets (1)(2)..................... 1.00%** 1.00% 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1)(2)......... 1.64%** 2.56% 2.67% 2.82%**
Portfolio Turnover Rate............ 0% 29% 22% 17%
</TABLE>
- ------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment
income............................ $0.13 $0.06 $0.03 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets..... 23.14%** 1.68% 1.26% 1.27%**
Net Investment Income (Loss) to
Average
Net Assets...................... (20.50)%** 1.88% 2.41% 2.55%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.85% of the
average daily net assets of the Small Cap Value Equity Portfolio. The
Adviser has agreed to waive a portion of this fee and/ or reimburse expenses
of the Portfolio to the extent that the total operating expenses of the
Portfolio exceed 1.00% of the average daily net assets of the Class A shares
and 1.25% of the average daily net assets of the Class B shares. In the
period ended December 31, 1992, the years ended December 31, 1993 and 1994,
and the six months ended June 30, 1995, the Adviser waived management fees
and/or reimbursed expenses totalling $38,000, $123,000, $94,000 and $58,000,
respectively, for the Small Cap Value Equity Portfolio.
* Commencement of Operations.
** Annualized.
5
<PAGE>
VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
JANUARY 31, 1990* YEAR ENDED YEAR ENDED TWO MONTHS ENDED YEAR ENDED YEAR ENDED
TO OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1990 1991 1992 1992 1993 1994
----------------- ----------- ----------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $10.00 $8.59 $10.24 $10.71 $11.31 $12.63
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)................... 0.37 0.46 0.38 0.08 0.37 0.40
Net Realized and
Unrealized Gain/
(Loss) on
investments........... (1.45) 1.67 0.48 0.52 1.31 (0.55)
Total from Investment
Operations.......... (1.08) 2.13 0.86 0.60 1.68 (0.15)
DISTRIBUTIONS
Net Investment
Income................ (0.33) (0.48) (0.39) -- (0.36) (0.40)
Net Realized Gain...... -- -- -- -- -- (0.58)
Total
Distributions....... (0.33) (0.48) (0.39) -- (0.36) (0.98)
NET ASSET VALUE, END OF
PERIOD.................. $8.59 $10.24 $10.71 $11.31 $12.63 $11.50
TOTAL RETURN............. (11.05)% 25.34% 8.51% 5.60% 15.14% (1.29)%
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands)............. $18,178 $16,304 $25,013 $27,541 $54,598 $73,406
Ratio of Expenses to
Average Net Assets
(1)(2).................. 0.70%** 0.70% 0.70% 0.70%** 0.70% 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1)(2)........... 5.46%** 4.57% 3.72% 4.41%** 3.23% 3.37%
Portfolio Turnover
Rate.................... 70% 90% 56% 9% 51% 33%
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1995
(UNAUDITED)
-----------------
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $11.50
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)................... 0.18
Net Realized and
Unrealized Gain/
(Loss) on
investments........... 1.95
Total from Investment
Operations.......... 2.13
DISTRIBUTIONS
Net Investment
Income................ (0.19)
Net Realized Gain...... (0.38)
Total
Distributions....... (0.57)
NET ASSET VALUE, END OF
PERIOD.................. $13.06
TOTAL RETURN............. 19.41%
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands)............. $108,080
Ratio of Expenses to
Average Net Assets
(1)(2).................. 0.70%**
Ratio of Net Investment
Income to Average Net
Assets (1)(2)........... 3.18%**
Portfolio Turnover
Rate.................... 18%
</TABLE>
- ------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income..... $0.01 $0.02 $0.01 $0.01 $0.03 $0.01 $0.01
Ratios before expense limitation:
Expenses to Average Net
Assets................ 0.88%** 0.87% 0.84% 1.20%** 0.95% 0.80% 0.82%**
Net Investment Income to
Average Net Assets.... 5.28%** 4.40% 3.58% 3.91%** 2.98% 3.27% 3.06%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.50% of the
average daily net assets of the Value Equity Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 0.70% of the average daily net assets of the Class A shares and 0.95%
of the average daily net assets of the Class B shares. In the period ended
October 31, 1990, the years ended October 31, 1991 and 1992, the two months
ended December 31, 1992, the years ended December 31, 1993 and 1994, and the
six months ended June 30, 1995, the Adviser waived management fees and/ or
reimbursed expenses totalling $26,000, $25,000, $27,000, $24,000, $106,000,
$73,000 and $52,000, respectively, for the Value Equity Portfolio.
* Commencement of Operations.
** Annualized.
6
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
FEBRUARY 20, 1990* YEAR ENDED YEAR ENDED TWO MONTHS ENDED YEAR ENDED YEAR ENDED
TO OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1990 1991 1992 1992 1993 1994
------------------ ----------- ----------- ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $10.00 $9.62 $10.61 $11.00 $11.31 $11.13
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)................... 0.40 0.59 0.58 0.10 0.44 0.42
Net Realized and
Unrealized Gain (Loss)
on Investments........ (0.46) 1.03 0.42 0.21 0.79 (0.64)
Total from Investment
Operations.......... (0.06) 1.62 1.00 0.31 1.23 (0.22)
DISTRIBUTIONS
(0.32) (0.63) (0.58) -- (0.41) (0.49)
Net Investment
Income................
In Excess of Net
Investment Income..... -- -- -- -- (0.08) --
Net Realized Gain...... -- -- (0.03) -- (0.06) (1.46)
In Excess of Net
Realized Gain......... -- -- -- -- (0.86) --
Total
Distributions....... (0.32) (0.63) (0.61) -- (1.41) (1.95)
NET ASSET VALUE, END OF
PERIOD.................. $9.62 $10.61 $11.00 $11.31 $11.13 $8.96
TOTAL RETURN............. (0.63)% 17.31% 9.57% 2.82% 12.09% (2.32)%
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands)............. $37,444 $51,334 $40,332 $39,984 $29,684 $18,492
Ratio of Expenses to
Average Net Assets
(1)(2).................. 0.70%** 0.70% 0.70% 0.70%** 0.70% 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1)(2)........... 6.81%** 5.99% 5.21% 5.29%** 3.88% 4.13%
Portfolio Turnover
Rate.................... 19% 67% 40% 4% 136% 44%
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1995
(UNAUDITED)
----------------
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $8.96
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)................... 0.19
Net Realized and
Unrealized Gain (Loss)
on Investments........ 1.03
Total from Investment
Operations.......... 1.22
DISTRIBUTIONS
(0.19)
Net Investment
Income................
In Excess of Net
Investment Income..... --
Net Realized Gain...... (0.26)
In Excess of Net
Realized Gain......... --
Total
Distributions....... (0.45)
NET ASSET VALUE, END OF
PERIOD.................. $9.73
TOTAL RETURN............. 14.25%
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands)............. $21,313
Ratio of Expenses to
Average Net Assets
(1)(2).................. 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1)(2)........... 4.23%**
Portfolio Turnover
Rate.................... 14%**
</TABLE>
- ------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income..... $0.01 $0.01 $0.01 $0.01 $0.04 $0.03 $0.02
Ratios before expense limitation:
Expenses to Average Net
Assets................ 0.90%** 0.78% 0.79% 1.00%** 1.02% 0.95% 1.12%**
Net Investment Income to
Average Net Assets.... 6.61%** 5.91% 5.12% 4.99%** 3.56% 3.88% 3.81%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.50% of the
average daily net assets of the Balanced Portfolio. The Adviser has agreed
to waive a portion of this fee and/or reimburse expenses of the Portfolio to
the extent that the total operating expenses of the Portfolio exceed 0.70%
of the average daily net assets of the Class A shares and 0.95% of the
average daily net assets of the Class B shares. In the period ended October
31, 1990, the years ended October 31, 1991 and 1992, the two months ended
December 31, 1992, the years ended December 31, 1993 and 1994, and the six
months ended June 30, 1995, the Adviser waived management fees and/ or
reimbursed expenses totalling $38,000, $39,000, $40,000, $20,000, $115,000,
$60,000 and $43,000, respectively, for the Balanced Portfolio.
* Commencement of Operations.
** Annualized.
7
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-seven portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio, offers Class A shares and, except the International
Small Cap, Money Market and Municipal Money Market Portfolios (the "Single Class
Portfolios"), also offers Class B shares. Each portfolio has its own investment
objective and policies designed to meet specific goals. The investment objective
of each Portfolio described in this Prospectus is as follows:
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
corporations.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
The other portfolios of the Fund are described in other Prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The objectives of these other portfolios are listed
below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including United States issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-United States issuers.
8
<PAGE>
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-United States issuers
with equity market capitalizations of less than $500 million.
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and debt
securities issued or guaranteed by Latin American governments or
governmental entities.
US EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The U.S. REAL ESTATE 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.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with the preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
9
<PAGE>
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at September 30, 1995 had approximately $55.2 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its Portfolios. See "Management of
the Fund -- Investment Adviser" and "-- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. Shares in a Portfolio account opened prior to January 2, 1996
(each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996.
For a Portfolio account opened on or after January 2, 1996 (a "New Account"),
the minimum initial investment is $500,000 for Class A shares of each Portfolio
and $100,000 for Class B shares of each Portfolio. Certain exceptions to the
foregoing minimums apply to (1) shares in a Pre-1996 Account with a value of
$100,000 or more on March 1, 1996 (a "Grandfathered Class A Account"); (2)
Portfolio accounts held by officers of the Adviser and its affiliates; and (3)
certain advisory or asset allocation accounts, such as Total Funds Management
accounts, managed by Morgan Stanley or its affiliates, including the Adviser
("Managed Accounts"). The Adviser reserves the right in its sole discretion to
determine which of such advisory or asset allocation accounts shall be Managed
Accounts. For information regarding Managed Accounts please contact your Morgan
Stanley account representative or the Fund at the telephone number provided on
the cover of this Prospectus. Shares in a Pre-1996 Account with a value of less
than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") convert to
Class B shares on March 1, 1996. See "Purchase of Shares -- Minimum Investment
and Account Sizes; Conversion from Class A to Class B Shares."
The minimum subsequent investment for each Portfolio account is $1,000
(except for automatic reinvestment of dividends and capital gains distributions
for which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
HOW TO REDEEM
Class A shares or Class B shares of each Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions may cause
involuntary redemption or automatic conversion. Class A or Class B shares held
in New Accounts are subject to involuntary redemption if shareholder
redemption(s) of such shares reduces the value of such account to less than
$100,000 for a continuous 60-day period. Involuntary redemption does not apply
to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B
Accounts, regardless of the value of such accounts. Class A shares in a New
Account will convert to Class B shares if shareholder redemption(s) of such
shares reduces the value of such account to less than $500,000 for a continuous
60-day period. Class B shares in a New Account will convert
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<PAGE>
to Class A shares if shareholder purchases of additional Class B shares or
market activity cause the value of the Class B shares in the New Account to
increase to $500,000 or more. See "Purchase of Shares -- Minimum Account Sizes
and Involuntary Redemption of Shares" and "Redemption of Shares."
RISK FACTORS
The investment policies of each of the Portfolios entail certain risks and
considerations of which an investor should be aware. Each Portfolio may invest
in securities of foreign issuers and forward foreign currency exchange
contracts, which are subject to certain risks not typically associated with U.S.
securities. Because the Small Cap Value Equity Portfolio seeks high long-term
total return by investing primarily in small-to medium sized corporations which
are more vulnerable to financial risks and other risks than larger corporations,
investments may involve a higher degree of risk and price volatility than
investments in the general equity markets. See "Investment Objectives and
Policies" and "Additional Investment Information." In addition, each Portfolio
may invest in repurchase agreements, lend its portfolio securities and purchase
securities on a when-issued basis or delayed delivery basis and invest in
forward foreign currency exchange contracts to hedge currency risk associated
with investments in non-U.S. dollar-denominated securities. The Portfolios may
also invest indirectly in securities through sponsored or unsponsored American
Depositary Receipts. Each Portfolio may invest in short-term or medium-term debt
securities or hold cash or cash equivalents for temporary defensive purposes.
The Portfolios may also invest in stock options, stock futures contracts and
options on stock futures contracts. Each of these investment strategies involves
specific risks which are described under "Investment Objectives and Policies"
and "Additional Investment Information" herein and under "Investment Objectives
and Policies" in the Statement of Additional Information.
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies the Fund employs in its efforts to achieve these objectives. Each
Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Fund will attain its objectives. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval.
THE SMALL CAP VALUE EQUITY PORTFOLIO
The investment objective of the Small Cap Value Equity Portfolio is to
provide high total return by investing in equity securities of small- to
medium-sized corporations that the Adviser believes to be undervalued relative
to the stock market in general at the time of purchase. The Portfolio invests
primarily in corporations domiciled in the U.S. with equity market
capitalizations that range generally from $70 million up to $1 billion, but may
from time to time invest in similar size foreign corporations. Under normal
circumstances, the Portfolio will invest at least 65% of the value of its total
assets in equity securities of corporations whose equity market capitalization
is up to $1 billion. The Portfolio may invest up to 35% of the value of its
total assets in equity securities of corporations which are generally smaller
than the 500 largest corporations in the United States. With respect to the
Portfolio, equity securities include common and preferred stocks, convertible
securities, rights and warrants to purchase common stocks, and similar equity
interests, such as trusts or partnership interests. These investments may or may
not carry voting rights.
The Adviser invests with the philosophy that a diversified portfolio of
undervalued, small- to medium-sized companies will provide high total return in
the long run.
Companies considered attractive will have the following characteristics:
1. The market prices of the stocks will be undervalued relative to the
normal earning power of the companies;
2. Stock prices will be low relative to the intrinsic value of the
companies' assets;
3. Stocks will most often have yields distinctly above the average of
companies with similar capitalizations; and
4. Stocks will be of high quality, in the Adviser's judgment, as
evaluated by the companies' balance sheets, income statements,
franchises and product competitiveness.
The thrust of this approach is to seek investments in stocks for which
investor enthusiasm is currently low, as reflected in their valuation, but which
have the financial and fundamental features, which, according to the Adviser's
assessment, will allow the stocks to achieve a higher valuation. Value is
achieved and exposure is reduced for the Portfolio when the investment
community's perceptions improve and the stocks approach what the Adviser
believes is fair valuation.
The Adviser takes a long-term approach by placing a strong emphasis on its
ability to identify attractive values. The Adviser does not intend to respond to
short-term market fluctuations or to acquire securities for the
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<PAGE>
purpose of short-term trading. However, the Adviser may take advantage of
short-term opportunities that are consistent with its objective of high total
return. The Portfolio will maintain diversity among industries and does not
expect to invest more than 25% of its total assets in the stocks of issuers in
any one industry.
The Portfolio invests primarily in small- to medium-sized companies
domiciled in the U.S. The portfolio may, on occasion, invest in equity
securities of foreign issuers that trade on a United States exchange or
over-the-counter in the form of American Depositary Receipts or common stocks.
See "Additional Investment Information."
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE VALUE EQUITY PORTFOLIO
The investment objective of the Value Equity Portfolio is to achieve high
total return (i.e., long-term growth of capital and high current income) by
investing in equity securities that the Adviser believes to be undervalued
relative to the stock market in general at the time of purchase. It seeks
superior market cycle total returns, with an emphasis on strong relative
performance in falling markets. The Portfolio invests primarily in equity
securities of large capitalization companies mainly domiciled in the United
States. With respect to the Portfolio, equity securities include common and
preferred stocks, convertible securities, and rights and warrants to purchase
common stocks. Under normal circumstances, the Portfolio will invest at least
65% of the value of its total assets in equity securities.
The Adviser invests with the philosophy that a diversified portfolio of
undervalued equity securities will outperform the market over the long term, as
well as preserve principal in difficult market environments. Companies
considered attractive will have the following characteristics: 1) stocks most
often will have distinctly above average dividend yields, 2) the market prices
of the stocks will be undervalued relative to the normal earning power of the
company, 3) many stocks will sell at close to or below the replacement value of
their assets and 4) most stocks' market prices will have underperformed the
general market due to a lower level of investor expectations regarding the
company outlook. The thrust of this approach is to seek investments where
current investor enthusiasm is low, as reflected in their valuations. Exposure
is reduced when the investment community's perceptions improve and the company
approaches fair valuation.
The Adviser takes a long-term investment approach by placing a strong
emphasis on its ability to determine attractive values and does not try to
determine short-term changes in the general market level. The Portfolio will
maintain diversity among industries by not investing more than 25% of its total
assets in equity securities of issuers in any one industry. The Portfolio may
invest up to 25% of its total assets in the equity securities of foreign
issuers, including American Depositary Receipts. See "Additional Investment
Information."
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE BALANCED PORTFOLIO
The investment objective of the Balanced Portfolio is to achieve high total
return while preserving capital by investing in a combination of undervalued
equity securities and fixed income securities. The Portfolio seeks
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<PAGE>
strong total returns in all market conditions, with a special emphasis on
minimizing interim declines during falling equity markets. It primarily invests
in large capitalization equity securities, intermediate-maturity bonds and cash
equivalents.
The Adviser uses a valuation-driven balanced portfolio philosophy which
combines separate equity, fixed income and asset allocation strategies. The
equity investment approach is the same one used for the Value Equity Portfolio.
This produces a portfolio of stocks with low price-to-earnings and price-to-book
ratios and high dividend yields. The fixed income strategy values bonds using
historical yield differentials. Short and intermediate government, corporate and
mortgage bonds are used exclusively to implement the Portfolio's fixed income
strategy. The asset allocation strategy shifts the stock/bond/cash equivalent
mix relative to calculated risk and return levels. All three strategies use
historical capital market behavior to reach conclusions.
The Portfolio will typically maintain between 35% and 65% of its total
assets invested in equity securities, depending upon the Adviser's assessment of
market conditions. With respect to the Portfolio, equity securities include
common and preferred stocks, convertible securities, and rights and warrants to
purchase common stocks. In overvalued equity markets, the common stock exposure
will be at the low end of this range. It is expected that equity exposure will
average approximately 55% over time.
Fixed income securities in which the Portfolio may invest include U.S.
Government securities, mortgage-backed securities, corporate bonds, bank
obligations and other short-term money market instruments. The average maturity
of the fixed income securities in the Portfolio will, under normal
circumstances, be approximately five years, although this will vary with
changing market conditions. Up to 25% of the Portfolio's total assets may be
invested in the securities of foreign issuers. See "Additional Investment
Information."
ADDITIONAL INVESTMENT INFORMATION
DEPOSITARY RECEIPTS. Each portfolio is permitted to invest indirectly in
securities of foreign companies through sponsored or unsponsored American
Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and other
types of Depositary Receipts (which, together with ADRs and GDRs, are
hereinafter collectively referred to as "Depositary Receipts"), to the extent
such Depositary Receipts are or become available. Depositary Receipts are not
necessarily denominated in the same currency as the underlying securities. In
addition, the issuers of the securities underlying unsponsored Depositary
Receipts are not obligated to disclose material information in the U.S. and,
therefore, there may be less information available regarding such issuers and
there may not be a correlation between such information and the market value of
the Depositary Receipts. ADRs are Depositary Receipts typically issued by a U.S.
financial institution which evidence ownership interests in a security or pool
of securities issued by a foreign issuer. GDRs and other types of Depositary
Receipts are typically issued by foreign banks or trust companies, although they
also may be issued by U.S. financial institutions, and evidence ownership
interests in a security or pool of securities issued by either a foreign or a
U.S. corporation. Generally, Depositary Receipts in registered form are designed
for use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the U.S. For purposes of each
Portfolio's investment policies, the Portfolio's investments in Depositary
Receipts will be deemed to be investments in the underlying securities.
FOREIGN INVESTMENT. Each Portfolio may invest in securities of foreign
issuers. Investment in obligations of foreign issuers and in foreign branches of
domestic banks involves somewhat different investment risks than
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<PAGE>
those affecting obligations of U.S. issuers. There may be limited publicly
available information with respect to foreign issuers, and foreign issuers are
not generally subject to uniform accounting, auditing and financial standards
and requirements comparable to those applicable to U.S. companies. There may
also be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the U.S. Many foreign securities
markets have substantially less volume than U.S. national securities exchanges,
and securities of some foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the U.S. Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid to the Portfolios
by domestic companies. It is not expected that a Portfolio or its shareholders
would be able to claim a credit for U.S. tax purposes with respect to any such
foreign taxes. See "Taxes." Additional risks include future political and
economic developments, the possibility that a foreign jurisdiction might impose
or change withholding taxes on income payable with respect to foreign
securities, possible seizure, nationalization or expropriation of the foreign
issuer or foreign deposits and the possible adoption of foreign governmental
restrictions such as exchange controls.
Such investments in securities of foreign issuers are frequently denominated
in foreign currencies, and since the Portfolios may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the value of each Portfolio's
assets as measured in U.S. dollars may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and the
Portfolios may incur costs in connection with conversions between various
currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each Portfolio may enter into
forward foreign currency exchange contracts ("forward contracts") that provide
for the purchase or sale of an amount of a specified foreign currency at a
future date. Purposes for which such contracts may be used include protecting
against a decline in a foreign currency against the U.S. dollar between the
trade date and settlement date when the Portfolio purchases or sells non-U.S.
dollar denominated securities, locking in the U.S. dollar value of dividends
declared on securities held by the Portfolio and generally protecting the U.S.
dollar value of securities held by a Portfolio against exchange rate
fluctuation. Such contracts may also be used as a protective measure against the
effects of fluctuating rates of currency exchange and exchange control
regulations. While such forward contracts may limit losses to a Portfolio as a
result of exchange rate fluctuation, they will also limit any gains that may
otherwise have been realized. See "Investment Objectives and Policies -- Forward
Foreign Currency Exchange Contracts" in the Statement of Additional Information.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. Each Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets. Securities lending entails certain risks of delay in recovery or
loss of rights in collateral in the event of the insolvency of the borrower. For
more detailed information about securities lending see "Investment Objectives
and Policies" in the Statement of Additional Information.
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<PAGE>
MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money
market instruments, although the Portfolios intend to stay invested in
securities satisfying their primary investment objective to the extent
practical. Each Portfolio may make money market investments pending other
investment or settlement for liquidity, or in adverse market conditions. The
money market investments permitted for the Portfolios include: obligations of
the United States Government and its agencies and instrumentalities; other debt
securities; commercial paper including bank obligations; certificates of deposit
(including Eurodollar certificates of deposit); and repurchase agreements. For
more detailed information about these money market investments, see "Description
of Securities and Ratings" in the Statement of Additional Information.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. Each Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The aggregate of certain repurchase
agreements and certain other investments is limited as set forth under
"Investment Limitations."
STOCK OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In order
to remain fully invested, and to reduce transaction costs, each Portfolio may
utilize appropriate stock futures contracts and options to a limited extent.
Because transaction costs associated with futures and options may be lower than
the costs of investing in stocks directly, it is expected that the use of index
futures and options to facilitate cash flows may reduce a Portfolio's overall
transaction costs. The Portfolios will engage in futures and options
transactions only for hedging purposes.
Each Portfolio may enter into futures contracts provided that not more than
5% of the Portfolio's total assets are required as deposit to secure obligations
under such contracts.
The primary risks associated with the use of futures and options are (i)
imperfect correlation between the change in market value of the stocks held by
the Portfolio and the prices of futures and options relating to the stocks
purchased or sold by the Portfolio; and (ii) possible lack of a liquid secondary
market for a futures contract and the resulting inability to close a futures
position which could have an adverse impact on the Portfolio's ability to hedge.
In the opinion of the Board of Directors, the risk that the Portfolio will be
unable to close out a futures position or options contract will be minimized by
only entering into futures contracts or options transactions traded on national
exchanges and for which there appears to be a liquid secondary market. For more
detailed information about futures transactions see "Investment Objectives and
Policies" in the Statement of Additional Information.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable a Portfolio may
reduce its holdings in equity and other securities, for temporary defensive
purposes, and the Portfolio may invest in certain short-term (less than twelve
months to maturity) and medium-term (not greater than five years to maturity)
debt securities or may hold cash. The short-
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<PAGE>
term and medium-term debt securities in which a Portfolio may invest consist of
(a) obligations of the U.S. or foreign country governments, their respective
agencies or instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of U.S. or
foreign country banks denominated in any currency; (c) floating rate securities
and other instruments denominated in any currency issued by international
development agencies; (d) finance company and corporate commercial paper and
other short-term corporate debt obligations of U.S. and foreign country
corporations meeting the Portfolio's credit quality standards; and (e)
repurchase agreements with banks and broker-dealers with respect to such
securities. For temporary defensive purposes, the Portfolios intend to invest
only in short-term and medium-term debt securities that the Adviser believes to
be of high quality, i.e., subject to relatively low risk of loss of interest or
principal.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment, but will
take place no more than 120 days after the trade date. Each Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of
high-grade debt securities or cash in an amount at least equal to these
commitments. The payment obligation and the interest rates that will be received
are each fixed at the time a Portfolio enters into the commitment and no
interest accrues to the Portfolio until settlement. Thus, it is possible that
the market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed. It is a
current policy of each Portfolio not to enter into when-issued commitments and
delayed delivery commitments exceeding, in the aggregate, 15% of the market
value of the Portfolio's total assets less liabilities other than the
obligations created by these commitments.
INVESTMENT LIMITATIONS
As a diversified investment company, each Portfolio is subject to the
following limitations: (a) as to 75% of its total assets, a Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the United States Government and its agencies and
instrumentalities, and (b) a Portfolio may not own more than 10% of the
outstanding voting securities of any one issuer.
Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, each
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. Each Portfolio
may not (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 10% of the market value of the Portfolio's
total assets would be invested in such repurchase agreements and other
investments for which market quotations are not readily available or which are
otherwise illiquid; (ii) borrow money, except from banks for extraordinary or
emergency purposes, and then only in amounts up to 10% of the value of the
Portfolio's total assets, taken at cost at the time of borrowing, or purchase
securities while borrowings exceed 5% of its total assets; (iii) mortgage,
pledge or hypothecate any assets except in connection with any such borrowing in
amounts up to 10% of the value of the Portfolio's net
17
<PAGE>
assets at the time of borrowing; (iv) invest in fixed time deposits with a
duration of over seven calendar days; or (v) invest in fixed time deposits with
a duration of from two business days to seven calendar days if more than 10% of
the Portfolio's total assets would be invested in these deposits.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment
Adviser and Administrator of the Fund and each Portfolio. The Adviser provides
investment advice and portfolio management services, pursuant to an Investment
Advisory Agreement and, subject to the supervision of the Fund's Board of
Directors, makes each Portfolio's day-to-day investment decisions, arranges for
the execution of portfolio transactions and generally manages each Portfolio's
investments. The Adviser is entitled to receive from each Portfolio an annual
management fee, payable quarterly, equal to the percentage of average daily net
assets set forth in the table below. However, the Adviser has agreed to a
reduction in the fees payable to it and to reimburse the Portfolios, if
necessary, if such fees would cause the total annual operating expenses of any
Portfolio to exceed the respective percentage of average daily net assets set
forth in the table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING
EXPENSES
AFTER FEE WAIVERS
--------------------------
PORTFOLIO MANAGEMENT FEE CLASS A CLASS B
- ----------------------------------- --------------- ------------ ------------
<S> <C> <C> <C>
Small Cap Value Equity Portfolio... 0.85% 1.00% 1.25%
Value Equity Portfolio............. 0.50% 0.70% 0.95%
Balanced Portfolio................. 0.50% 0.70% 0.95%
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
United States and abroad. At September 30, 1995, the Adviser, together with its
affiliated asset management companies, managed investments totaling
approximately $55.2 billion, including approximately $40.1 billion under active
management and $15.1 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS
Michael A. Crowe, Stephen C. Sexauer and Alford E. Zick, Jr. have primary
responsibility for managing the Balanced Portfolio and the Value Equity
Portfolio; Mr. Crowe has had such responsibility since September, 1992 and Mr.
Sexauer and Mr. Zick have had such responsibility since the Portfolios'
inception in February and January, 1990, respectively. Michael A. Crowe and
Christian K. Stadlinger have had primary responsibility for managing the Small
Cap Value Equity Portfolio and have had such responsibility since its inception
in December, 1992.
MICHAEL A. CROWE. Mr. Crowe is a Managing Director of Morgan Stanley and
Chief Operating Officer of the Adviser's Chicago office, with overall
responsibility for the Adviser's U.S. large-capitalization value equity, U.S.
small-capitalization value equity, and value balanced products. His equity
research responsibilities include the energy, bank, and financial diversified
sectors. Previously, he had been Worldwide Director of Marketing for the
Adviser; prior to that, he was a Portfolio Manager and Senior Business
Development Officer of the Adviser's Chicago office. Before joining Morgan
Stanley in 1986, Mr. Crowe was senior vice president and midwestern regional
manager for Callan Associates, a large, privately-held investment management
consulting firm. At Callan, he served as the consultant to some of the major
public and private pension plans in the U.S. Prior to his
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<PAGE>
tenure at Callan, Mr. Crowe was a vice president of Continental Illinois
National Bank and a member of the trust investment committee, which set overall
investment policy for the trust department. Mr. Crowe began his financial
services career with Kidder Peabody & Co. and Blyth Eastman Dillon. He received
his B.A. and his M.B.A. from Western Michigan University.
STEPHEN C. SEXAUER. Mr. Sexauer is a Principal of Morgan Stanley and is a
member of the investment management team of the Adviser's Chicago affiliate as
well as Vice President of the Adviser. In addition to portfolio management, his
equity research responsibilities include aerospace, industrials, capital goods,
transportation, and diversified financial companies. Mr. Sexauer joined the firm
in July 1989 after three years as a Vice President at Salomon Brothers.
Previously, he was with Merrill Lynch Economics and Wharton Econometrics. Mr.
Sexauer received a B.S. in Economics from the University of Illinois and an
M.B.A. in Economics and Statistics from the University of Chicago.
CHRISTIAN K. STADLINGER. Mr. Stadlinger is a Vice President of the Adviser
and manages the small-cap value equity product of the Adviser's Chicago
affiliate. He became a member of the Adviser's Chicago large cap value portfolio
management team, specializing in quantitative and fundamental research, upon
completion of his doctoral dissertation at Northwestern University in April
1989. Mr. Stadlinger was the catalyst in the development of the Adviser's
small-cap value product, and he continues to research and develop structured
valuation techniques in the area of small cap investing. Mr. Stadlinger has a
degree in Computer Science and Economics from the University of Vienna, a Ph.D.
in Economics from Northwestern University, and is a Certified Financial Analyst.
ALFORD E. ZICK, JR. Mr. Zick is a Principal of Morgan Stanley and is a
member of the investment management team of the Adviser's Chicago affiliate. In
addition to portfolio management, his equity research responsibilities include
consumer staples, retail and insurance companies. He became a member of the
Adviser's Chicago investment management team in August 1989, after an extensive
career in asset management with Chicago Pacific Corporation, Staley Continental,
Inc., and A.E. STALEY Manufacturing Company. Mr. Zick has a degree in accounting
from the University of Illinois.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
the Board of Directors of the Fund and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal and state laws. The Administration Agreement also
provides that the Administrator, through its agents, will provide the Fund
dividend disbursing and transfer agent services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which, on an
annual basis equals, 0.15% of the average daily net assets of each Portfolio.
In a merger completed on September 1, 1995, The Chase Manhattan Bank, N.A.
("Chase") succeeded to all of the rights and obligations under the U.S. Trust
Administration Agreement between the Adviser and the United States Trust Company
of New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide
certain administrative services to the Fund. Pursuant to a delegation clause in
the U.S. Trust Administration Agreement, U.S. Trust delegated its administration
responsibilities to Chase Global Funds Services Company ("CGFSC"), formerly
known as Mutual Funds Service Company which after the merger with Chase is a
subsidiary of Chase and will continue to provide certain administrative services
to the Fund. The Adviser supervises and monitors such administrative services
provided by CGFSC. The services provided under the Administration Agreement and
the U.S. Trust Administration Agreement are also subject to the supervision of
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<PAGE>
the Board of Directors of the Fund. The Board of Directors of the Fund has
approved the provision of services described above pursuant to the
Administration Agreement and the U.S. Trust Administration Agreement as being in
the best interests of the Fund. CGFSC's business address is 73 Tremont Street,
Boston, Massachusetts 02108-3913. For additional information regarding the
Administration Agreement or the U.S. Trust Administration Agreement, see
"Management of the Fund" in the Statement of Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
Each Portfolio currently offers only the classes of shares offered by this
Prospectus. Each Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each Portfolio pursuant to Rule 12b-1 under the 1940 Act (each, a
"Plan"). Under each Plan, the Distributor is entitled to receive from each
Portfolio a distribution fee, which is accrued daily and paid quarterly, of
0.25% of the average daily net assets of the Class B shares of each Portfolio on
an annualized basis. The Distributor expects to reallocate most of its fee to
its investment representatives. The Distributor may, in its discretion,
voluntarily waive from time to time all or any portion of its distribution fee
and each of the Distributor and the Adviser is free to make additional payments
out of its own assets to promote the sale of Fund shares, including payments
that compensate financial institutions for distribution services or shareholder
services.
Each Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of each Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolios. See "Valuation of Shares."
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MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio opened on or after January 2, 1996 (a "New Account"), the
minimum initial investment and minimum account size are $500,000 for Class A
shares and $100,000 minimum for Class B shares. Managed Accounts may purchase
Class A shares without being subject to a minimum initial investment or minimum
account size requirements for a Portfolio account. Officers of the Adviser and
its affiliates are subject to the minimums for a Portfolio account, except they
may purchase Class B shares subject to a minimum initial investment and minimum
account size of $5,000 for a Portfolio account.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based solely upon changes in the market that reduce the net asset value of
shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remain Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B Account") convert to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
The Fund reserves the right to modify or terminate the conversion features
of the shares as stated above at any time upon 60-days' notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to New Accounts containing Class B shares held by
officers of the Adviser or its affiliates. However, if the value of such account
held by an officer of the Adviser or its affiliates falls below $5,000 because
of shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains $5,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
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CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days' notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of each Portfolio and $100,000 for Class B shares of each
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers)
payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio name]," to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The Portfolio(s) to be
purchased should be designated on the Account Registration Form. For purchases
by check, the Fund is ordinarily credited with Federal Funds within one
business day. Thus, your purchase of shares by check is ordinarily credited to
your account at the net asset value per share of the relevant Portfolio
determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund
prior to wiring funds.)
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B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
Purchase orders for shares of the Portfolios which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed
at the price computed on the date of receipt as long as the Transfer Agent
receives payment by check or in Federal Funds prior to the regular close of
the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested.
Your bank may charge a service fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000 for each Portfolio, except for automatic reinvestment of dividends and
capital gains distributions for which there are no minimums) by purchasing
shares at net asset value by mailing a check to the Fund (payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]") at the above address or
by wiring monies to the Custodian Bank as outlined above. It is very important
that your account name, portfolio name and the class selected be specified in
the letter or wire to assure proper crediting to your account. In order to help
to ensure that your wire orders are invested promptly, you are requested to
notify one of the Fund's representatives (toll free 1-800-548-7786) prior to
sending the wire. Additional investments will be applied to purchase additional
shares in the same class held by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of each portfolio is
the net asset value next determined after the order is received. See "Valuation
of Shares." An order received prior to the close of the New York Stock Exchange
("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the
price computed on the
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date of receipt; an order received after the close of the NYSE will be executed
at the price computed on the next day the NYSE is open as long as the Transfer
Agent receives payment by check or in Federal Funds prior to the regular close
of the NYSE on such day.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolios will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor. See "Purchase of Shares" in the Statement of Additional
Information.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of each Portfolio and each Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging Class
A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class
A shares of Portfolio B for Class A shares of Portfolio C and again exchanging
Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (1) trades exclusively between money market portfolios; and (2)
trades done in connection with an asset allocation service, such as TFM
Accounts, managed or advised by MSAM and/or any of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase has been collected, which
may take up to eight business days after purchase. The Fund will redeem Class A
shares or
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Class B shares of each Portfolio at the next determined net asset value of
shares to their applicable class. On days that both the NYSE and the Custodian
Bank are open for business, the net asset values per share of each of the
Portfolios is determined at the close of trading of the NYSE (currently 4:00
p.m. Eastern Time). Shares of each Portfolio may be redeemed by mail or
telephone. No charge is made for redemption. Any redemption proceeds may be more
or less than the purchase price of your shares depending on, among other
factors, the market value of the investment securities held by the Portfolio.
BY MAIL
Each Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your request
should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798, except that deliveries by overnight courier
should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global
Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension
and profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund,
Inc.'s representatives for further details. In times of drastic market
conditions, the telephone redemption option may be difficult to implement. If
you experience difficulty in making a telephone redemption, your request may be
made by mail or overnight courier, and will be implemented at the net asset
value next determined after it is received. Redemption requests sent to the Fund
through overnight courier must be sent to Morgan Stanley Institutional Fund,
Inc., c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108. The Fund and the Fund's transfer agent (the "Transfer
Agent") will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include requiring the
investor to provide certain personal identification information at the time an
account is opened and prior to effecting each transaction requested by
telephone. In addition, all telephone transaction requests will be recorded and
investors may be required to provide additional telecopied written instructions
regarding transaction requests. Neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.
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To change the name of the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Fund at the address
above. Requests to change the bank or account must be signed by each shareholder
and each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed under this
procedure within one business day of receipt of the request, but in no event
will payment be made more than seven days after receipt of a redemption request
in good order. However, payments to investors redeeming shares which were
purchased by check will not be made until payment for the purchase has been
collected, which may take up to eight days after the date of purchase. The Fund
may suspend the right of redemption or postpone the date upon which redemptions
are effected at times when the NYSE is closed, or under any emergency
circumstances as determined by the Securities and Exchange Commission (the
"Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by a Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in each Portfolio for shares of any
other available portfolio of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege is only available with respect to portfolios that are
registered for sale in a shareholder's state of residence. The exchange
privilege may be modified or terminated by the Fund at any time upon 60-days'
notice to shareholders.
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BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the names of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current Portfolio, the name(s) of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the class of
the portfolios involved in the exchange of shares at the close of business.
Requests received after 4:00 p.m. are processed the next business day based on
the net asset value determined at the close of business on such day. For
additional information regarding responsibility for the authenticity of
telephoned instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of a Portfolio's shares and may result in involuntary
conversion or redemption of your shares. See "Purchase of Shares" above.
VALUATION OF SHARES
The net asset value per share of a class of shares of each of the Portfolios
is determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such a class, less any liabilities attributable
to such a class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. 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 not readily available are valued
at a price that is considered to best represent fair value within a range not
exceeding of the current asked price nor less than the current bid price. The
current bid and asked prices are determined based on the bid and asked prices
quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices, but take into account institutional size trading in similar groups of
securities and any developments related to the
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specific securities. Securities not priced in this manner are valued at the most
recently quoted bid price, or, when securities exchange valuations are used, at
the latest quoted sale price on the day of valuation. If there is no such
reported sale, the latest quoted bid price will be used. Securities purchased
with remaining maturities of 60 days or less are valued at amortized cost, if it
approximates market value. In the event that amortized cost does not approximate
market value, market prices as determined above will be used.
The value of other assets and securities for which no quotations are readily
available (including restricted securities and unlisted foreign securities) and
those securities the prices for which it is inappropriate to determined in
accordance with the above-stated procedures are determined in good faith at fair
value using methods determined by the Board of Directors. For purposes of
calculating net asset value per share, all assets and liabilities initially
expressed in foreign currencies will be translated into U.S. dollars at the mean
of the bid price and asked price of such currencies against the U.S. dollar last
quoted by any major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in a
class of the Portfolio would have earned over a specified period of time (such
as one, five or ten years), assuming that all distributions and dividends by the
Portfolio were reinvested in the same class on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes that may be payable on dividends and distributions or upon redemption. The
Fund may also include comparative performance information in advertising or
marketing the Portfolios' shares. Such performance information may include data
from Lipper Analytical Services, Inc., other industry publications, business
periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will automatically be reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash. Each Portfolio expects to distribute substantially all of
its net investment income in the form of quarterly dividends. Net realized
gains, if any, after reduction for any available tax loss carryforwards will
also be distributed annually. Confirmations of the purchase of shares of the
Portfolio through the automatic reinvestment of income dividends and capital
gains distributions
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will be provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act
of 1934, as amended, on the next monthly client statement following such
purchase of shares. Consequently, confirmations of such purchases will not be
provided at the time of completion of such purchases as might otherwise be
required by Rule 10b-10.
Undistributed net investment income is included in a Portfolio's net assets
for the purpose of calculating net asset value per share. Therefore, on the
"ex-dividend" date, the net asset value per share excludes the dividend (i.e.,
is reduced by the per share amount of the dividend). Dividends paid shortly
after the purchase of shares by an investor, although in effect a return of
capital, are taxable to shareholders subject to tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolios will differ at times.
Expenses of the Portfolios allocated to a particular class of shares thereof
will be borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), so that the Portfolio will be relieved of federal income tax on
that part of its net investment income and net capital gain that is distributed
to shareholders.
Each Portfolio distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to shareholders.
Dividends from a Portfolio's net investment income are taxable to shareholders
as ordinary income, whether received in cash or in additional shares. Such
dividends paid by a Portfolio will generally qualify for the 70%
dividends-received deduction for corporate shareholders to the extent of the
aggregate qualifying dividend income received by the Portfolio from U.S.
corporations. Distributions of net capital gain (the excess of net long-term
capital gain over net short-term capital loss) are taxable to shareholders as
long-term capital gain, regardless of how long shareholders have held their
shares. Each Portfolio sends reports annually to shareholders of the federal
income tax status of all distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses), including any available capital loss carry-forwards, prior to the end
of each calendar year to avoid liability for federal excise tax.
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Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale or redemption of shares may result in taxable gain or loss to the
redeeming shareholder, depending upon whether the fair market value of the
redemption proceeds exceeds or is less than the shareholder's adjusted basis in
the redeemed or sold shares. If capital gain distributions have been made with
respect to shares that are sold at a loss after being held for six months or
less, then the loss is treated as a long-term capital loss to the extent of the
capital gain distributions.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for each of the Fund's Portfolios and directs the Adviser to use its
best efforts to obtain the best available price and most favorable execution
with respect to all transactions for the Portfolios. The Fund has authorized the
Adviser to pay higher commissions in recognition of brokerage services which, in
the opinion of the Adviser, are necessary for the achievement of better
execution, provided the Adviser believes this to be in the best interest of the
Fund.
Since shares of the Portfolios are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Fund's Portfolios or who act as agents in the purchase of
shares of the Fund's Portfolios for their clients.
In purchasing and selling securities for the Portfolios, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by a Portfolio may also be appropriate for
other clients served by the Adviser. If a purchase or sale of securities
consistent with the investment policies of a portfolio and one or more of these
other clients served by the Adviser is considered at or about the same time,
transactions in such securities will be allocated among the portfolios and such
other clients
30
<PAGE>
in a manner deemed fair and reasonable by the Adviser. Although there is no
specified formula for allocating such transactions, the various allocation
methods used by the Adviser, and the results of such allocations, are subject to
periodic review by the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of the Portfolio's brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Fund, the commissions, fees or other remuneration received by Morgan Stanley
or such affiliates must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of the Directors who are not
"interested persons," as defined in the Investment Company Act of 1940, as
amended (the "1940 Act") have adopted procedures which are reasonably designed
to provide that any commissions, fees or other remuneration paid to Morgan
Stanley or such affiliates be consistent with the foregoing standard.
Portfolio securities will not be purchased from or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act, of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.
Although none of the Portfolios intend to invest for short-term trading
purposes, investment securities may be sold from time to time without regard to
the length of time they have been held. For each Portfolio, it is anticipated
that, under normal circumstances, the annual portfolio turnover rate will not
exceed 100%. High portfolio turnover involves correspondingly greater
transaction costs which will be borne directly by the respective Portfolio. In
addition, high portfolio turnover may result in more capital gains which would
be taxable to the shareholders of the respective Portfolio. The tables set forth
in "Financial Highlights" present the Portfolios' historical turnover rates.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by shareholders, the Board of Directors has the power to
designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with respect to such classes. The shares of
common stock of each portfolio are currently classified into two classes, the
Class A shares and the Class B shares, except for the International Small Cap,
Money Market and Municipal Money Market Portfolios, which only offer Class A
shares.
The shares of each Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect
31
<PAGE>
100% of the Directors if they choose to do so. Persons or organizations owning
25% or more of the outstanding shares of a Portfolio may be presumed to
"control" (as that term is defined in the 1940 Act) the Portfolio. Under
Maryland law, the Fund is not required to hold an annual meeting of its
shareholders unless required to do so under the 1940 Act.
REPORTS TO SHAREHOLDERS
The transfer agent of the Fund will send to its shareholders annual and
semiannual reports; the financial statements appearing in annual reports are
audited by independent accountants. Monthly unaudited portfolio data are also
available from the Fund upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
As of September 1, 1995, domestic securities and cash are held by Chase,
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
32
<PAGE>
<TABLE>
<CAPTION>
<S><C>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
SMALL CAP VALUE EQUITY, VALUE EQUITY AND BALANCED PORTFOLIOS
P.O. Box 2798, Boston, MA 02208-2798
- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT REGISTRATION FORM
- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, please contact your Morgan Stanley representative or call us
toll free 1-(800)-548-7786. Please print all items except signature, and mail to
the Fund at the address above.
- -----------------------------------------------------------------------------------------------------------------------------------
A) REGISTRATION
1. INDIVIDUAL 1.
------------------------------------------------------------------------------------------------
2. JOINT TENANTS First Name Initial Last Name
(RIGHTS OF SURVIVORSHIP 2.
PRESUMED UNLESS ------------------------------------------------------------------------------------------------
TENANCY IN COMMON First Name Initial Last Name
IS INDICATED)
------------------------------------------------------------------------------------------------
First Name Initial Last Name
- -----------------------------------------------------------------------------------------------------------------------------------
3. CORPORATIONS, 3.
TRUSTS AND OTHERS ------------------------------------------------------------------------------------------------
Please call the Fund
for additional documents ------------------------------------------------------------------------------------------------
that may be required to
set up account and to ------------------------------------------------------------------------------------------------
authorize transactions Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/
ASSOCIATION TRANSFER TO
MINOR (ONLY ONE
CUSTODIAN AND
MINOR PERMITTED)
/ / TRUST / / OTHER (Specify)
------------------------ -------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box
-------------------------------------------------------------------------------
Please fill in City State Zip
completely, including -------------------------------------- ---- --------------------------------------
telephone number(s). Home Telephone No. - - Business Telephone No. - -
------------ ------------
/ / United States Citizen / / Resident Alien / / Non-Resident Alien: Indicate Country of Residence
------------------
- -----------------------------------------------------------------------------------------------------------------------------------
C) TAXPAYER PART 1. Enter your Taxpayer IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For You (as a payee) are required by law to provide us
NUMBER most individual taxpayers, (as payer) with your correct Taxpayer Identification
If the account is in more than this is your Social Security Number. Accounts that have a missing or incorrect Taxpayer
one name, CIRCLE THE NAME OF Number. Identification Number will be subject to backup withholding
THE PERSON WHOSE TAXPAYER TAXPAYER IDENTIFICATION at a 31% rate on dividends, distributions and other payments.
IDENTIFICATION NUMBER IS NUMBER If you have not provided us with your correct taxpayer
PROVIDED IN SECTION A) ABOVE. -------------------------- identification number, you may be subject to a $50 penalty
If no name is circled, the imposed by the Internal Revenue Service.
number will be considered to OR Backup withholding is not an additional tax; the tax
be that of the last name SOCIAL SECURITY NUMBER liability of persons subject to backup withholding will be
listed. For Custodian account -------------------------- reduced by the amount of tax withheld. If withholding
of a minor (Uniform Gift/ results in an overpayment of taxes, a refund may be
Transfer to Minors Act), PART 2. BACKUP WITHHOLDING obtained.
give the Social Security / / Check this box if you are You may be notified that you are subject to backup
Number of the minor. NOT subject to Backup withholding under Section 3406(a)(1)(C) of the Internal
Withholding under the Revenue Code because you have underreported interest or
provisions of Section dividends or you were required to but failed to file a return
3406(a)(1)(C) of the Internal which would have included a reportable interest or
Revenue Code. dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK
THE BOX IN PART 2 AT LEFT.
- -----------------------------------------------------------------------------------------------------------------------------------
D) PORTFOLIO AND CLASS For Purchase of the following Portfolio(s):
SECTION (Class A Shares Small Cap Value Equity Portfolio / / Class A Shares $ / / Class B Shares $
minimum $500,000 for each ------- -------
Portfolio and Class B shares Value Equity Portfolio / / Class A Shares $ / / Class B Shares $
minimum $100,000 for ------- --------
each Portfolio). Balanced Portfolio / / Class A Shares $ / / Class B Shares $
Please indicate Portfolio, ------- -------
class and amount.
Total Initial Investment $
------------
- -----------------------------------------------------------------------------------------------------------------------------------
<PAGE>
E) METHOD OF INVESTMENT Payment by:
Please indicate / / check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--
manner of payment. PORTFOLIO NAME)
/ / Exchange $ From -
---------------- ------------------------ -------------------------
Name of Portfolio Account No.
/ / Account previously established by:
/ / Phone exchange / / Wire on
--------------------------- --------------------------
Date Account No. (Check
(Previously assigned Digit)
by the Fund)
- -----------------------------------------------------------------------------------------------------------------------------------
F) DISTRIBUTION Income dividends and capital gains distributions (if any) will be reinvested in
OPTION additional shares unless either box below is checked.
/ / Income dividends to be paid in cash, capital gains distributions (if any) in
shares.
/ / Income dividends and capital gains distributions (if any) to be paid in
cash.
- -----------------------------------------------------------------------------------------------------------------------------------
G) TELEPHONE / / I/we hereby authorize the Fund and its
REDEMPTION agents to honor any telephone requests to ------------------------- -------------------------
wire redemption proceeds to the Name of COMMERCIAL Bank Bank Account No.
Please select at time of commercial bank indicated at rights and/or (Not Savings Bank)
initial application if mail redemption proceeds to the name -------------------------
you wish to redeem or and address in which my/our fund account Bank ABA No.
exchange shares by is registered if such requests are believed
telephone. A to be authentic.
SIGNATURE GUARANTEE IS THE FUND AND THE FUND'S TRANSFER AGENT ---------------------------------------------------
REQUIRED IF BANK ACCOUNT WILL EMPLOY REASONABLE PROCEDURES TO Name(s) in which your Bank Account is Established
IS NOT REGISTERED CONFIRM THAT INSTRUCTIONS COMMUNICATED BY
IDENTICALLY TO YOUR TELEPHONE ARE GENUINE. THESE PROCEDURES ---------------------------------------------------
FUND ACCOUNT. INCLUDE REQUIRING THE INVESTOR TO PROVIDE Bank's Street Address
CERTAIN PERSONAL IDENTIFICATION INFORMATION AT
TELEPHONE REQUESTS FOR THE TIME AN ACCOUNT IS OPENED AND PRIOR TO ---------------------------------------------------
REDEMPTIONS EFFECTING EACH TRANSACTION REQUESTED BY City State Zip
WILL NOT BE HONORED UNLESS TELEPHONE. IN ADDITION, ALL TELEPHONE
THE BOX IS CHECKED. TRANSACTION REQUESTS WILL BE RECORDED AND
INVESTORS MAY BE REQUIRED TO PROVIDE
ADDITIONAL TELECOPIED WRITTEN INSTRUCTIONS OF
TRANSACTION REQUESTS. NEITHER THE FUND NOR
THE TRANSFER AGENT WILL BE RESPONSIBLE FOR
ANY LOSS, LIABILITY, COST OR EXPENSE FOR
FOLLOWING INSTRUCTIONS RECEIVED BY TELEPHONE
THAT IT REASONABLY BELIEVES TO BE GENUINE.
- -----------------------------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION ------------------------------------------------------------------------------------------------
Name
In addition to the ac-
count statement sent to ------------------------------------------------------------------------------------------------
my/our registered ad-
dress, I/we hereby au-
thorize the fund to mail ------------------------------------------------------------------------------------------------
duplicate statements to Address
the name and address
provide at right. ------------------------------------------------------------------------------------------------
City State Zip Code
- -----------------------------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION -------------------- -------------------- --------------------
Representative Name Representative No. Branch No.
- -----------------------------------------------------------------------------------------------------------------------------------
J) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal capacity to purchase and redeem
ALL HOLDERS shares of the Fund and affirm that I/we have received a current Prospectus of the Morgan Stanley
AND TAXPAYER Institutional Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF PERJURY,
CERTIFICATION I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE.
Sign Here -- (X) (X)
----------------------------------------- ----------------------------------------------------
Signature Date Signature Date
(X) (X)
----------------------------------------- ----------------------------------------------------
Signature Date Signature Date
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 8
Investment Objectives and Policies................ 12
Additional Investment Information................. 14
Investment Limitations............................ 17
Management of the Fund............................ 18
Purchase of Shares................................ 20
Redemption of Shares.............................. 24
Shareholder Services.............................. 26
Valuation of Shares............................... 27
Performance Information........................... 28
Dividends and Capital Gains Distributions......... 28
Taxes............................................. 29
Portfolio Transactions............................ 30
General Information............................... 31
Account Registration Form
</TABLE>
SMALL CAP VALUE EQUITY
PORTFOLIO
VALUE EQUITY PORTFOLIO
BALANCED PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
ACTIVE COUNTRY
ALLOCATION PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
---------------------------------------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-seven portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and the Class B
shares of the Active Country Allocation Portfolio (the "Portfolio"). On January
2, 1996, the Portfolio began offering two classes of shares, the Class A shares
and the Class B shares. All shares of the Portfolio owned prior to January 2,
1996 were redesignated Class A shares on January 2, 1996. The Class A and Class
B shares currently offered by the Portfolio have different minimum investment
requirements and fund expenses. Shares of the portfolios are offered with no
sales charge or exchange or redemption fee (with the exception of one of the
portfolios).
The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital appreciation
by investing in accordance with country weightings determined by the Adviser in
equity securities of non-U.S. issuers which, in the aggregate, replicate broad
country indices.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, China Growth, Emerging Markets,
European Equity, Global Equity, Gold, International Equity, International Small
Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value
Equity, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and
Municipal Bond Portfolios; and (v) MONEY MARKET -- Money Market and Municipal
Money Market Portfolios. Additional information about the Fund is contained in a
"Statement of Additional Information," dated January 2, 1996, which is
incorporated herein by reference. The Statement of Additional Information and
the prospectuses pertaining to the other portfolios of the Fund are available
upon request and without charge by writing or calling the Fund at the address
and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY 2, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Active Country Allocation Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A............................................................................................... None
Class B............................................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
Class A............................................................................................... None
Class B............................................................................................... None
Deferred Sales Load
Class A............................................................................................... None
Class B............................................................................................... None
Redemption Fees
Class A............................................................................................... None
Class B............................................................................................... None
Exchange Fees
Class A............................................................................................... None
Class B............................................................................................... None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- --------------------------------------------------------------------------------------------------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C>
Management Fee (Net of Fee Waiver)*
Class A............................................................................................... 0.28%
Class B............................................................................................... 0.28%
12b-1 Fees
Class A............................................................................................... None
Class B............................................................................................... 0.25%
Other Expenses
Class A............................................................................................... 0.52%
Class B............................................................................................... 0.52%
Total Operating Expenses (Net of Fee Waivers)*
Class A............................................................................................... 0.80%
Class B............................................................................................... 1.05%
---------
---------
</TABLE>
- --------------
* The Adviser has agreed to waive its management fees and/or to reimburse the
Portfolio, if necessary, if such fees would cause the Portfolio's total
annual operating expenses, as a percentage of average daily net assets, to
exceed the percentages set forth in the table above. Absent the fee waiver,
the management fee would be 0.65%. Absent the fee waiver and/or expense
reimbursement, the Portfolio's total operating expenses would be 1.17% of the
average daily net assets of the Class A shares and 1.42% of the average daily
net assets of the Class B shares. As a result of this reduction, the
Management Fee stated above is lower than the contractual fee stated under
"Management of the Fund." The Adviser reserves the right to terminate any of
its fee waivers and/or expense reimbursements at any time in its sole
discretion. For further information on Fund expenses, see "Management of the
Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. The Class A expenses and fees for the Portfolio have been restated
to reflect current fees. The Class B expenses and fees for the Portfolio are
based on estimates, assuming that the average daily net assets of the Class B
shares of the Portfolio will be $50,000,000. "Other Expenses" include Board of
Directors' fees and expenses, amortization of organizational costs, filing fees,
professional fees and costs for shareholder reports. Due to the continuous
nature of Rule 12b-1 fees, long term Class B shareholders may pay more than the
equivalent of the maximum front-end sales charges otherwise permitted by the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
("NASD").
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Fund charges no
redemption fees of any kind. The following example is based on the total
operating expenses of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Active Country Allocation Portfolio
Class A.......................... $ 8 $ 26 $ 44 $ 99
Class B.......................... 11 33 58 128
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Fund intends to comply with all state laws that restrict investment
company expenses. Currently, the most restrictive state law requires that the
aggregate annual expenses of an investment company shall not exceed two and
one-half percent (2 1/2%) of the first $30 million of average net assets, two
percent (2%) of the next $70 million of average net assets, and one and one-half
percent (1 1/2%) of the remaining net assets of such investment company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse the Portfolio, if necessary, if in any fiscal year the sum of the
Portfolio's expenses exceeds the limit set by applicable state law.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A shares of
the Portfolio for each of the periods presented. The new Class B shares were not
offered prior to the date of this Prospectus. The audited financial highlights
for the Class A shares for the fiscal year ended December 31, 1994 and the
unaudited financial highlights for the Class A shares for the six months ended
June 30, 1995 are part of the Fund's financial statements which appear in the
Fund's December 31, 1994 Annual Report to Shareholders and June 30, 1995
Semi-Annual Report to Shareholders, respectively, and which are included in the
Fund's Statement of Additional Information. The Portfolio's financial highlights
for each of the periods presented, except for the six months ended June 30,
1995, have been audited by Price Waterhouse LLP, whose unqualified report
thereon is also included in the Statement of Additional Information. Additional
performance information for the Class A shares is included in the Annual Report.
The Annual Report, Semi-Annual Report and the financial statements therein,
along with the Statement of Additional Information, are available at no cost
from the Fund at the address and telephone number noted on the cover page of
this Prospectus. Subsequent to October 31, 1992 (the Fund's prior fiscal year
end), the Fund changed its fiscal year end to December 31. The following
information should be read in conjunction with the financial statements and
notes thereto.
4
<PAGE>
<TABLE>
<CAPTION>
ACTIVE COUNTRY ALLOCATION PORTFOLIO
--------------------------------------------------------------------------------
TWO MONTHS YEAR ENDED YEAR ENDED
JANUARY 17, 1992* ENDED DECEMBER DECEMBER SIX MONTHS ENDED
TO OCTOBER 31, DECEMBER 31, 31, 31, JUNE 30, 1995
1992 1992 1993 1994 (UNAUDITED)
----------------- ------------ ----------- ----------- -----------------
<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 0.12
Net Realized and Unrealized Gain/
(Loss) on Investments................ (0.74) 0.20 2.75 (0.25) (0.33)
------- ------------ ----------- ----------- --------
Total from Investment Operations.... (0.63) 0.22 2.88 (0.06) (0.21)
------- ------------ ----------- ----------- --------
DISTRIBUTIONS
Net Investment Income................. -- -- (0.09) (0.14) --
In Excess of Net Investment Income.... -- -- (0.08) -- --
Net Realized Gain..................... -- -- -- (0.36) (0.44)
In Excess of Net Realized Gain........ -- -- (0.09) -- --
------- ------------ ----------- ----------- --------
Total Distributions................. -- -- (0.26) (0.50) (0.44)
------- ------------ ----------- ----------- --------
NET ASSET VALUE, END OF PERIOD.......... $ 9.37 $ 9.59 $ 12.21 $ 11.65 $ 11.00
------- ------------ ----------- ----------- --------
------- ------------ ----------- ----------- --------
TOTAL RETURN............................ (6.30)% 2.35% 30.72% (0.52)% (1.81)%
------- ------------ ----------- ----------- --------
------- ------------ ----------- ----------- --------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)... $ 47,534 $ 50,234 $ 150,854 $ 182,977 $ 154,247
Ratio of Expenses to Average Net
Assets (1)(2).......................... 0.88%** 0.80%** 0.80% 0.80% 0.80%**
Ratio of Net Investment Income to
Average Net Assets (1)(2).............. 2.32%** 1.22%** 1.29% 1.43% 1.83%**
Portfolio Turnover Rate................. 62% 2% 53% 51% 37%**
</TABLE>
- ------------------
(1) Effect of voluntary expense limitation during the period:
<TABLE>
<S> <C> <C> <C> <C> <C>
Per share benefit to net
investment income............... $ 0.03 $ 0.01 $ 0.05 $ 0.03 $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets.... 1.58%** 1.70%** 1.33% 1.00% 1.17%**
Net Investment Income to Average
Net Assets...................... 1.62%** 0.32%** 0.76% 1.23% 1.46%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is
entitled to receive a management fee calculated at an annual rate of 0.65%
of the average daily net assets of the Portfolio. The Adviser has agreed to
waive a portion of this fee and/or reimburse expenses of the Portfolio to
the extent that the total operating expenses of the Portfolio exceed 0.80%
of the average daily net assets of the Class A shares and 1.05% of the
average daily net assets of the Class B shares. In the period ended October
31, 1992, the two months ended December 31, 1992, the years ended December
31, 1993 and 1994 and the six months ended June 30, 1995, the Adviser
waived management fees and/or reimbursed expenses totalling $164,000,
$72,000, $552,000, $367,000 and $306,000, respectively, for the Portfolio.
* Commencement of Operations.
** Annualized.
5
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-seven portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except the International
Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class
B shares. Each portfolio has its own investment objective and policies designed
to meet its specific goals. This Prospectus pertains to the Class A and Class B
shares of the Active Country Allocation Portfolio.
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The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The objectives of these other portfolios are listed
below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in the equity securities of Asian issuers.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in the equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in the equity securities of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in the equity securities of issuers throughout the
world, including United States issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in the equity securities of non-United States issuers.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in the equity securities of non-United States
issuers with equity market capitalizations of less than $500 million.
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and debt
securities issued or guaranteed by Latin American governments or
governmental entities.
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US EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented
equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
-The U.S. REAL ESTATE 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 VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including United States issuers.
-The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with the preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
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MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high-quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at September 30, 1995 had approximately $55.2 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. Shares in a Portfolio account opened prior to January 2, 1996
(each, a "Pre-1996
Account") were designated Class A shares on January 2, 1996. For a Portfolio
account opened on or after January 2, 1996 (a "New Account"), the minimum
initial investment is $500,000 for Class A shares and $100,000 for Class B
shares. Certain exceptions to the foregoing minimums apply to (1) shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the
Adviser and its affiliates; and (3) certain advisory or asset allocation
accounts, such as Total Funds Management accounts, managed by Morgan Stanley or
its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves
the right in its sole discretion to determine which of such advisory or asset
allocation accounts shall be Managed Accounts. For information regarding Managed
Accounts, please contact your Morgan Stanley account representative or the Fund
at the telephone number provided on the cover of this Prospectus. Shares in a
Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a
"Grandfathered Class B Account") convert to Class B shares on March 1, 1996. See
"Purchase of Shares -- Minimum Investment and Account Sizes; Conversion from
Class A to Class B Shares."
The minimum subsequent investment for a Portfolio account is $1,000 (except
for automatic reinvestment of dividends and capital gains distributions for
which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
HOW TO REDEEM
Class A shares or Class B shares of the Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions may cause
involuntary
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redemption or automatic conversion. Class A or Class B shares held in New
Accounts are subject to involuntary redemption if shareholder redemption(s) of
such shares reduces the value of such account to less than $100,000 for a
continuous 60-day period. Involuntary redemption does not apply to Managed
Accounts, Grandfathered Class A Accounts and Grandfathered Class B Accounts,
regardless of the value of such accounts. Class A shares in a New Account will
convert to Class B shares if shareholder redemption(s) of such shares reduces
the value of such account to less than $500,000 for a continuous 60-day period.
Class B shares in a New Account will automatically convert to Class A shares if
shareholder purchases of additional Class B shares or market activity cause the
value of the Class B shares in the New Account to increase to $500,000 or more.
See "Purchase of Shares -- Minimum Account Sizes and Involuntary Redemption of
Shares" and "Redemption of Shares."
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. The Portfolio will invest
in securities of foreign issuers, including issuers in emerging countries, which
are subject to certain risks not typically associated with domestic securities,
including (1) restrictions on foreign investment and on repatriation of capital
invested in foreign countries, (2) currency fluctuations, (3) the cost of
converting foreign currency into U.S. dollars, (4) potential price volatility
and lesser liquidity of shares traded on foreign country securities markets or
lack of a secondary trading market for such securities and (5) political and
economic risks, including the risk of nationalization or expropriation of assets
and the risk of war. In addition, accounting, auditing, financial and other
reporting standards in foreign countries are not equivalent to U.S. standards
and therefore, disclosure of certain material information may not be made and
less information may be available to investors investing in foreign countries
than in the United States. There is also generally less governmental regulation
of the securities industry in foreign countries than the United States.
Moreover, it may be more difficult to obtain a judgment in a court outside the
United States. See "Investment Objective and Policies" and "Additional
Investment Information." In addition, the Portfolio may invest in repurchase
agreements, lend its portfolio securities, purchase securities on a when-issued
basis and invest in forward foreign currency exchange contracts to hedge
currency risk associated with investment in non-U.S. dollar denominated
securities. Each of these investment strategies involves specific risks which
are described under "Investment Objective and Policies" and "Additional
Investment Information" herein and under "Investment Objectives and Policies" in
the Statement of Additional Information.
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Active Country Allocation Portfolio is
described below, together with the policies the Fund employs in its efforts to
achieve this objective. The Active Country Allocation Portfolio's investment
objective is a fundamental policy which may not be changed without the approval
of a majority of the Portfolio's outstanding voting securities. There is no
assurance that the Fund will attain its objective. The investment policies
described below are not fundamental policies and may be changed without
shareholder approval.
The investment objective of the Active Country Allocation Portfolio is to
provide long-term capital appreciation by investing in accordance with country
weightings determined by the Adviser in equity securities of non-U.S. issuers
which, in the aggregate, replicate broad country indices. The Adviser utilizes a
top-down approach in selecting investments for the Portfolio that emphasizes
country selection and weighting rather than individual stock selection. This
approach reflects the Adviser's philosophy that a diversified selection of
securities representing exposure to world markets, based upon the economic
outlook and current valuation levels for each country, is an effective way to
maximize the return and minimize the risk associated with international
investment.
The Adviser determines country allocations for the Portfolio on an ongoing
basis within policy ranges dictated by each country's market capitalization and
liquidity. The Portfolio will invest in the industrialized countries throughout
the world that comprise the Morgan Stanley Capital International EAFE (Europe,
Australia and the Far East) Index. The Portfolio will also invest in emerging
country equity securities. With respect to the Portfolio, the term "emerging
country" applies to any country which, in the opinion of the Adviser, is
generally considered to be an emerging or developing country by the
international financial community, including the International Bank for
Reconstruction and Development (more commonly known as the World Bank) and the
International Finance Corporation. There are currently over 130 countries which,
in the opinion of the Adviser, are generally considered to be emerging or
developing countries by the international financial community, approximately 40
of which currently have stock markets. These countries generally include every
nation in the world except the United States, Canada, Japan, Australia, New
Zealand and most nations located in Western Europe. Currently, investing in many
emerging countries is not feasible or may involve unacceptable political risks.
The Portfolio will focus its investments on those emerging market countries in
which it believes the economies are developing strongly and in which the markets
are becoming more sophisticated. With respect to the portion of the Portfolio
that is invested in emerging country equity securities, the Portfolio initially
intends to invest primarily in some or all of the following countries:
Argentina
Brazil
India
Indonesia
Malaysia
Mexico
Portugal
Philippines
South Africa
South Korea
Thailand
Turkey
As markets in other countries develop, the Portfolio expects to expand and
further diversify the emerging countries in which it invests. The Portfolio does
not intend to invest in any security in a country where the currency is not
freely convertible to U.S. dollars, unless the Portfolio has obtained the
necessary governmental licensing to convert such currency or other appropriately
licensed or sanctioned contractual guarantee to protect such investment against
loss of that currency's external value, or the Portfolio has a reasonable
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expectation at the time the investment is made that such governmental licensing
or other appropriately licensed or sanctioned guarantee would be obtained or
that the currency in which the security is quoted would be freely convertible at
the time of any proposed sale of the security by the Portfolio.
An emerging country security is one issued by a company that, in the opinion
of the Adviser, has one or more of the following characteristics: (i) its
principal securities trading market is in an emerging country, (ii) alone or on
a consolidated basis it derives 50% or more of its annual revenue from either
goods produced, sales made or services performed in emerging countries; or (iii)
it is organized under the laws of, and has a principal office in, an emerging
country. The Adviser will base determinations as to eligibility on publicly
available information and inquiries made to the companies. (See "Foreign
Investment Risk Factors and Special Considerations" for a discussion of the
nature of information publicly available for non-U.S. companies.)
By analyzing a variety of macroeconomic and political factors, the Adviser
develops fundamental projections on interest rates, currencies, corporate
profits and economic growth for each country. These country projections are used
then to determine what the Adviser believes to be a fair value for the stock
market of each country. Discrepancies between actual value and fair value as
determined by the Adviser provide an expected return for each stock market. The
expected return is adjusted by currency return expectations derived from the
Adviser's purchasing-power parity exchange rate model to arrive at an expected
total return in U.S. dollars. The final country allocation decision is then
arrived at by considering the expected total return in light of various country
specific considerations such as market size, volatility, liquidity and country
risk.
Within a particular country, investments are made through the purchase of
equity securities which, in aggregate, replicate a broad market index, which in
most cases will be the Morgan Stanley Capital International index for the given
country. The Adviser may overweight or underweight an industry segment of a
particular index if it concludes this would be advantageous to the Portfolio.
With respect to the Portfolio, equity securities include common and preferred
stock, convertible securities, and rights and warrants to purchase common
stocks. Indexation of the Portfolio's stock selection reduces stock-specific
risk through diversification and minimizes transaction costs, which can be
substantial in foreign markets.
Common stocks purchased for the Portfolio normally will be listed on a major
stock exchange in the subject country. The Portfolio will not invest in the
stocks of U.S. issuers. For a description of special considerations and certain
risks associated with investments in foreign issuers, see "Additional Investment
Information." The Portfolio may temporarily reduce its equity holdings in
response to adverse market conditions and invest in domestic, Eurodollar and
foreign short-term money market instruments for defensive purposes. See
"Investment Objective and Policies" in the Statement of Additional Information.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
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ADDITIONAL INVESTMENT INFORMATION
FOREIGN INVESTMENT. Investment in obligations of foreign issuers and in
foreign branches of domestic banks involves somewhat different investment risks
than those affecting obligations of U.S. issuers. There may be limited publicly
available information with respect to foreign issuers, and foreign issuers are
not generally subject to uniform accounting, auditing and financial standards
and requirements comparable to those applicable to domestic companies. There may
also be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the U.S. Many foreign securities
markets have substantially less volume than U.S. national securities exchanges,
and securities of some foreign issuers are less liquid and more volatile than
securities of comparable U.S. issuers. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the U.S. Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid to the Portfolios
by domestic companies. See "Taxes". Additional risks include future political
and economic developments, the possibility that a foreign jurisdiction might
impose or change withholding taxes on income payable with respect to foreign
securities, possible seizure, nationalization or expropriation of the foreign
issuer or foreign deposits, and the possible adoption of foreign governmental
restrictions such as exchange controls. Such investments in securities of
foreign issuers are frequently denominated in foreign currencies, and since the
Portfolio may temporarily hold uninvested reserves in bank deposits in foreign
currencies, the value of the Portfolio's assets as measured in U.S. dollars may
be affected favorably or unfavorably by changes in currency rates and in
exchange control regulations, and the Portfolio may incur costs in connection
with conversions between various currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Portfolio may enter into
forward foreign currency exchange contracts, that provide for the purchase or
sale of an amount of a specified foreign currency at a future date. Purposes for
which such contracts may be used include protecting against a decline in a
foreign currency against the U.S. dollar between the trade date and settlement
date when the Portfolio purchases or sells securities, locking in the U.S.
dollar value of dividends declared on securities held by the Portfolio and
generally protecting the U.S. dollar value of securities held by the Portfolio
against exchange rate fluctuation. Such contracts may also be used as a
protective measure against the effects of fluctuating rates of currency exchange
and exchange control regulations. While such forward contracts may limit losses
to the Portfolio as a result of exchange rate fluctuation, they will also limit
any gains that may otherwise have been realized. See "Investment Objectives and
Policies -- Forward Foreign Currency Contracts" in the Statement of Additional
Information.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets. For more detailed information about securities lending, see
"Investment Objectives and Policies" in the Statement of Additional Information.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent
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practical. The Portfolio may make money market investments pending other
investment or settlement for liquidity, or in adverse market conditions. The
money market investments permitted for the Portfolio include obligations of the
United States Government and its agencies and instrumentalities; obligations of
foreign sovereignties; other debt securities; commercial paper including bank
obligations; certificates of deposit (including Eurodollar certificates of
deposit); and repurchase agreements. For more detailed information about these
money market investments, see "Description of Securities and Ratings" in the
Statement of Additional Information.
OPTIONS AND FUTURES. The Portfolio may write (i.e., sell) covered call
options and covered put options on portfolio securities. By selling a covered
call option, the Portfolio would become obligated during the term of the option
to deliver the securities underlying the option should the option holder choose
to exercise the option before the option's termination date. In return for the
call it has written, the Portfolio will receive from the purchaser (or option
holder) a premium which is the price of the option, less a commission charged by
a broker. The Portfolio will keep the premium regardless of whether the option
is exercised. By selling a covered put option, the Portfolio incurs an
obligation to buy the security underlying the option from the purchaser of the
put at the option's exercise price at any time during the option period, at the
purchaser's election (certain options written by the Portfolio will be
exercisable by the purchaser only on a specific date). A call option is
"covered" if the Portfolio owns the security underlying the option it has
written or has an absolute or immediate right to acquire the security by holding
a call option on such security, or maintains a sufficient amount of cash, cash
equivalents or liquid securities to purchase the underlying security. Generally,
a put option is "covered" if the Fund maintains cash, U.S. Government securities
or other high grade debt obligations equal to the exercise price of the option,
or if the Fund holds a put option on the same underlying security with a similar
or higher exercise price. When the Portfolio writes covered call options, it
augments its income by the premiums received and is thereby hedged to the extent
of that amount against a decline in the price of the underlying securities. The
premiums received will offset a portion of the potential loss incurred by the
Portfolio if the securities underlying the options are ultimately sold by the
Portfolio at a loss. However, during the option period, the Portfolio has, in
return for the premium on the option, given up the opportunity for capital
appreciation above the exercise price should the market price of the underlying
security increase, but has retained the risk of loss should the price of the
underlying security decline. The Portfolio will write covered put options to
receive the premiums paid by purchasers (when the Adviser wishes to purchase the
security underlying the option at a price lower than its current market price,
in which case the Portfolio will write the covered put at an exercise price
reflecting the lower purchase price sought) and to close out a long put option
position. The Portfolio may also purchase put or call options on its portfolio
securities. When the Portfolio purchases a call option it acquires the right to
buy a designated security at a designated price (the "exercise price"), and when
the Portfolio purchases a put option it acquires the right to sell a designated
security at the exercise price, in each case on or before a specified date (the
"termination date"), which is usually not more than nine months from the date
the option is issued. The Portfolio may purchase call options to close out a
covered call position or to protect against an increase in the price of a
security it anticipates purchasing. The Portfolio may purchase put options on
securities which it holds in its portfolio to protect itself against a decline
in the value of the security. If the value of the underlying security were to
fall below the exercise price of the put purchased in an amount greater than the
premium paid for the option, the Portfolio would incur no additional loss. The
Portfolio may also purchase put options to close out written put positions in a
manner similar to call option closing purchase transactions. There are no other
limits on the Portfolio's ability to purchase call and put options. The
Portfolio may enter into futures contracts and options on
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futures contracts as a hedge against fluctuations in price of a security it
holds or intends to acquire, but not for speculation or for achieving leverage.
The Portfolio may also enter into futures transactions to remain fully invested
and to reduce transaction costs. The Portfolio may enter into futures contracts
and options on futures contracts provided that not more than 5% of the
Portfolio's total assets at the time of entering into the contract or option is
required as deposit to secure obligations under all such contracts and options,
and provided that not more than 20% of the Portfolio's total assets in the
aggregate is invested in options, futures contracts and options on futures
contracts. The Portfolio may purchase and write call and put options on futures
contracts that are traded on any international exchange, traded over the counter
or which are synthetic options or futures or equity swaps, and enter into
closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right (in
return for the premium paid) to assume a position in the futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the term of the option.
The Portfolio will purchase and write options on futures contracts for identical
purposes to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out a
long or short position in futures contracts. The primary risks associated with
the use of futures and options are (i) imperfect correlation between the change
in market value of the stocks held by the Portfolio and the prices of futures
and options relating to the stocks purchased or sold by the Portfolio; and (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position which could have an adverse
impact on the Portfolio's ability to hedge. In the opinion of the Board of
Directors, the risk that the Portfolio will be unable to close out a futures
position or options contract will be minimized by only entering into futures
contracts or options transactions for which there appears to be a liquid
secondary market.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines adopted by the
Fund's Directors. In a repurchase agreement, the Portfolio buys a security from
a seller that has agreed to repurchase it at a mutually agreed upon date and
price, reflecting the interest rate effective for the term of the agreement. The
term of these agreements is usually from overnight to one week and never exceeds
one year. Repurchase agreements may be viewed as a fully collateralized loan of
money by the Portfolio to the seller. The Portfolio always receives securities
with a market value at least equal to the purchase price (including accrued
interest) as collateral and this value is maintained during the term of the
agreement. If the seller defaults and the collateral value declines, the
Portfolio might incur a loss. If bankruptcy proceedings are commenced with
respect to the seller, the Portfolio's realization upon the collateral may be
delayed or limited. The aggregate of certain repurchase agreements and certain
other investments is limited as set forth under "Investment Limitations."
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of
high-grade debt securities or cash in an amount at least equal to these
commitments. The payment obligation and the interest rates that will be received
are each fixed at the time the Portfolio enters into the commitment and no
interest accrues to the
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Portfolio until settlement. Thus, it is possible that the market value at the
time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. It is a current policy of the
Portfolio not to enter into when-issued commitments exceeding, in the aggregate,
15% of the market value of the Portfolio's total assets less liabilities other
than the obligations created by these commitments.
INVESTMENT LIMITATIONS
As a diversified investment company, the Portfolio is subject to the
following limitations: (a) as to 75% of its total assets, the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the United States Government and its agencies and
instrumentalities, and (b) the Portfolio may not own more than 10% of the
outstanding voting securities of any one issuer.
The Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, the
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. The Portfolio
may not (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 10% of the market value of the Portfolio's
total assets would be invested in such repurchase agreements and other
investments for which market quotations are not readily available or which are
otherwise illiquid; (ii) borrow money, except from banks for extraordinary or
emergency purposes, and then only in amounts up to 10% of the value of the
Portfolio's total assets, taken at cost at the time of borrowing; or purchase
securities while borrowings exceed 5% of its total assets; (iii) mortgage,
pledge or hypothecate any assets except in connection with any such borrowing in
amounts up to 10% of the value of the Portfolio's net assets at the time of
borrowing; (iv) invest in fixed time deposits with a duration of over seven
calendar days; or (v) invest in fixed time deposits with a duration of from two
business days to seven calendar days if more than 10% of the Portfolio's total
assets would be invested in these deposits.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment
Adviser and Administrator of the Fund and each of its Portfolios. The Adviser
provides investment advice and portfolio management services, pursuant to an
Investment Advisory Agreement and, subject to the supervision of the Fund's
Board of Directors, makes each of the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages each of the Portfolio's investments. The Adviser is entitled to receive
from the Active Country Allocation Portfolio an annual management fee, payable
quarterly, equal to 0.65% of the average daily net assets of the Portfolio.
The fees of the Portfolio, which involves international investments, are
higher than those of most investment companies but comparable to those of
investment companies with similar objectives. The Adviser has agreed to a
reduction in the fees payable to it and to reimburse the Portfolio, if
necessary, if such fees would cause total annual operating expenses of the
Portfolio to exceed 0.80% of the average daily net assets of the Class A shares
of the Portfolio and 1.05% of the average daily net assets of the Class B shares
of the Portfolio.
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The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
United States and abroad. At September 30, 1995, the Adviser, together with its
affiliated asset management companies, managed investments totaling
approximately $55.2 billion, including approximately $40.1 billion under active
management and $15.1 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. BARTON M. BIGGS, MADHAV DHAR, FRANCINE J. BOVICH AND
ANN D. THIVIERGE. Barton Biggs has been Chairman and a director of the Adviser
since 1980 and a Managing Director of Morgan Stanley since 1975. He is also a
director of Morgan Stanley Group Inc. and a director and officer of several
registered investment companies to which the Adviser and certain of its
affiliates provide investment advisory services. Mr. Biggs holds a B.A. from
Yale University and an M.B.A. from New York University. Madhav Dhar is a
Managing Director of Morgan Stanley. He joined the Adviser in 1984 to focus on
global asset allocation and investment strategy and now heads the Adviser's
emerging markets group and serves as the group's principal portfolio manager.
Mr. Dhar also coordinates the Adviser's developing country funds effort and has
been involved in the launching of the Adviser's country funds. He is the
portfolio manager of the Fund's Emerging Markets Portfolio, the Emerging Markets
and Global Equity Allocation Funds of the Morgan Stanley Fund, Inc., and the
Morgan Stanley Emerging Markets Fund, Inc. (a closed-end investment company
listed on the New York Stock Exchange). Mr. Dhar is also a director of the
Morgan Stanley Emerging Markets Fund, Inc. He holds a B.S. (honors) from St.
Stephens College, Delhi University (India), and an M.B.A. from Carnegie-Mellon
University. Francine Bovich joined the Adviser as a Principal in 1993. She is
responsible for product development, portfolio management and communication of
the Adviser's asset allocation strategy to institutional investor clients.
Previously, Ms. Bovich was a Principal and Executive Vice President of Westwood
Management Corp. ("Westwood"), a registered investment adviser. Before joining
Westwood, she was a Managing Director of Citicorp Investment Management, Inc.
(now Chancellor Capital Management), where she was responsible for the
Institutional Investment Management group. Ms. Bovich began her investment
career with Banker's Trust Company. She holds a B.A. in Economics from
Connecticut College and an M.B.A. in Finance from New York University. Ann
Thivierge is a Vice President of the Adviser. She is a member of the Adviser's
asset allocation committee, primarily representing the Total Fund Management
team since its inception in 1991. Prior to joining the Adviser in 1986, she
spent two years at Edgewood Management Company, a privately held investment
management firm. Ms. Thivierge holds a B.A. in International Relations from
James Madison College, Michigan State University, and an M.B.A. in Finance from
New York University.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
the Board of Directors of the Fund and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under Federal and State laws. The Administration Agreement also
provides that the Administrator, through its agents, will provide the Fund
dividend disbursing and transfer agent services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15% of the average daily net assets of the Portfolio.
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In a merger completed on September 1, 1995, The Chase Manhattan Bank, N.A.
("Chase") succeeded to all of the rights and obligations under the U.S. Trust
Administration Agreement between the Adviser and the United States Trust Company
of New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide
certain administrative services to the Fund. Pursuant to a delegation clause in
the U.S. Trust Administration Agreement, U.S. Trust delegated its administration
responsibilities to Chase Global Funds Services Company ("CGFSC"), formerly
known as Mutual Funds Service Company, which after the merger with Chase is a
subsidiary of Chase and will continue to provide certain administrative services
to the Fund. The Adviser supervises and monitors such administrative services
provided by CGFSC. The services provided under the Administration Agreement and
the U.S. Trust Administration Agreement are also subject to the supervision of
the Board of Directors of the Fund. The Board of Directors of the Fund has
approved the provision of services described above pursuant to the
Administration Agreement and the U.S. Trust Administration Agreement as being in
the best interests of the Fund. CGFSC's business address is 73 Tremont Street,
Boston, Massachusetts 02108-3913. For additional information regarding the
Administration Agreement or the U.S. Trust Administration Agreement, see
"Management of the Fund" in the Statement of Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and review the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Fund upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Fund.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan,
the Distributor is entitled to receive from the Portfolio a distribution fee,
which is accrued daily and paid quarterly, of 0.25% of the Class B shares'
average daily net assets on an annualized basis. The Distributor expects to
reallocate most of its fee to its investment representatives. The Distributor
may, in its discretion, voluntarily waive from time to time all or any portion
of its distribution fee and each of the Distributor and the Adviser is free to
make additional payments out of its own assets to promote the sale of Fund
shares, including payments that compensate financial institutions for
distribution services or shareholder services.
The Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
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PURCHASE OF SHARES
Class A and Class B shares of the Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For an account for the Portfolio opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares. Managed Accounts may
purchase Class A shares without being subject to such minimum initial investment
or minimum account size requirements for a Portfolio account. Officers of the
Adviser and its affiliates are subject to the minimums for a Portfolio account,
except they may purchase Class B shares subject to a minimum initial investment
and minimum account size of $5,000 for a Portfolio account.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based solely upon changes in the market that reduce the net asset value of
shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remain Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B Account") convert to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
The Fund reserves the right to modify or terminate the conversion features
of the shares as stated above at any time upon 60-days' notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to New Accounts containing Class B shares held by
officers of the Adviser or its affiliates. However, if the value of such account
held by an officer of the Adviser or its affiliates falls below $5,000 because
of shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains $5,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder.
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Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A Shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days' notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
INITIAL INVESTMENTS
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of the Portfolio and $100,000 for Class B shares of the
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- Active
Country Allocation Portfolio", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The Class(es) of shares of
the Portfolio to be purchased should be designated on the Account Registration
Form. For purchases by check, the Fund is ordinarily credited with Federal
Funds within one business day. Thus your purchase of shares by check is
ordinarily credited to your account at the net asset value per share of the
Portfolio determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund
prior to wiring funds.)
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B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
Purchase orders for shares of the Portfolio which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed
at the price computed on the date of receipt as long as the Transfer Agent
receives payment by check or in Federal Funds prior to the regular close of the
NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested
and, therefore, will not be earning dividends. Your bank may charge a service
fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000, except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund, Inc.-- Active Country Allocation Portfolio") at the above address or by
wiring monies to the Custodian Bank as outlined above. It is very important that
your account name, the portfolio name and the class selected be specified in the
letter or wire to assure proper crediting to your account. In order to ensure
that your wire orders are invested promptly, you are requested to notify one of
the Fund's representatives (toll-free 1-800-548-7786) prior to the wire date.
Additional investments will be applied to purchase additional shares in the same
class held by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of the Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the close of the New York Stock Exchange
("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the
price computed on the
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date of receipt; an order received after the close of the NYSE will be executed
at the price computed on the next day the NYSE is open as long as the Transfer
Agent receives payment by check or in Federal Funds prior to the regular close
of the NYSE on such day.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolio and the Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging Class
A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class
A shares of Portfolio B for Class A shares of Portfolio C and again exchanging
Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (1) trades exclusively between money market portfolios; and (2)
trades done in connection with an asset allocation service, such as TFM
Accounts, managed or advised by MSAM and/or any of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase has been collected, which
may take up to eight business days after purchase. The Fund will redeem Class A
shares or Class B shares of the Portfolio at the next determined net asset value
of shares of the applicable class. On days
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that both the NYSE and the Custodian Bank are open for business, the net asset
value per share of the Portfolio is determined at the close of trading of the
NYSE (currently 4:00 p.m. Eastern Time). Shares of the Portfolio may be redeemed
by mail or telephone. No charge is made for redemption. Any redemption proceeds
may be more or less than the purchase price of your shares depending on, among
other factors, the market value of the investment securities held by the
Portfolio.
BY MAIL
The Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your request
should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798, except that deliveries by overnight courier
should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global
Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension
and profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by mail or
overnight courier and will be implemented at the net asset value next determined
after it is received. Redemption requests sent to the Fund through express mail
must be mailed to the address of the Dividend Disbursing and Transfer Agent
listed under "General Information." The Fund and the Fund's transfer agent (the
"Transfer Agent") will employ reasonable procedures to confirm that the
instructions communicated by telephone are genuine. These procedures include
requiring the investor to provide certain personal identification information at
the time an account is opened and prior to effecting each transaction requested
by telephone. In addition, all telephone transaction requests will be recorded
and investors may be required to provide additional telecopied written
instructions regarding transaction requests. Neither the Fund nor the Transfer
Agent will be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to be
genuine.
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To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-Kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in the Portfolio for shares of any
other available portfolio of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege is only available with respect to portfolios that are
registered for sale in a shareholder's state of residence. The exchange
privilege may be modified or terminated by the Fund at any time upon 60-days'
notice to shareholders.
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BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name and account number of the Portfolio, the name(s) of the
portfolio(s) and class(es) of shares into which you intend to exchange shares,
and the signatures of all registered account holders. Send the exchange request
to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, MA
02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current portfolio, the names of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the class of
the portfolios involved in the exchange of shares at the close of business.
Requests received after 4:00 p.m. are processed the next business day based on
the net asset value determined at the close of business on such day. For
additional information regarding responsibility for the authenticity of
telephoned instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolio's shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the close of the NYSE
on each day that the NYSE is open for business. Price information on listed
securities is taken from the exchange where the security is primarily traded.
Securities listed on a U.S. securities exchange for which market quotations are
available are valued at the last quoted sale price on the day the valuation is
made. 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 a price that is
considered to best represent fair value within a range not exceeding the current
asked price nor less than the current bid price. The current bid and asked
prices are determined based on the bid and asked prices quoted on such valuation
date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices, but take into account institutional size trading in similar groups of
securities and any developments related to the
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<PAGE>
specific securities. Securities not priced in this manner are valued at the most
recently quoted bid price, or when securities exchange valuations are used, at
the latest quoted sale price on the day of valuation. If there is no such
reported sale, the latest quoted bid price will be used. Securities purchased
with remaining maturities of 60 days or less are valued at amortized cost, if it
approximates market value. In the event that amortized cost does not approximate
market value, market prices as determined above will be used.
The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above-stated procedure are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid price and
asked price of such currencies against the U.S. dollar last quoted by any major
bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in a
class of the Portfolio would have earned over a specified period of time (such
as one, five or ten years), assuming that all distributions and dividends by the
Portfolio were reinvested in the same class on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes that may be payable on dividends and distributions or on redemption. The
Fund may also include comparative performance information in advertising or
marketing the Portfolio's shares. Such performance information may include data
from Lipper Analytical Services, Inc., other industry publications, business
periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will automatically be reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash. The Portfolio expects to distribute substantially all of
its net investment income in the form of annual dividends. Net realized gains,
if any, after reduction for any available tax loss carryforwards will also be
distributed annually. Confirmations of the purchase of shares of the Portfolio
through the automatic reinvestment of income dividends and capital gains
distributions
25
<PAGE>
will be provided, pursuant to Rule 10b-10 under the Securities Exchange Act of
1934, as amended, on the next monthly client statement following such purchase
of shares. Consequently, confirmations of such purchases will not be provided at
the time of completion of such purchases as might otherwise be required by Rule
10b-10.
Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares thereof will
be borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), so that the Portfolio will be relieved of federal income tax on
that part of its net investment income and net capital gain that is distributed
to shareholders.
The Portfolio distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to shareholders.
Dividends from the Portfolio's net investment income are taxable to shareholders
as ordinary income, whether received in cash or reinvested in additional shares.
Such dividends paid by the Portfolio will generally not qualify for the 70%
dividends-received deduction for corporate shareholders. The Portfolio will
report annually to its shareholders the amount of dividend income qualifying for
such treatment.
Distributions of net capital gains (i.e., net long-term capital gains in
excess of net short-term capital losses) are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held the
Portfolio's shares. The Portfolio sends reports annually to shareholders of the
federal income tax status of all distributions made during the preceding year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses), including any available capital loss carryforwards, prior to the end of
each calendar year to avoid liability for federal excise tax.
26
<PAGE>
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale or redemption of shares may result in taxable gain or loss to the
redeeming shareholder, depending upon whether the fair market value of the
redemption proceeds exceeds or is less than the shareholder's adjusted basis in
the redeemed or sold shares. If capital gain distributions have been made with
respect to shares that are sold at a loss after being held for six months or
less, then the loss is treated as a long-term capital loss to the extent of the
capital gain distributions.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that the Portfolio is liable for foreign income taxes so withheld, the
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although the
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that the Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolio and directs the Adviser to use its best efforts to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolio. The Fund has authorized the Adviser to pay
higher commissions in recognition of brokerage services which, in the opinion of
the Adviser, are necessary for the achievement of better execution, provided the
Adviser believes this to be in the best interest of the Fund.
Since shares of the Portfolio are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Fund's portfolios or who act as agents in the purchase of
shares of the Fund's portfolios for their clients.
In purchasing and selling securities for the Portfolio, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolio, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial
27
<PAGE>
condition, general execution and operational capabilities of competing
broker-dealers, and the brokerage and research services which they provide to
the Fund. Some securities considered for investment by the Portfolio may also be
appropriate for other clients served by the Adviser. If purchase or sale of
securities consistent with the investment policies of the Portfolio and one or
more of these other clients served by the Adviser is considered at or about the
same time, transactions in such securities will be allocated among the Portfolio
and clients in a manner deemed fair and reasonable by the Adviser. Although
there is no specified formula for allocating such transactions, the various
allocation methods used by the Adviser, and the results of such allocations, are
subject to periodic review by the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of each portfolio's brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Fund, the commissions, fees or other remuneration received by Morgan Stanley
or such affiliates must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of the Directors who are not
"interested persons," have adopted procedures which are reasonably designed to
provide that any commissions, fees or other remuneration paid to Morgan Stanley
or such affiliates are consistent with the foregoing standard.
Portfolio securities will not be purchased from, or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the Investment Company Act of 1940, as amended (the "1940 Act"), of Morgan
Stanley when such entities are acting as principals, except to the extent
permitted by law.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that the annual turnover rate of
the Portfolio will not exceed 100% in normal circumstances.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by shareholders, the Board of Directors has the power to
designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with respect to such classes. The shares of
common stock of each portfolio are currently classified into two classes, the
Class A shares and the Class B shares, except for the International Small Cap,
Money Market and Municipal Money Market Portfolios, which only offer Class A
shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no preemptive rights. The shares of the Portfolio have
non-cumulative voting rights,
28
<PAGE>
which means that the holders of more than 50% of the shares voting for the
election of Directors can elect 100% of the Directors if they choose to do so.
Persons or organizations owning 25% or more of the outstanding shares of a
portfolio may be presumed to "control" (as that term is defined in the 1940 Act)
that Portfolio. Under Maryland law, the Fund is not required to hold an annual
meeting of its shareholders unless required to do so under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
As of September 1, 1995, domestic securities and cash are held by Chase,
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
29
<PAGE>
<TABLE>
<CAPTION>
<S><C>
MORGAN STANLEY INSTITUTIONAL FUND, INC. -- ACTIVE COUNTRY ALLOCATION PORTFOLIO
P.O. Box 2798, Boston, MA 02208-2798
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT REGISTRATION FORM
- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, please contact your Morgan Stanley representative or call us
toll free 1-(800)-548-7786. Please print all items except signature, and mail to
the Fund at the address above.
- -----------------------------------------------------------------------------------------------------------------------------------
A) REGISTRATION
1. INDIVIDUAL 1.
------------------------------------------------------------------------------------------------
2. JOINT TENANTS First Name Initial Last Name
(RIGHTS OF SURVIVORSHIP 2.
PRESUMED UNLESS ------------------------------------------------------------------------------------------------
TENANCY IN COMMON First Name Initial Last Name
IS INDICATED)
------------------------------------------------------------------------------------------------
First Name Initial Last Name
3. CORPORATIONS, 3.
TRUSTS AND OTHERS ------------------------------------------------------------------------------------------------
Please call the Fund
for additional documents ------------------------------------------------------------------------------------------------
that may be required to
set up account and to ------------------------------------------------------------------------------------------------
authorize transactions Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/
ASSOCIATION TRANSFER TO
MINOR (ONLY ONE
CUSTODIAN AND
MINOR PERMITTED)
/ / TRUST / / OTHER (Specify)
------------------------ -------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box
-------------------------------------------------------------------------------
Please fill in City State Zip
completely, including -------------------------------------- ---- --------------------------------------
telephone number(s). Home Telephone No. - - Business Telephone No. - -
------------ ------------
/ / United States Citizen / / Resident Alien / / Non-Resident Alien: Indicate Country of Residence
------------------
- -----------------------------------------------------------------------------------------------------------------------------------
C) TAXPAYER PART 1. Enter your Taxpayer IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For You (as a payee) are required by law to provide us
NUMBER most individual taxpayers, (as payer) with your correct taxpayer identification
If the account is in more than this is your Social Security number. Accounts that have a missing or incorrect taxpayer
one name, CIRCLE THE NAME OF Number. identification number will be subject to backup withholding
THE PERSON WHOSE TAXPAYER TAXPAYER IDENTIFICATION at a 31% rate on dividends, distributions and other payments.
IDENTIFICATION NUMBER IS NUMBER If you have not provided us with your correct taxpayer
PROVIDED IN SECTION A) ABOVE. -------------------------- identification number, you may be subject to a $50 penalty
If no name is circled, the imposed by the Internal Revenue Service.
number will be considered to OR Backup withholding is not an additional tax; the tax
be that of the last name SOCIAL SECURITY NUMBER liability of persons subject to backup withholding will be
listed. For Custodian account -------------------------- reduced by the amount of tax withheld. If withholding
of a minor (Uniform Gifts/ results in an overpayment of taxes, a refund may be
Transfers to Minors Acts), PART 2. BACKUP WITHHOLDING obtained.
give the Social Security / / Check this box if you are You may be notified that you are subject to backup
Number of the minor. NOT subject to Backup withholding under Section 3406(a)(1)(C) of the Internal
Withholding under the Revenue Code because you have underreported interest or
provisions of Section dividends or you were required to but failed to file a return
3406(a)(1)(C) of the Internal which would have included a reportable interest or
Revenue Code. dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK
THE BOX IN PART 2 AT LEFT.
- -----------------------------------------------------------------------------------------------------------------------------------
D) PORTFOLIO AND CLASS FOR PURCHASE OF THE FOLLOWING PORTFOLIO:
SELECTION (CLASS A SHARES
MINIMUM $500,000 AND Active Country Allocation Portfolio / / Class A Shares / / Class B Shares
CLASS B SHARES MINIMUM ------------- ------------
$100,000). PLEASE Total Initial Investment $
INDICATE CLASS AND ------------------------------------
AMOUNT.
- -----------------------------------------------------------------------------------------------------------------------------------
E) METHOD OF INVESTMENT Payment by:
Please indicate manner of / / check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--ACTIVE COUNRTY ALLOCATION
payment. PORTFOLIO)
/ / Exchange $ From -
---------------- ------------------------ -------------------------
Name of Portfolio Account Number
/ / Account previously established by:
/ / Phone exchange / / Wire on -
--------------------------- --------------------------
Date Account Number (Check
(Previously assigned Digit)
by the Fund)
- -----------------------------------------------------------------------------------------------------------------------------------
<PAGE>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) will be reinvested in
OPTION additional shares unless either box below is checked.
/ / Income dividends to be paid in cash, capital gains distributions (if any) in
shares.
/ / Income dividends and capital gains distributions (if any) to be paid in
cash.
- -----------------------------------------------------------------------------------------------------------------------------------
G) TELEPHONE / / I/we hereby authorize the Fund and its
REDEMPTION agents to honor any telephone requests to ------------------------- -------------------------
OPTION wire redemption proceeds to the Name of Commercial Bank Bank Account No.
Please select at time of commercial bank indicated at right and/or (Not Savings Bank)
initial application if mail redemption proceeds to the name -------------------------
you wish to redeem shares and address in which my/our fund account Bank ABA No.
by telephone. A SIGNATURE is registered if such requests are believed ---------------------------------------------------
GUARANTEE IS REQUIRED IF to be authentic. Name(s) in which your Bank Account is Established
BANK ACCOUNT IS NOT
REGISTERED IDENTICALLY TO THE FUND AND THE FUND'S TRANSFER AGENT ---------------------------------------------------
YOUR FUND ACCOUNT. WILL EMPLOY REASONABLE PROCEDURES TO Bank's Street Address
TELEPHONE REQUESTS FOR CONFIRM THAT INSTRUCTIONS COMMUNICATED BY ---------------------------------------------------
REDEMPTIONS OR TELEPHONE ARE GENUINE. THESE PROCEDURES City State Zip
EXCHANGES WILL NOT BE INCLUDE REQUIRING THE INVESTOR TO PROVIDE
HONORED UNLESS THE CERTAIN PERSONAL IDENTIFICATION INFORMATION AT
APPLICABLE BOX IS THE TIME AN ACCOUNT IS OPENED AND PRIOR TO
CHECKED. EFFECTING EACH TRANSACTION REQUESTED BY
TELEPHONE. IN ADDITION, ALL TELEPHONE
TRANSACTION REQUESTS WILL BE RECORDED AND
INVESTORS MAY BE REQUIRED TO PROVIDE
ADDITIONAL TELECOPIED WRITTEN INSTRUCTIONS OF
TRANSACTION REQUESTS. NEITHER THE FUND NOR
THE TRANSFER AGENT WILL BE RESPONSIBLE FOR
ANY LOSS, LIABILITY, COST OR EXPENSE FOR
FOLLOWING INSTRUCTIONS RECEIVED BY TELEPHONE
THAT IT REASONABLY BELIEVES TO BE GENUINE.
- -----------------------------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION ------------------------------------------------------------------------------------------------
Name
In addition to the ac-
count statement sent to ------------------------------------------------------------------------------------------------
my/our registered ad-
dress, I/we hereby au-
thorize the fund to mail ------------------------------------------------------------------------------------------------
duplicate statements to Address
the name and address
provided at right. ------------------------------------------------------------------------------------------------
City State Zip Code
- -----------------------------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION -------------------- -------------------- --------------------
Representative Name Representative No. Branch No.
- -----------------------------------------------------------------------------------------------------------------------------------
J) SIGNATURE OF The undersigned certify that I/we have full authority and legal capacity to purchase and redeem
ALL HOLDERS shares of the Fund and affirm that I/we have received a current Prospectus of the Morgan Stanley
AND TAXPAYER Institutional Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF PERJURY,
CERTIFICATION I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE.
Sign Here -- (X) (X)
----------------------------------------- ----------------------------------------------------
Signature Date Signature Date
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 6
Investment Objective and Policies................. 10
Additional Investment Information................. 12
Investment Limitations............................ 15
Management of the Fund............................ 15
Purchase of Shares................................ 18
Redemption of Shares.............................. 21
Shareholder Services.............................. 23
Valuation of Shares............................... 24
Performance Information........................... 25
Dividends and Capital Gains Distributions......... 25
Taxes............................................. 26
Portfolio Transactions............................ 27
General Information............................... 28
Account Registration Form
</TABLE>
ACTIVE COUNTRY ALLOCATION PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
GOLD PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-seven portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and the Class B
shares of the Gold Portfolio (the "Portfolio"). On January 2, 1996, the
Portfolio began offering two classes of shares, the Class A shares and the Class
B shares. All shares of the Portfolio owned prior to January 2, 1996 were
redesignated Class A shares on January 2, 1996. The Class A and Class B shares
currently offered by the Portfolio have different minimum investment
requirements and fund expenses. Shares of the portfolios are offered with no
sales charge or exchange or redemption fee (with the exception of one of the
portfolios).
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.
INVESTORS SHOULD NOTE THAT THE PORTFOLIO MAY INVEST UP TO 10% OF ITS TOTAL
ASSETS IN RESTRICTED SECURITIES, AND IT MAY INVEST UP TO 20% OF ITS TOTAL ASSETS
IN RESTRICTED SECURITIES THAT ARE RULE 144A SECURITIES. SEE "ADDITIONAL
INVESTMENT INFORMATION -- NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND
RESTRICTED SECURITIES." INVESTMENTS IN EXCESS OF 5% OF THE PORTFOLIO'S TOTAL
ASSETS MAY BE CONSIDERED A SPECULATIVE ACTIVITY, MAY INVOLVE GREATER RISK, AND
MAY INCREASE THE PORTFOLIO'S EXPENSES.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional investors and high net
worth individual investors a series of portfolios which benefit from the
investment expertise and commitment to excellence associated with Morgan Stanley
and its affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, China Growth, Emerging Markets,
European Equity, Global Equity, Gold, International Equity, International Small
Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value
Equity, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and
Municipal Bond Portfolios; and (v) MONEY MARKET -- Money Market and Municipal
Money Market Portfolios. Additional information about the Fund is contained in a
"Statement of Additional Information," dated January 2, 1996, which is
incorporated herein by reference. The Statement of Additional Information and
the prospectuses pertaining to the other portfolios of the Fund are available
upon request and without charge by writing or calling the Fund at the address
and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY 2, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Gold Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A................................................................................... None
Class B................................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
Class A................................................................................... None
Class B................................................................................... None
Deferred Sales Load
Class A................................................................................... None
Class B................................................................................... None
Redemption Fees
Class A................................................................................... None
Class B................................................................................... None
Exchange Fees
Class A................................................................................... None
Class B................................................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- --------------------------------------------------------------------------------------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C>
Management Fee (Net of Fee Waiver)*
Class A................................................................................... 0.63%
Class B................................................................................... 0.63%
12b-1 Fees
Class A................................................................................... None
Class B................................................................................... 0.25%
Other Expenses
Class A................................................................................... 0.62%
Class B................................................................................... 0.62%
---------
Total Operating Expenses (Net of Fee Waivers)*
Class A................................................................................... 1.25%
Class B................................................................................... 1.50%
---------
---------
</TABLE>
- ------------------------
*The Adviser has agreed to waive its management fees and/or to reimburse the
Portfolio, if necessary, if such fees would cause the Portfolio's total annual
operating expenses, as a percentage of average daily net assets, to exceed the
percentages set forth in the table above. Absent the fee waiver, the management
fee would be 1.00%. Absent the fee waiver and/or expense reimbursement, the
Portfolio's total operating expenses would be 1.63% of the average daily net
assets of the Class A shares and 1.88% of the average daily net assets of the
Class B shares. As a result of this reduction, the Management Fee stated above
is lower than the contractual fee stated under "Management of the Fund." The
Adviser reserves the right to terminate any of its fee waivers and/or expense
reimbursements at any time in its sole discretion. For further information on
Fund expenses, see "Management of the Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. The Class A expenses and fees for the Portfolio have been restated
to reflect current fees. The Class B expenses and fees for the Portfolio are
based on estimates, assuming that the average daily net assets of the Class B
shares of the Portfolio will be $50,000,000. "Other Expenses" include Board of
Directors' fees and expenses, amortization of organizational costs, filing fees,
professional fees and costs for shareholder reports. Due to the continuous
nature of Rule 12b-1 fees, long term Class B shareholders may pay more than the
equivalent of the maximum front-end sales charges otherwise permitted by the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
("NASD").
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolio charges
no redemption fees of any kind. The example is based on total operating expenses
of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
GOLD PORTFOLIO
CLASS A................ $ 13 $ 40 $ 69 $ 151
CLASS B................ 15 47 82 179
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Fund intends to comply with all state laws that restrict investment
company expenses. Currently, the most restrictive state law requires that the
aggregate annual expenses of an investment company shall not exceed two and
one-half percent (2 1/2%) of the first $30 million of average net assets, two
percent (2%) of the next $70 million of average net assets, and one and one-half
percent (1 1/2%) of the remaining net assets of such investment company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse the Portfolio, if necessary, if in any fiscal year the sum of the
Portfolio's expenses exceeds the limit set by applicable state law. If the
Adviser is required to so reduce its fee or reimburse the Portfolio, the
Sub-Adviser has agreed to a proportionate waiver of its fee payable from the
Adviser or reimbursement of expenses.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A shares of
the Portfolio for each of the periods prescribed. The new Class B shares were
not offered prior to the date of this Prospectus. The audited financial
highlights for the Class A shares for the fiscal year ended December 31, 1994
and the unaudited financial highlights for the Class A shares for the six months
ended June 30, 1995 are part of the Fund's financial statements which appear in
the Fund's December 31, 1994 Annual Report to Shareholders and June 30, 1995
Semi-Annual Report to Shareholders, respectively, and which are included in the
Fund's Statement of Additional Information. The Portfolio's financial highlights
for each of the periods presented, except for the six months ended June 30,
1995, have been audited by Price Waterhouse LLP, whose unqualified report
thereon is also included in the Statement of Additional Information. Additional
performance information for the Class A shares is included in the Annual Report.
The Annual Report, Semi-Annual Report and the financial statements therein,
along with the Statement of Additional Information, are available at no cost
from the Fund at the address and telephone number noted on the cover page of
this Prospectus. The following information should be read in conjunction with
the financial statements and notes thereto.
4
<PAGE>
GOLD PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1, 1994* SIX MONTHS ENDED
TO JUNE 30, 1995
DECEMBER 31, 1994 (UNAUDITED)
------------------- -----------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD...................................... $ 10.00 $ 9.13
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)............................................... 0.03 (0.03)
Net Realized and Unrealized Gain/(Loss) on Investments.................. (0.88) 0.68
------- -------
Total from Investment Operations...................................... (0.85) 0.65
------- -------
DISTRIBUTIONS
Net Investment Income................................................... (0.02) (0.01)
------- -------
Net Realized Gain....................................................... -- (0.24)
------- -------
Total Distributions................................................... (0.02) (0.25)
------- -------
NET ASSET VALUE, END OF PERIOD............................................ $ 9.13 $ 9.53
------- -------
------- -------
TOTAL RETURN.............................................................. (8.49)% 7.47%
------- -------
------- -------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)..................................... $ 30,243 $ 20,554
Ratio of Expenses to Average Net Assets (1)(2)............................ 1.25%** 1.25%**
Ratio of Net Investment Income/(Loss) to Average Net Assets (1)(2)........ 0.41%** (0.43)%**
Portfolio Turnover Rate................................................... 56% 10%
</TABLE>
- ------------------------
<TABLE>
<S> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income............... $ 0.04 $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets........................... 1.72 %** 1.63 %**
Net Investment Loss to Average Net Assets................ (0.06)%** (0.81)%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive an investment advisory fee calculated at an annual rate of 1.00%
of the average daily net assets of the Portfolio. The Adviser has agreed to
waive a portion of this fee and/or reimburse expenses of the Portfolio to
the extent that the total operating expenses of the Portfolio exceed 1.25%
of the average daily net assets of the Class A shares and 1.50% of the
average daily net assets of the Class B shares. In the period ended December
31, 1994 and the six months ended June 30, 1995, the Adviser waived advisory
fees and/or reimbursed expenses totaling $55,000 and $52,425, respectively,
for the Portfolio.
* Commencement of Operations.
** Annualized.
5
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-seven portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except the International
Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class
B shares. Each portfolio has its own investment objective and policies designed
to meet its specific goals. The investment objective of the Gold Portfolio is as
follows:
-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.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and telephone number noted on the
cover page of this Prospectus. The objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in the equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $500 million.
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and debt
securities issued or guaranteed by Latin American governments or
governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
6
<PAGE>
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small-to-medium
sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small-to-medium sized
companies.
-The U.S. REAL ESTATE 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 VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
7
<PAGE>
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at September 30, 1995 had approximately $55.2 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. Sun Valley Gold
Company (the "Sub-Adviser"), which at January 31, 1995 had approximately $150
million in assets under management, acts as sub-adviser to the Portfolio. See
"Management of the Fund -- Investment Adviser and Sub-Adviser" and "Management
of the Fund -- Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. Shares in a Portfolio account opened prior to January 2, 1996
(each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996.
For a Portfolio account opened on or after January 2, 1996 (a "New Account"),
the minimum initial investment is $500,000 for Class A shares and $100,000 for
Class B shares. Certain exceptions to the foregoing minimums apply to (1) shares
in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the
Adviser and its affiliates; and (3) certain advisory or asset allocation
accounts, such as Total Funds Management accounts, managed by Morgan Stanley or
its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves
the right in its sole descretion to determine which of such advisory or asset
allocation accounts shall be Managed Accounts. For information regarding Managed
Accounts, please contact your Morgan Stanley account representative or the Fund
at the telephone number provided on the cover of this Prospectus. Shares in a
Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a
"Grandfathered Class B Account") convert to Class B shares on March 1, 1996. See
"Purchase of Shares -- Minimum Investment and Account Sizes; Conversion from
Class A to Class B Shares."
The minimum subsequent investment for a Portfolio account is $1,000 (except
for automatic reinvestment of dividends and capital gains distributions for
which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
HOW TO REDEEM
Class A shares or Class B shares of the Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions may cause
involuntary redemption or automatic conversion. Class A or Class B shares held
in New Accounts are subject to involuntary redemption if shareholder
redemption(s) of such shares reduces the value of such account to less than
$100,000 for a continuous 60-day period. Involuntary redemption does not apply
to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B
Accounts, regardless of the value of such accounts. Class A shares in a New
Account will convert to Class B shares if shareholder redemption(s) of such
shares reduces the value of such account to less than $500,000 for a continuous
60-day period. Class B shares in a New Account will convert
8
<PAGE>
to Class A shares if shareholder purchases of additional Class B shares or
market activity causes the value of the Class B shares in the New Account to
increase to $500,000 or more. See "Purchase of Shares -- Minimum Account Sizes
and Involuntary Redemption of Shares" and "Redemption of Shares."
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. The Portfolio's investments
may be subject to greater risk and market fluctuation than a fund that invests
in securities representing a broader range of investment alternatives.
Historically, stock prices of companies involved in precious metals-related
industries have been volatile. In addition, prices of gold and other precious
metals and minerals may fluctuate sharply over short periods of time due to
various world-wide economic, financial and political factors. The Portfolio may
also invest in securities of foreign issuers which are subject to certain risks
not typically associated with domestic securities. See "Investment Objective and
Policies." In addition, the Portfolio may invest in repurchase agreements, lend
its portfolio securities and purchase securities on a when-issued basis. The
Portfolio may invest in forward foreign currency exchange contracts to hedge
currency risk associated with investment in non-U.S. dollar denominated
securities and may purchase and sell options and enter into futures transactions
and options thereon for hedging purposes. The Portfolio may invest in short-term
or medium-term debt securities or hold cash or cash equivalents for temporary
defensive purposes. The Portfolio may also invest in securities that are neither
listed on a stock exchange nor traded over-the-counter, including private
placement securities. The Portfolio may also invest indirectly in securities
through sponsored or unsponsored American Depositary Receipts. Each of these
investment strategies involves specific risks which are described under
"Investment Objectives and Policies" and "Additional Investment Information"
herein and under "Investment Objective and Policies" in the Statement of
Additional Information.
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Gold Portfolio is long-term capital
appreciation. The production of any current income is incidental to this
objective. The Portfolio seeks to achieve its objective by investing primarily
in the equity securities of foreign and domestic issuers principally engaged in
gold-related activities. There can be no assurance that the Portfolio's
investment objective will be achieved. The Portfolio's investment objective is a
fundamental policy which may not be changed without the approval of a majority
of the Portfolio's outstanding voting securities. Because the securities in
which the Portfolio invests may involve risks not associated with more
traditional investments, an investment in the Portfolio, by itself, should not
be considered a balanced investment program.
Under normal circumstances, the Portfolio will invest at least 70% of its
total assets in equity securities of companies principally engaged in the
exploration, mining, fabrication, processing, distribution or trading of gold
(or, to a lesser degree, silver, platinum or other precious metals or minerals)
or the financing, managing, controlling or operating of companies engaged in
such activities. (Such activities and the activities of such related financing,
managing, controlling or operating companies are referred to herein as
"gold-related" or "precious-metals-related" activities.) For these purposes, a
company will be considered to be principally engaged in such activities if its
derives more than 50% of its income, or devotes 50% or more of its assets, to
such activities. With respect to the Portfolio, equity securities include common
and preferred stocks, convertible securities, and rights and warrants to
purchase common stocks. The Portfolio will invest more than 25% of its total
assets in securities of companies in the group of industries involved in
gold-related or precious-metals-related activities, as described above, and may
invest more than 25% of its total assets in one or more of the industries, such
as mining, that are a part of such group of industries, as described above.
Potential investors in the Portfolio should consider the possibly greater risk
arising from the concentration of the Portfolio's investments in one such
industry or the group of industries.
Because most of the world's gold production is outside of the United States,
the Portfolio expects that a significant portion of its assets may be invested
in securities of foreign issuers. The percentage of assets invested in
particular countries or regions will change from time to time in accordance with
the judgment of Morgan Stanley Asset Management, Inc. (the "Adviser") and Sun
Valley Gold Company (the "Sub-Adviser", and collectively with the Adviser, the
"Advisers"), which may be based on, among other things, consideration of the
political stability and economic outlook of these countries or regions. It is
currently anticipated, however, that the Portfolio's assets will be principally
invested in the equity securities of companies located in the United States,
Canada and Australia, and the Portfolio's assets may be invested in equity
securities of companies located in South Africa.
The Portfolio expects to invest in foreign securities by buying the foreign
securities themselves, but the Portfolio may also invest in American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") or similar securities
that are convertible into securities of foreign issuers and that evidence
ownership of the underlying foreign security when the Advisers believe that it
is in the best interest of the Portfolio to do so. ADRs are dollar-denominated
receipts that are generally issued by domestic banks or trust companies and
which represent the deposit with the bank or trust company of a security of a
foreign issuer. EDRs are European receipts evidencing a similar arrangement with
a European bank. Generally, ADRs, in registered form, are designed for use in
the U.S. securities market and EDRs, in bearer form, are designed for use in the
European
10
<PAGE>
securities market. ADRs may be sponsored or unsponsored. The issuers of the
stock of unsponsored ADRs are not obligated to disclose material information in
the United States and therefore, there may not be a correlation between such
information and the market value of the ADR. In the event that ADRs or EDRs are
not available for a particular security, the Portfolio may invest in that
security, which may or may not be listed on a foreign securities exchange.
The Portfolio may also invest up to 10% of its total assets in gold bullion.
Bullion will only be bought from and sold to U.S. and foreign banks, regulated
U.S. commodities exchanges, exchanges affiliated with a regulated U.S. stock
exchange, and dealers who are members of, or affiliated with, a regulated U.S.
commodities exchange, in accordance with applicable investment laws. Investors
should note that bullion offers the potential for capital appreciation or
depreciation, but unlike other investments does not generate income. In bullion
transactions, the Portfolio may encounter higher custody costs and other costs
(including shipping and insurance) than those costs that are normally associated
with ownership of securities. The Fund may attempt to minimize the costs
associated with the actual custody of bullion by the use of receipts or
certificates representing ownership interests in bullion. The Advisers currently
intend to use the Portfolio's investments in gold bullion as a short-term
investment for portfolio management purposes.
The Portfolio may also invest up to 30% of its assets in money market
instruments under normal circumstances, although the Portfolio intends to stay
invested in securities satisfying its primary investment objective to the extent
practicable. Money market instruments include obligations of the U.S. Government
and its agencies and instrumentalities, commercial paper including bank
obligations, certificates of deposit (including Eurodollar certificates of
deposit) and repurchase agreements. For temporary investment purposes, the
Portfolio may invest up to all of its assets in such instruments.
For hedging purposes only, the Portfolio may enter into forward foreign
currency exchange transactions, covered call and put options (listed on an U.S.
securities exchange or written in the over-the-counter market), futures
contracts and options on futures. The Portfolio may also enter into repurchase
agreements, purchase securities on a when-issued or delayed delivery basis and
lend its portfolio securities. For more information on these practices, see
"Additional Investment Information" below and "Investment Objectives and
Policies" in the Statement of Additional Information.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations.
ADDITIONAL INVESTMENT INFORMATION
DEPOSITARY RECEIPTS. The Portfolio is permitted to invest indirectly in
securities of foreign companies through sponsored or unsponsored American
Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and other
types of Depositary Receipts (which, together with ADRs and GDRs, are
hereinafter collectively referred to as "Depositary Receipts"), to the extent
such Depositary Receipts are or become available. Depositary Receipts are not
necessarily denominated in the same currency as the underlying securities. In
addition, the issuers of the securities underlying unsponsored Depositary
Receipts are not obligated to disclose material information in the U.S. and,
therefore, there may be less information available regarding such issuers and
there may not be a correlation between such information and the market value of
the Depositary
11
<PAGE>
Receipts. ADRs are Depositary Receipts typically issued by a U.S. financial
institution which evidence ownership interests in a security or pool or
securities issued by a foreign issuer. GDRs and other types of Depositary
Receipts are typically issued by foreign banks or trust companies, although they
also may be issued by U.S. financial institutions, and evidence ownership
interests in a security or pool of securities issued by either a foreign or a
U.S. corporation. Generally, Depositary Receipts in registered form are designed
for use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the U.S. For purposes of the
Portfolio's investment policies, the Portfolio's investments in Depositary
Receipts will be deemed to be investments in the underlying securities.
FOREIGN INVESTMENT. Investment in securities of foreign issuers also
involves somewhat different investment risks than those affecting U.S.
investments. There may be limited publicly available information with respect to
foreign issuers, and foreign issuers are not generally subject to uniform
accounting, auditing and financial standards and requirements comparable to
those applicable to domestic companies. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and listed
companies than in the U.S. Many foreign securities markets have substantially
less volume than U.S. national securities exchanges, and securities of some
foreign issuers are less liquid and more volatile than securities of comparable
domestic issuers. Brokerage commissions and other transaction costs on foreign
securities exchanges are generally higher than in the U.S. Dividends and
interest paid by foreign issuers may be subject to withholding and other foreign
taxes, which may decrease the net return on foreign investments as compared to
dividends and interest paid to the Portfolio by domestic companies. It is not
expected that the Portfolio or its shareholders would be able to claim a credit
for U.S. tax purposes with respect to any such foreign taxes. See "Taxes".
Additional risks include future political and economic developments, the
possibility that a foreign jurisdiction might impose or change withholding taxes
on income payable with respect to foreign securities, possible seizure,
nationalization or expropriation of the foreign issuer or foreign deposits and
the possible adoption of foreign governmental restrictions such as exchange
controls. Current developments in South Africa have raised the threat of
political instability and uncertainty concerning the impact of such instability
on South Africa's economy and businesses. Accordingly, the risk of investing in
securities of issuers in South Africa may be greater than the risk of investing
in more stable foreign countries.
Such investments in securities of foreign issuers are frequently denominated
in foreign currencies and because the Portfolio may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the value of the Portfolio's
assets as measured in U.S. dollars may be affected favorably or unfavorably by
changes in currency rates and exchange control regulations, and the Portfolio
may incur costs in connection with conversions between various currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Portfolio may enter into
forward foreign currency exchange contracts that provide for the purchase or
sale of an amount of a specified currency at a future date. Purposes for which
such contracts may be used include protecting against a decline in a foreign
currency against the U.S. dollar between the trade date and settlement date when
the Portfolio purchases or sells non-U.S. dollar-denominated securities, locking
in the U.S. dollar value of dividends and interest on securities held by the
Portfolio and generally protecting the U.S. dollar value of securities held by
the Portfolio against exchange rate fluctuation. Such contracts may also be used
as a protective measure against the effects of fluctuating rates of currency
exchange and exchange control regulations. While such forward contracts may
limit losses to the
12
<PAGE>
Portfolio as a result of exchange rate fluctuation, they will also limit any
gains that may otherwise have been realized. See "Investment Objectives and
Policies -- Forward Currency Exchange Contracts" in the Statement of Additional
Information.
GOLD RELATED INVESTMENTS. The Portfolio intends to invest at least 70% of
its total assets in securities of companies engaged in gold-related activities.
As a result of this policy, which is a fundamental policy of the Portfolio, the
Portfolio's investments may be subject to greater risk and market fluctuation
than a fund that invests in securities representing a broader range of
investment alternatives. Historically, stock prices of companies involved in
precious metals-related industries have been volatile. Investment related to
gold and other precious metals and minerals are considered speculative and are
impacted by a variety of world-wide economics, financial and political factors.
Prices of gold and other precious metals may fluctuate sharply over short
periods of time due to changes in inflation or expectations regarding inflation
in various countries, the availability of supplies of precious metals, changes
in industrial and commercial demand, metal sales by governments, central banks
or international agencies, investment speculation, monetary and other economic
policies of various governments and government restrictions on private ownership
of certain precious metals and minerals.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of its total assets.
For more detailed information about securities lending see "Investment
Objectives and Policies" in the Statement of Additional Information.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
The Portfolio may make money market investments pending other investments or
settlement for liquidity, or in adverse market conditions. The money market
investments permitted for the Portfolio include obligations of the United States
Government and its agencies and instrumentalities; obligations of foreign
sovereignties; other debt securities; commercial paper including bank
obligations; certificates of deposit (including Eurodollar certificates of
deposit), and repurchase agreements. For more detailed information about these
money market investments, see "Description of Securities and Ratings" in the
Statement of Additional Information.
NON-PUBLICALLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolio may invest in securities that are neither listed on a
stock exchange nor traded over-the-counter, including privately placed
securities. As a result of the absence of a public trading market for these
securities, they may be less liquid than publically traded securities. Although
these securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by the
Portfolio, or less than what may be considered the fair value of such
securities. The Portfolio may not invest more than 15% of its net assets in
illiquid securities, including securities for which there is no readily
available secondary market nor more than 10% of its total assets in securities
that are restricted from sale to the public without registration
13
<PAGE>
("Restricted Securities") under the Securities Act of 1933, as amended (the
"1933 Act"). Nevertheless, subject to the foregoing limit on illiquid
securities, the Portfolio may invest up to 20% of its total assets in Restricted
Securities that can be offered and sold to qualified institutional buyers under
Rule 144A under that Act ("144A Securities"). The Board of Directors has adopted
guidelines and delegated to the Advisers, subject to the supervision of the
Board of Directors, the daily function of determining and monitoring the
liquidity of Rule 144A securities. Rule 144A securities may become illiquid if
qualified institutional buyers are not interested in acquiring the securities.
PRECIOUS METALS FORWARD AND FUTURES CONTRACTS. The Portfolio may enter into
futures contracts on precious metals as a hedge against changes in the prices of
precious metals held or intended to be acquired by the Portfolio, but not for
speculation or for achieving leverage. The Portfolio's hedging activities may
include purchases of futures contracts as an offset against the effect of
anticipated increases in the price of a precious metal which the Portfolio
intends to acquire or sales of futures contracts as an offset against the effect
of anticipated declines in the price of precious metal which the Portfolio owns.
The Portfolio may enter into precious metals forward contracts, which are
similar to precious metals futures contracts in that they both provide for the
purchase or sale of precious metals at an agreed price with delivery to take
place at an agreed future time. However, unlike futures contracts, forward
contracts are negotiated contracts which are primarily used in the dealer
market. The Portfolio will use forward contracts for the same hedging purposes
as those applicable to futures contracts, as described above. Precious metals
futures and forward contract prices can be volatile and are influenced
principally by changes in spot market prices, which in turn are affected by a
variety of political and economic factors. While the correlation between changes
in prices of futures and forward contracts and prices of the precious metals
being hedged by such contracts has historically been very strong, the
correlation may be imperfect at times, and even a well conceived hedge may be
unsuccessful to some degree because of market behavior or unexpected precious
metals price trends. For more detailed information about precious metals forward
and futures transactions see "Investment Objectives and Policies" in the
Statement of Additional Information.
The Portfolio may also purchase and write covered call or put options on
precious metals futures contracts. Such options would be purchased solely for
hedging purposes. Call options might be purchased to hedge against an increase
in the price of precious metals the Portfolio intends to acquire, and put
options may be purchased to hedge against a decline in the price of precious
metals owned by the Portfolio. As is the case with futures contracts, options on
precious metals futures may facilitate the Portfolio's acquisition of precious
metals or permit the Portfolio to defer disposition of precious metals for tax
or other purposes.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines of the Fund's
Directors. In a repurchase agreement, the Portfolio buys a security from a
seller that has agreed to repurchase it at a mutually agreed upon date and
price, reflecting the interest rate effective for the term of the agreement. The
term of these agreements is usually from overnight to one week and never exceeds
one year. Repurchase agreements may be viewed as a fully collateralized loan of
money by the Portfolio to the seller. The Portfolio always receives securities
with a market value at least equal to the purchase price (including accrued
interest) as collateral, and this value is maintained during the term of the
agreement. If the seller defaults and the collateral value declines, the
Portfolio might incur a loss. If bankruptcy
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proceedings are commenced with respect to the seller, the Portfolio's
realization upon the collateral may be delayed or limited. The aggregate of
certain repurchase agreements and certain other investments is limited as set
forth under "Investment Limitations."
STOCK OPTIONS, STOCK FUTURES CONTRACTS AND OPTIONS ON STOCK FUTURES
CONTRACTS. The Portfolio may write (i.e., sell) covered call options and
covered put options on portfolio securities. By selling a covered call option,
the Portfolio would become obligated during the terms of the option to deliver
the securities underlying the option should the option holder choose to exercise
the option before the option's termination date. In return for the call it has
written, the Portfolio will receive from the purchaser (or option holder) a
premium which is the price of the option, less a commission charged by a broker.
The Portfolio will keep the premium regardless of whether the option is
exercised. By selling a covered put option, the Portfolio incurs an obligation
to buy the security underlying the option from the purchaser of the put at the
option's exercise price at any time during the option period, at the purchaser's
election (certain options written by the Portfolio will be exercisable by the
purchaser only on a specific date). A call option is "covered" if the Portfolio
owns the security underlying the option it has written or has an absolute or
immediate right to acquire the security by holding a call option on such
security, or maintains a sufficient amount of cash, cash equivalents or liquid
securities to purchase the underlying security. Generally, a put option is
"covered" if the Portfolio maintains cash, U.S. Government securities or other
high grade debt obligations equal to the exercise price of the option or if the
Portfolio holds a put option on the same underlying security with a similar or
higher exercise price.
When the Portfolio writes covered call options, it augments its income by
the premiums received, and is thereby hedged, to the extent of that amount,
against a decline in the price of the underlying securities. The premiums
received will offset a portion of the potential loss incurred by the Portfolio
if the securities underlying the options are ultimately sold by the Portfolio at
a loss. However, during the option period, the Portfolio has, in return for the
premium on the option, given up the opportunity for capital appreciation above
the exercise price should the market price of the underlying security increase,
but has retained the risk of loss should the price of the underlying security
decline.
The Portfolio will write put options to receive the premiums paid by
purchasers (when the Advisers wish to purchase the security underlying the
option at a price lower than its current market price, in which case the
Portfolio will write the covered put at an exercise price reflecting the lower
purchase price sought) and to close out a long put option position.
The Portfolio may also purchase put or call options on its portfolio
securities. When the Portfolio purchases a call option it acquires the right to
buy a designated security at a designated price (the "exercise price"), and when
the Portfolio purchases a put option it acquires the right to sell a designated
security at the exercise price, in each case on or before a specified date (the
"termination date"), usually not more than nine months from the date the option
is issued. The Portfolio may purchase call options to close out a covered call
position or to protect against an increase in the price of a security it
anticipates purchasing. The Portfolio may purchase put options on securities
which it holds in its portfolio only to protect itself from a decline in the
value of the security. If the value of the underlying security were to fall
below the exercise price of the put purchased in an amount greater than the
premium paid for the option, the Portfolio would incur no additional loss. The
Portfolio may also purchase put options to close out written put positions in a
manner similar to call option closing purchase transactions. There are no other
limits on the Portfolio's ability to purchase call and put options.
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The Portfolio may enter into futures contracts and options on futures
contracts as a hedge against fluctuations in price of a security it holds or
intends to acquire, but not for speculation or for achieving leverage. The
Portfolio may also enter into futures transactions to remain fully invested and
to reduce transaction costs. The Portfolio may enter into futures contracts and
options on futures contracts provided that not more than 5% of the Portfolio's
total assets at the time of entering into the contract or option is required as
deposit to secure obligations under such contracts and option, and provided that
not more than 20% of the Portfolio's total assets in the aggregate is invested
in options, futures contracts and options on futures contracts.
The Portfolio may purchase and write call and put options on futures
contracts that are traded on a U.S. exchange, and enter into closing
transactions with respect to such options to terminate an existing position. An
option on a futures contract gives the purchaser the right (in return for the
premium paid) to assume a position in future contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. The Portfolio will
purchase and write options on futures contracts for the purchase of a futures
contract (purchase of a call option or sale of a put option) and for the sale of
a futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in future contracts for identical purposes to
those set forth above.
The primary risks associated with the use of option, futures and options on
futures are (i) imperfect correlation between the change in market value of the
stocks held by the Portfolio, and the prices of futures and options relating to
the stocks purchased or sold by the Portfolio; and (ii) possible lack of a
liquid secondary market for a futures contract and the resulting inability to
close a futures position which could have an adverse impact on the Portfolio's
ability to hedge. In the opinion of the Board of Directors, the risk that the
Portfolio will be unable to close out a futures position or options contract
will be minimized by only entering into futures contracts or options
transactions for which there appears to be a liquid secondary market.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, the Portfolio
may reduce its holdings in equity and other securities, for temporary defensive
purposes, and the Portfolio may invest in certain short-term (less than twelve
months to maturity) and medium-term (not greater than five years to maturity)
debt securities or may hold cash. The short-term and medium-term debt securities
in which the Portfolio may invest consist of (a) obligations of the United
States or foreign country governments, their respective agencies or
instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of United
States or foreign country banks denominated in any currency; (c) floating rate
securities and other instruments denominated in any currency issued by
international development agencies, (d) finance company and corporate commercial
paper and other short-term corporate debt obligations of United States and
foreign country corporations meeting the Portfolio's credit quality standards;
and (e) repurchase agreements with banks and broker-dealers with respect to such
securities. For temporary defensive purposes, the Portfolios intend to invest
only in short-term and medium-term debt securities that the Adviser believes to
be of high quality, i.e., subject to relatively low risk of loss of interest or
principal. There is currently no rating system for debt securities in most
foreign countries.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the
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transaction. Delivery of and payment for these securities may take as long as a
month or more after the date of the purchase commitment but will take place no
more than 120 days after the trade date. The Portfolio will maintain with the
Custodian a separate account with a segregated portfolio of high-grade equity
securities or cash in an amount at least equal to these commitments. The payment
obligation and the interest rates that will be received are each fixed at the
time the Portfolio enters into the commitment and no interest accrues to the
Portfolio until settlement. Thus, it is possible that the market value at the
time of settlement could be higher or lower than the purchase price if, among
other factors, the general level of interest rates has changed. It is a current
policy of the Portfolio not to enter into when-issued commitments exceeding in
the aggregate 15% of the market value of the Portfolio's total assets less
liabilities, other than the obligations created by these commitments.
INVESTMENT LIMITATIONS
As a diversified investment company, the Gold Portfolio is subject to the
following limitations: (a) as to 75% of its total assets, the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government and its agencies and
instrumentalities, and (b) the Portfolio may not own more than 10% of the
outstanding voting securities of any one issuer.
The Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, the
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. The Portfolio
may not (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 15% of the market value of the Portfolio's
total assets would be invested in such repurchase agreements and other
investments for which market quotations are not readily available or which are
otherwise illiquid; (ii) borrow money, except from banks for extraordinary or
emergency purposes, and then only in amounts up to 10% of the value of the
Portfolio's total assets, taken at cost at the time of borrowing, or purchase
securities while borrowings exceed 5% of its total assets; (iii) mortgage,
pledge or hypothecate any assets except in connection with any such borrowing in
amounts up to 10% of the value of the Portfolio's net assets at the time of
borrowing; (iv) invest in fixed time deposits with a duration of over seven
calendar days; or (v) invest in fixed time deposits with a duration of from two
business days to seven calendar days if more than 10% of the Portfolio's total
assets would be invested in these deposits.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER AND SUB-ADVISER. Morgan Stanley Asset Management Inc. is
the Investment Adviser and Administrator of the Fund and each of its portfolios.
The Adviser provides investment advice and portfolio management services,
pursuant to an Investment Advisory Agreement and, subject to the supervision of
the Fund's Board of Directors, makes each of the Portfolio's day-to-day
investment decisions, arranges for the execution of portfolio transactions and
generally manages each of the portfolio's investments. With respect to the
Portfolio, the Adviser has delegated these responsibilities, subject to its
supervision, to the Sub-Adviser. The Adviser is entitled to receive from the
Portfolio an annual investment advisory fee, payable quarterly, in an amount
equal to 1.00% of the average daily net assets of the Portfolio.
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Sun Valley Gold Company is sub-adviser of the Portfolio. Pursuant to a
Sub-Advisory Agreement, and subject at all times to the supervision of the
Adviser and the Board of Directors of the Fund, the Sub-Adviser provides
investment advice and portfolio management services, makes the Portfolio's
day-to-day investment decisions, arranges for the execution of portfolio
transactions and generally manages the Portfolio's investments. The Sub-Adviser
is entitled to receive from the Adviser an annual sub-advisory fee, payable
quarterly, in an amount equal to 0.40% of the average daily net assets of the
Portfolio.
The Adviser has agreed to a reduction in the fees payable to it and to
reimburse the Portfolio, if necessary, if such fees would cause the total annual
operating expenses of the Portfolio to exceed 1.25% of its average daily net
assets. The Sub-Adviser has agreed to a proportionate reduction in its fees from
the Adviser if the Adviser is required to waive its fees or to reimburse the
Portfolio so that the Portfolio's total operating expenses do not exceed 1.25%
of its average daily net assets.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business. It
provides a broad range of portfolio management services to customers in the
United States and abroad. At September 30, 1995, the Adviser, together with its
affiliated asset management companies, managed investments totaling
approximately $55.2 billion, including approximately $40.1 billion under active
management and $15.1 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
The Sub-Adviser, with principal offices at 620 Sun Valley Road, Sun Valley,
Idaho 83340, specializes in the management of gold-related investments. At
January 31, 1995 the Sub-Adviser managed investments totaling approximately $150
million.
PORTFOLIO MANAGER. Peter F. Palmedo, the President of the Sub-Adviser since
its inception in January, 1992, has had primary portfolio management
responsibility for the Portfolio since its inception. He has also served as
President of Sun Valley Gold Trading, Inc., a registered broker-dealer, since
its inception in January, 1992, and of Mad River Management since September,
1989. Prior thereto, Mr. Palmedo worked at Morgan Stanley in the institutional
equity department and specialized in portfolio risk management, derivatives and
the development and analysis of long-dated options, synthetic options and
options embedded in securities. He received a BA in Business and Finance from
Hampshire College in 1979.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
the Board of Directors of the Fund and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal and state laws. The Administration Agreement also
provides that the Administrator, through its agents, will provide the Fund
dividend disbursing and transfer agent services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15% of the average daily net assets of the Portfolio.
In a merger completed on September 1, 1995, The Chase Manhattan Bank, N.A.
("Chase") succeeded to all of the rights and obligations under the U.S. Trust
Administration Agreement between the Adviser and the United States Trust Company
of New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide
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certain administrative services to the Fund. Pursuant to a delegation clause in
the U.S. Trust Administration Agreement, U.S. Trust delegated its administration
responsibilities to Chase Global Funds Services Company ("CGFSC"), formerly
known as Mutual Funds Service Company which after the merger with Chase is a
subsidiary of Chase and will continue to provide certain administrative services
to the Fund. The Adviser supervises and monitors such administrative services
provided by CGFSC. The services provided under the Administration Agreement and
the U.S. Trust Administration Agreement are also subject to the supervision of
the Board of Directors of the Fund. The Board of Directors of the Fund has
approved the provision of services described above pursuant to the
Administration Agreement and the U.S. Trust Administration Agreement as being in
the best interest of the Fund. CGFSC's business address is 73 Tremont Street,
Boston, Massachusetts 02108-3913. For additional information regarding the
Administration Agreement or the U.S. Trust Administration Agreement, see
"Management of the Fund" in the Statement of Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Portfolio upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Portfolio.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan,
the Distributor is entitled to receive from the Portfolio a distribution fee,
which is accrued daily and paid quarterly, of 0.25% of the Class B shares'
average daily net assets on an annualized basis. The Distributor expects to
reallocate most of its fee to its investment representatives. The Distributor
may, in its discretion, voluntarily waive from time to time all or any portion
of its distribution fee and each of the Distributor and the Adviser is free to
make additional payments out if its own assets to promote the sale of Fund
shares, including payments that compensate financial institutions for
distribution services or shareholder services.
The plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees, and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
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PURCHASE OF SHARES
Class A and Class B shares of the Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio account opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares. Managed Accounts may
purchase Class A shares without being subject to any minimum initial investment
or minimum account size requirements for a Portfolio account. Officers of the
Adviser and its affiliates are subject to the minimums for a Portfolio account,
except they may purchase Class B shares subject to a minimum initial investment
and minimum account size of $5,000 for a Portfolio account.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based solely upon changes in the market that reduce the net asset value of
shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remain Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B Account") convert to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
The Fund reserves the right to modify or terminate the conversion features
of the shares as stated above at any time upon 60-days' notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to New Accounts containing Class B shares held by
officers of the Adviser or its affiliates. However, if the value of such account
held by an officer of the Adviser or its affiliates falls below $5,000 because
of shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains $5,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder.
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Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days' notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form, and mailing it, together with a check ($500,000 minimum
for Class A shares of the Portfolio and $100,000 for Class B shares of the
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- Gold
Portfolio", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for payment
by other currencies is given by the Fund. The class(es) of shares of the
Portfolio to be purchased should be designated on the Account Registration Form.
For purchases by check, the Fund is ordinarily credited with Federal Funds
within one business day. Thus, your purchase of shares by check is ordinarily
credited to your account at the net asset value per share of the Portfolio
determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the Portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
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B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
Purchase orders for shares of the Portfolio which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed at
the price computed on the date of receipt as long as the Transfer Agent receives
payment by check or in Federal Funds prior to the regular close of the NYSE on
such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested.
Your bank may charge a service fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000, except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund, Inc.-Gold Portfolio") at the above address or by wiring monies to the
Custodian Bank as outlined above. It is very important that your account name,
the portfolio name and the class selected be specified in the letter or wire to
ensure proper crediting to your account. In order to ensure that your wire
orders are invested promptly, you are requested to notify one of the Fund's
representatives (toll free: 1-800-548-7786) prior to the wire date. Additional
investments will be applied to purchase additional shares in the same class held
by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of the Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the regular close of the New York Stock
Exchange ("NYSE"), which is currently 4:00 p.m. (Eastern Time), will be executed
at the price computed on the date of receipt; an order received after the
regular close of the NYSE will be executed at the price computed on the next day
the NYSE is open as long as the Transfer Agent receives payment by check or in
Federal Funds prior to the regular close of the NYSE on such day.
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Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is canceled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor. See "Purchase of Shares" in the Statement of Additional
Information.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolio and the Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging Class
A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class
A shares of Portfolio B for Class A shares of Portfolio C and again exchanging
Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions; (1) trades exclusively between money market portfolios; and (2)
trades done in connection with an asset allocation service, such as TFM
Accounts, managed or advised by MSAM and/or any of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares or Class B shares of the Portfolio at the next determined net
asset value of shares of the applicable class. On days that both the NYSE and
the Custodian Bank are open for business, the net asset value per share of the
Portfolio is determined at the regular close of trading of the NYSE (currently
4:00 p.m. Eastern Time). Shares of the
23
<PAGE>
Portfolio may be redeemed by mail or telephone. No charge is made for
redemption. Any redemption proceeds may be more or less than the purchase price
of your shares depending on, among other factors, the market value of the
investment securities held by the Portfolio.
BY MAIL
The Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your request
should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798, except that deliveries by overnight courier
should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global
Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by mail or
overnight courier and will be implemented at the net asset value next determined
after it is received. Redemption requests sent to the Fund through overnight
courier must be sent to Morgan Stanley Institutional Fund, Inc., c/o Mutual
Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108. The Fund
and the Fund's transfer agent (the "Transfer Agent") will employ reasonable
procedures to confirm that the instructions communicated by telephone are
genuine. These procedures include requiring the investor to provide certain
personal identification information at the time an account is opened and prior
to effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to provide
additional telecopied written instructions regarding transaction requests.
Neither the Fund nor the Transfer Agent will be responsible for any loss,
liability, cost or expense for following instructions received by telephone that
either of them reasonably believes to be genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
24
<PAGE>
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in the Portfolio for shares of any
other available portfolio of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege is only available with respect to portfolios that are
registered for sale in a shareholder's state of residence. The exchange
privilege may be modified or terminated by the Fund at any time upon 60-days'
notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the names of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
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<PAGE>
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current portfolios, the name(s) of the portfolio(s)
and class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the class of
the portfolio involved in the exchange of shares at the close of business.
Requests received after 4:00 p.m. (Eastern Time) are processed the next business
day based on the net asset value determined at the close of business on such
day. For additional information regarding responsibility for the authenticity of
telephoned instructions, see "Redemption of Shares By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolio's shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. 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 not readily available are valued
at a price within a range not exceeding the current asked price nor less than
the current bid price. The current bid and asked prices are determined based on
the bid and asked prices quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices but take into account institutional size trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recently quoted bid price or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
26
<PAGE>
The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above-stated procedures are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid price and
asked price of such currencies against the U.S. dollar last quoted by any major
bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise "total return" for each class of
the Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an
investment in a class of the Portfolio would have earned over a specified period
of time (such as one, five or ten years) assuming that all distributions and
dividends by the portfolio were reinvested in the same class on the reinvestment
dates during the period. Total return does not take into account any federal or
state income taxes that may be payable on dividend and distributions or upon
redemption. The Fund may also include comparative performance information in
advertising or marketing a portfolio's shares. Such performance information may
include data from Lipper Analytical Services, Inc., other industry publications,
business periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will automatically be reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash. The Portfolio expects to distribute substantially all of
its net investment income in the form of quarterly dividends. Net realized
gains, if any, after reduction for any available tax loss carryforwards will
also be distributed annually. Confirmations of the purchase of shares of the
Portfolio through the automatic reinvestment of income dividends and capital
gains distributions will be provided, pursuant to Rule 10b-10(b) under the
Securities Exchange Act of 1934, as amended, on the next monthly client
statement following such purchase of shares. Consequently, confirmations of such
purchases will not be provided at the time of completion of such purchases as
might otherwise be required by Rule 10b-10.
Undistributed net investment income is included in a portfolio's net assets
for the purpose of calculating net asset value per share. Therefore, on the
"ex-dividend" date, the net asset value per share excludes the dividend (i.e.,
is reduced by the per share amount of the dividend). Dividends paid shortly
after the purchase of shares by an investor, although in effect a return of
capital, are taxable to shareholders subject to income tax.
27
<PAGE>
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares thereof will
be borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), so that the Portfolio will be relieved of federal income tax on
that part of its net investment income and net capital gain that is distributed
to shareholders.
The Portfolio distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to shareholders.
Dividends from the Portfolio's net investment income are taxable to shareholders
as ordinary income, whether received in cash or in additional shares. Such
dividends will generally qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent of the aggregate qualifying dividend
income received by the Portfolio from U.S. corporations. The Portfolio will
report annually to its shareholders the amount of dividend income qualifying for
such treatment.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. The
Portfolio sends reports annually to shareholders of the federal income tax
status of all distributions made during the preceding year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses), including any available capital loss carryforwards, prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale or redemption of shares may result in taxable gain or loss to the
redeeming shareholder, depending upon whether the fair market value of the
redemption proceeds exceeds or is less than the shareholder's
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adjusted basis in the redeemed or sold shares. If capital gain distributions
have been made with respect to shares that are sold at a loss after being held
for six months or less, then the loss is treated as a long-term capital loss to
the extent of the capital gain distributions.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that the Portfolio is liable for foreign income taxes so withheld, the
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although the
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that the Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Sub-Advisory Agreement authorizes the Sub-Adviser, subject to the
supervision of the Adviser, to select the brokers or dealers that will execute
the purchases and sales of investment securities for the Portfolio and directs
the Sub-Adviser to use its best efforts to obtain the best available price and
most favorable execution with respect to all transactions for the Portfolio. The
Fund has authorized the Sub-Adviser to pay higher commissions in recognition of
brokerage services which, in the opinion of the Sub-Adviser, are necessary for
the achievement of better execution, provided the Sub-Adviser, subject to the
supervision of the Adviser believes this to be in the best interest of the Fund.
Since shares of the Portfolio are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Sub-Adviser may place portfolio orders with qualified
broker-dealers who recommend the Fund's Portfolios or who act as agents in the
purchase of shares of the Portfolios for their clients.
In purchasing and selling securities for the Portfolio, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolio, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolio may also be appropriate
for other clients served by the Adviser or the Sub-Adviser. If purchase or sale
of securities consistent with the investment policies of the Portfolio and one
or more of these other clients served by the Adviser or Sub-Adviser is
considered at or about the same time, transactions in such securities will be
allocated among the Portfolio and such other clients in a manner deemed fair and
reasonable by the Sub-Adviser,
29
<PAGE>
subject to the supervision of the Adviser. Although there is no specified
formula for allocating such transactions, the various allocation methods used by
the Sub-Adviser, and the results of such allocations, are subject to periodic
review by the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Sub-Adviser, subject to the supervision of the Adviser, may
allocate a portion of the Portfolio brokerage transactions to Morgan Stanley or
broker affiliates of Morgan Stanley. In order for Morgan Stanley or its
affiliates to effect any portfolio transactions for the Fund, the commissions,
fees or other remuneration received by Morgan Stanley or such affiliates must be
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a comparable
period of time. Furthermore, the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons," as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to Morgan Stanley or such affiliates are consistent
with the foregoing standard.
Portfolio securities will not be purchased from or through, or sold to or
through, the Adviser, the Sub-Adviser or Morgan Stanley or any "affiliated
persons," as defined in the 1940 Act, of Morgan Stanley when such entities are
acting as principals, except to the extent permitted by law.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. The Portfolio anticipates that, under normal
circumstances, the annual portfolio turnover rate will not exceed 100%. High
portfolio turnover involves correspondingly greater transaction costs which will
be borne directly by the respective Portfolio. In addition, high portfolio
turnover may result in more capital gains which would be taxable to the
shareholders of the Portfolio.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by shareholders, the Board of Directors has the power to
designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with respect to such classes. The shares of
common stock of each portfolio are currently classified into two classes, the
Class A shares and the Class B shares, except for the International Small Cap,
Money Market and Municipal Money Market Portfolios, which only offer Class A
shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no preemptive rights. The shares of the Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares
30
<PAGE>
of a portfolio may be presumed to "control" (as that term is defined in the 1940
Act) that Portfolio. Under Maryland law, the Fund is not required to hold an
annual meeting of its shareholders unless required to do so under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
As of September 1, 1995 domestic securities and cash are held by Chase,
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York, ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
31
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<TABLE>
<CAPTION>
<S><C>
MORGAN STANLEY INSTITUTIONAL FUND, INC. -- GOLD PORTFOLIO
P.O. Box 2798, Boston, MA 02208-2798
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- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT REGISTRATION FORM
- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, please contact your Morgan Stanley representative or call us
toll free 1-(800)-548-7786. Please print all items except signature, and mail to
the Fund at the address above.
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A) REGISTRATION
1. INDIVIDUAL 1.
------------------------------------------------------------------------------------------------
2. JOINT TENANTS First Name Initial Last Name
(RIGHTS OF SURVIVORSHIP 2.
PRESUMED UNLESS ------------------------------------------------------------------------------------------------
TENANCY IN COMMON First Name Initial Last Name
IS INDICATED)
------------------------------------------------------------------------------------------------
First Name Initial Last Name
3. CORPORATIONS, 3.
TRUSTS AND OTHERS ------------------------------------------------------------------------------------------------
Please call the Fund
for additional documents ------------------------------------------------------------------------------------------------
that may be required to
set up account and to ------------------------------------------------------------------------------------------------
authorize transactions Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/
ASSOCIATION TRANSFER TO
MINOR (ONLY ONE
CUSTODIAN AND
MINOR PERMITTED)
/ / TRUST / / OTHER (Specify)
------------------------ -------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box
-------------------------------------------------------------------------------
Please fill in City State Zip
completely, including -------------------------------------- ---- --------------------------------------
telephone number(s). Home Telephone No. - - Business Telephone No. - -
------------ ------------
/ / United States Citizen / / Resident Alien / / Non-Resident Alien: Indicate Country of Residence
------------------
- -----------------------------------------------------------------------------------------------------------------------------------
C) TAXPAYER PART 1. Enter your Taxpayer IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For You (as a payee) are required by law to provide us
NUMBER most individual taxpayers, (as payer) with your correct taxpayer identification
If the account is in more than this is your Social Security number. Accounts that have a missing or incorrect taxpayer
one name, CIRCLE THE NAME OF Number. identification number will be subject to backup withholding
THE PERSON WHOSE TAXPAYER TAXPAYER IDENTIFICATION at a 31% rate on dividends, distributions and other payments.
IDENTIFICATION NUMBER IS NUMBER If you have not provided us with your correct taxpayer
PROVIDED IN SECTION A) ABOVE. -------------------------- identification number, you may be subject to a $50 penalty
If no name is circled, the imposed by the Internal Revenue Service.
number will be considered to OR Backup withholding is not an additional tax; the tax
be that of the last name SOCIAL SECURITY NUMBER liability of persons subject to backup withholding will be
listed. For Custodian account -------------------------- reduced by the amount of tax withheld. If withholding
of a minor (Uniform Gifts/ results in an overpayment of taxes, a refund may be
Transfers to Minors Acts), PART 2. BACKUP WITHHOLDING obtained.
give the Social Security / / Check this box if you are You may be notified that you are subject to backup
Number of the minor. NOT subject to Backup withholding under Section 3406(a)(1)(C) of the Internal
Withholding under the Revenue Code because you have underreported interest or
provisions of Section dividends or you were required to but failed to file a return
3406(a)(1)(C) of the Internal which would have included a reportable interest or
Revenue Code. dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK
THE BOX IN PART 2 AT LEFT.
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D) PORTFOLIO AND CLASS For Purchase of the following Portfolio:
SELECTION (Class A Shares
minimum $500,000 and Gold Portfolio / / Class A Shares / / Class B Shares
Class B shares minimum ------------- ------------
$100,000). Please Total Initial Investment $
indicate class and ------------------------------------
amount.
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E) METHOD OF INVESTMENT Payment by:
Please indicate manner of / / check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--GOLD PORTFOLIO
payment.
/ / Exchange $ From -
---------------- ------------------------ -------------------------
Name of Portfolio Account Number
/ / Account previously established by:
/ / Phone exchange / / Wire on -
--------------------------- --------------------------
Date Account Number (Check
(Previously assigned Digit)
by the Fund)
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<PAGE>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) will be reinvested in
OPTION additional shares unless either box below is checked.
/ / Income dividends to be paid in cash, capital gains distributions (if any) in
shares.
/ / Income dividends and capital gains distributions (if any) to be paid in
cash.
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G) TELEPHONE / / I/we hereby authorize the Fund and its
REDEMPTION agents to honor any telephone requests to ------------------------- -------------------------
wire redemption proceeds to the Name of COMMERCIAL Bank Bank Account No.
Please select at time of commercial bank indicated at right and/or (Not Savings Bank)
initial application if mail redemption proceeds to the name -------------------------
you wish to redeem shares and address in which my/our fund account Bank ABA No.
by telephone. A SIGNATURE is registered if such requests are believed ---------------------------------------------------
GUARANTEE IS REQUIRED IF to be authentic. Name(s) in which your Bank Account is Established
BANK ACCOUNT IS NOT
REGISTERED IDENTICALLY TO THE FUND AND THE FUND'S TRANSFER AGENT ---------------------------------------------------
YOUR FUND ACCOUNT. WILL EMPLOY REASONABLE PROCEDURES TO Bank's Street Address
TELEPHONE REQUESTS FOR CONFIRM THAT INSTRUCTIONS COMMUNICATED BY ---------------------------------------------------
REDEMPTIONS TELEPHONE ARE GENUINE. THESE PROCEDURES City State Zip
WILL NOT BE INCLUDE REQUIRING THE INVESTOR TO PROVIDE
HONORED UNLESS THE CERTAIN PERSONAL IDENTIFICATION INFORMATION AT
BOX IS THE TIME AN ACCOUNT IS OPENED AND PRIOR TO
CHECKED. EFFECTING EACH TRANSACTION REQUESTED BY
TELEPHONE. IN ADDITION, ALL TELEPHONE
TRANSACTION REQUESTS WILL BE RECORDED AND
INVESTORS MAY BE REQUIRED TO PROVIDE
ADDITIONAL TELECOPIED WRITTEN INSTRUCTIONS OF
TRANSACTION REQUESTS. NEITHER THE FUND NOR
THE TRANSFER AGENT WILL BE RESPONSIBLE FOR
ANY LOSS, LIABILITY, COST OR EXPENSE FOR
FOLLOWING INSTRUCTIONS RECEIVED BY TELEPHONE
THAT IT REASONABLY BELIEVES TO BE GENUINE.
- -----------------------------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION ------------------------------------------------------------------------------------------------
Name
In addition to the ac-
count statement sent to ------------------------------------------------------------------------------------------------
my/our registered ad-
dress, I/we hereby au-
thorize the fund to mail ------------------------------------------------------------------------------------------------
duplicate statements to Address
the name and address
provided at right. ------------------------------------------------------------------------------------------------
City State Zip Code
- -----------------------------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION -------------------- -------------------- --------------------
Representative Name Representative No. Branch No.
- -----------------------------------------------------------------------------------------------------------------------------------
J) SIGNATURE OF The undersigned certify that I/we have full authority and legal capacity to purchase and redeem
ALL HOLDERS shares of the Fund and affirm that I/we have received a current Prospectus of the Morgan Stanley
AND TAXPAYER Institutional Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF PERJURY,
CERTIFICATION I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE.
Sign Here -- (X) (X)
----------------------------------------- ----------------------------------------------------
Signature Date Signature Date
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 6
Investment Objective and Policies................. 10
Additional Investment Information................. 11
Investment Limitations............................ 17
Management of the Fund............................ 17
Purchase of Shares................................ 20
Redemption of Shares.............................. 23
Shareholder Services.............................. 25
Valuation of Shares............................... 26
Performance Information........................... 27
Dividends and Capital Gains Distributions......... 27
Taxes............................................. 28
Portfolio Transactions............................ 29
General Information............................... 30
Account Registration Form
</TABLE>
GOLD PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Sub-Adviser
Sun Valley Gold Company
Distributor
Morgan Stanley & Co.
Incorporated
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
-----------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
INTERNATIONAL SMALL CAP PORTFOLIO
ASIAN EQUITY PORTFOLIO
EUROPEAN EQUITY PORTFOLIO
JAPANESE EQUITY PORTFOLIO
LATIN AMERICAN PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-seven portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and the Class B
shares of the Global Equity, International Equity, Asian Equity, European
Equity, Japanese Equity and Latin American Portfolios (the "Multiclass
Portfolios") and to the Class A Shares of the International Small Cap Portfolio
(collectively, the "Portfolios"). On January 2, 1996, the Multiclass Portfolios
began offering two classes of shares, the Class A shares and the Class B shares.
All shares of the Portfolios owned prior to January 2, 1996 were redesignated
Class A shares on January 2, 1996. The International Equity Portfolio is
currently closed to new investors with the exception of certain Morgan Stanley
customers. The Class A and Class B shares currently offered by the Portfolios
have different minimum investment requirements and fund expenses. Shares of the
portfolios are offered with no sales charge or exchange or redemption fee (with
the exception of one of the portfolios).
The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $500 million.
The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of Asian issuers.
The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation through
investment in equity securities of Japanese issuers.
The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and in debt
securities issued or guaranteed by Latin American governments or governmental
entities.
INVESTORS SHOULD NOTE THAT EACH PORTFOLIO MAY INVEST UP TO 10% OF ITS TOTAL
ASSETS IN RESTRICTED SECURITIES, AND THE INTERNATIONAL SMALL CAP AND LATIN
AMERICAN PORTFOLIOS MAY INVEST UP TO 25% OF THEIR RESPECTIVE TOTAL ASSETS IN
RESTRICTED SECURITIES THAT ARE RULE 144A SECURITIES. SEE "ADDITIONAL INVESTMENT
INFORMATION -- NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES." INVESTMENTS IN RESTRICTED SECURITIES IN EXCESS OF 5% OF A
PORTFOLIO'S TOTAL ASSETS MAY BE CONSIDERED A SPECULATIVE ACTIVITY, MAY INVOLVE
GREATER RISK AND MAY INCREASE THE PORTFOLIO'S EXPENSES.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, China Growth, Emerging Markets,
European Equity, Global Equity, Gold, International Equity, International Small
Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value
Equity, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and
Municipal Bond Portfolios; and (v) MONEY MARKET -- Money Market and Municipal
Money Market Portfolios. Additional information about the Fund is contained in a
"Statement of Additional Information," dated January 2, 1996, which is
incorporated herein by reference. The Statement of Additional Information and
the prospectuses pertaining to the other portfolios of the Fund are available
upon request and without charge by writing or calling the Fund at the address
and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY 2, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
each Portfolio listed below will incur.
<TABLE>
<CAPTION>
GLOBAL EQUITY INTERNATIONAL EQUITY INTERNATIONAL SMALL ASIAN EQUITY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO CAP PORTFOLIO PORTFOLIO
- ---------------------------------------- ------------- -------------------- ------------------- ------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A............................... None None None* None
Class B............................... None None N/A None
Maximum Sales Load Imposed on Reinvested
Dividends
Class A............................... None None None None
Class B............................... None None N/A None
Deferred Sales Load
Class A............................... None None None None
Class B............................... None None N/A None
Redemption Fees
Class A............................... None None 1.00%* None
Class B............................... None None N/A None
Exchange Fees
Class A............................... None None None None
Class B............................... None None N/A None
<CAPTION>
EUROPEAN
EQUITY JAPANESE EQUITY LATIN AMERICAN
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------- ------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A............................... None None None
Class B............................... None None None
Maximum Sales Load Imposed on Reinvested
Dividends
Class A............................... None None None
Class B............................... None None None
Deferred Sales Load
Class A............................... None None None
Class B............................... None None None
Redemption Fees
Class A............................... None None None
Class B............................... None None None
Exchange Fees
Class A............................... None None None
Class B............................... None None None
</TABLE>
- --------------
* Shareholders of the International Small Cap Portfolio are charged a 1.00%
transaction fee, which is payable directly to the International Small Cap
Portfolio, in connection with each purchase and redemption of shares of the
Portfolio. The transaction fee is intended to allocate transaction costs
associated with purchases and redemptions of shares of the Portfolio to
investors actually making such purchases and redemptions rather than to the
Portfolio's other shareholders. The 1.00% fee represents the Adviser's
estimate of such transaction costs, which include the costs of acquiring and
disposing of Portfolio securities. The transaction fee is not a sales charge
or load, and is retained by the Portfolio. The fee does not apply to
Portfolios of the Fund other than the International Small Cap Portfolio and
is not charged in connection with the reinvestment of dividends or capital
gain distributions. The fee will not be charged with respect to purchases and
redemptions that do not result in actual transaction costs to the Portfolio.
Examples of such transactions include offsetting purchases and redemptions by
different shareholders occurring at the same time and in-kind purchases and
redemptions.
2
<PAGE>
<TABLE>
<CAPTION>
GLOBAL EQUITY INTERNATIONAL EQUITY INTERNATIONAL SMALL ASIAN EQUITY
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO CAP PORTFOLIO PORTFOLIO
- ---------------------------------------- ------------- -------------------- ------------------- ------------
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
<S> <C> <C> <C> <C>
Management Fee (Net of Fee Waivers)*
Class A............................... 0.63% 0.77% 0.85% 0.63%
Class B............................... 0.63% 0.77% N/A 0.63%
12b-1 Fees
Class A............................... None None None None
Class B............................... 0.25% 0.25% N/A 0.25%
Other Expenses
Class A............................... 0.37% 0.23% 0.30% 0.37%
Class B............................... 0.37% 0.23% N/A 0.37%
------ ------ ------ ------
Total Operating Expenses (Net of Fee
Waivers)*
Class A............................... 1.00% 1.00% 1.15% 1.00%
Class B............................... 1.25% 1.25% N/A 1.25%
------ ------ ------ ------
------ ------ ------ ------
<CAPTION>
EUROPEAN
EQUITY JAPANESE EQUITY LATIN AMERICAN
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------- ------------- -------------------- -------------------
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
<S> <C> <C> <C> <C>
Management Fee
(Net of Fee Waivers)*
Class A............................... 0.48% 0.47% 0.00%
Class B............................... 0.48% 0.47% 0.00%
12b-1 Fees
Class A............................... None None None
Class B............................... 0.25% 0.25% 0.25%
Other Expenses
Class A............................... 0.52% 0.53% 1.70%
Class B............................... 0.52% 0.53% 1.70%
------ ------ ------
Total Operating Expenses (Net of Fee
Waivers)
Class A............................... 1.00% 1.00% 1.70%
Class B............................... 1.25% 1.25% 1.95%
------ ------ ------
------ ------ ------
</TABLE>
- --------------
* The Adviser has agreed to waive its management fees and/or reimburse each
Portfolio, if necessary, if such fees would cause any of the total annual
operating expenses of the Portfolios to exceed a specified percentage of
their respective average daily net assets. Set forth below, for each
Portfolio as applicable, are the management fees, and total operating
expenses absent such fee waivers and/or expense reimbursements as a percent
of average daily net assets of the Class A shares of the Portfolios and Class
B Shares of the Multiclass Portfolios, respectively.
3
<PAGE>
<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT FEES --------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- ---------------------------------------------------- --------------------- ------------ ------------
<S> <C> <C> <C>
Global Equity....................................... 0.80% 1.17% 1.42%
International Equity................................ 0.80% 1.03% 1.28%
International Small Cap............................. 0.95% 1.25% N/A
Asian Equity........................................ 0.80% 1.16% 1.41%
European Equity..................................... 0.80% OP1.32% 1.57%
Japanese Equity..................................... 0.80% 1.33% 1.58%
Latin American...................................... 1.10% 3.10% 3.35%
</TABLE>
** "Other Expenses" for the Latin American Portfolio inlcudes an annual fee of
0.125% of the Portfolios' average weekly net assets paid to local
administrators required under Brazilian and Chilean law. See "Local
Administrators for the Latin American Portfolio"
- ------------------
+ Estimated.
These reductions became effective as of the inception of each Portfolio,
except with respect to the International Equity Portfolio, as to which the
effective date was February 15, 1990. As a result of these reductions, the
Management Fees stated above are lower than the contractual fees stated
under "Management of the Fund." For further information on Fund expenses,
see "Management of the Fund."
The purpose of the table is to assist the investor in understanding the
various expenses that an investor in the Portfolios will bear directly or
indirectly. The Class A expenses and fees for the International Equity Portfolio
are based on actual figures for the fiscal year ended December 31, 1994. The
Class A expenses and fees for the Latin American Portfolio are estimated using
actual figures for the period ended June 30, 1995. The Class A expenses and fees
for each of the other Portfolios have been restated to reflect current fees. The
Class B expenses and fees for the Multiclass Portfolios are based on estimates
assuming that the average daily net assets of the Class B shares of each
Multiclass Portfolio will be $50,000,000. "Other Expenses" include Board of
Directors' fees and expenses, amortization or organizational costs, filing fees,
professional fees and costs for shareholder reports. Due to the continuous
nature of Rule 12b-1 fees, long term Class B shareholders may pay more than the
equivalent of the maximum front-end sales charges otherwise permitted by the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
("NASD").
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% rate of return and (2) redemption at the end
of each time period. As noted above, the only fee charged by the
4
<PAGE>
Fund upon purchase or redemption of Fund shares is the 1% transaction fee
assessed on purchases and redemptions of shares of the International Small Cap
Portfolio, which charges are reflected in this example. The example is based on
total operating expenses of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ -------- -------- --------
<S> <C> <C> <C> <C>
Global Equity Portfolio
Class A.................................................................. $10 $32 $55 $122
Class B.................................................................. 13 40 69 151
International Equity Portfolio
Class A.................................................................. 10 32 55 122
Class B.................................................................. 13 40 69 151
International Small Cap Portfolio
Class A.................................................................. 32 58 85 164
Asian Equity Portfolio
Class A.................................................................. 10 32 55 122
Class B.................................................................. 13 40 69 151
European Equity Portfolio
Class A.................................................................. 10 32 55 122
Class B.................................................................. 13 40 69 151
Japanese Equity Portfolio
Class A.................................................................. 10 32 55 122
Class B.................................................................. 13 40 69 151
Latin American Portfolio
Class A.................................................................. 17 54 * *
Class B.................................................................. 20 61 * *
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
- ------------------
* Because the Latin American Portfolio has recently become operational, the
Fund has not projected expenses beyond the 3-year period shown.
The Fund intends to continue to comply with all state laws that restrict
investment company expenses. Currently, the most restrictive state law requires
that the aggregate annual expenses of an investment company shall not exceed two
and one-half percent (2 1/2%) of the first $30 million of average net assets,
two percent (2%) of the next $70 million of average net assets, and one and
one-half percent (1 1/2%) of the remaining net assets of such investment
company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse any Portfolio, if necessary, if in any fiscal year the sum of the
Portfolio's expenses exceeds the limit set by applicable state law.
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A shares of
the Portfolios for each of the periods presented. The new Class B shares were
not offered prior to the date of this Prospectus. The audited financial
highlights for the Class A shares for the fiscal year ended December 31, 1994
and the unaudited financial highlights for the Class A shares for the six months
ended June 30, 1995 are part of the Fund's financial statements which appear in
the Fund's December 31, 1994 Annual Report to Shareholders and June 30, 1995
Semi-Annual Report to Shareholders, respectively, and which are included in the
Fund's Statement of Additional Information. The Portfolios financial highlights
for each of the periods presented, except for the six months ended June 30,
1995, have been audited by Price Waterhouse, LLP, whose unqualified report
thereon is also included in the Statement of Additional Information. Additional
performance information for the Class A shares is included in the Annual Report.
The Annual Report, Semi-Annual Report and the financial statements therein,
along with the Statement of Additional Information, are available at no cost
from the Fund at the address and telephone number noted on the cover page of
this Prospectus. Subsequent to October 31, 1992 (the Fund's prior fiscal year
end) the Fund changed its fiscal year end to December 31. The following
information should be read in conjunction with the financial statements and
notes thereto.
6
<PAGE>
GLOBAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
TWO MONTHS SIX MONTHS
ENDED YEAR ENDED YEAR ENDED ENDED JUNE
JULY 15, 1992* TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 30, 1995
OCTOBER 31, 1992 1992 1993 1994 (UNAUDITED)
------------------ ------------ ------------ ------------ ------------
<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)(2)..... 0.02 0.01 0.08 0.08 0.13
Net Realized and Unrealized
Gain/(Loss) on Investments...... (0.67) 0.39 4.18 0.79 1.47
------- ------------ ------------ ------------ ------------
Total from Investment Operations... (0.65) 0.40 4.26 0.87 1.60
------- ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income............ -- -- (0.02) (0.12) (0.06)
In Excess of Net Investment
Income.......................... -- -- (0.03) -- --
Net Realized Gain................ -- -- (0.09) (1.22) (0.19)
------- ------------ ------------ ------------ ------------
Total Distributions................ -- -- (0.14) (1.34) (0.25)
------- ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD..... $ 9.35 $ 9.75 $ 13.87 $ 13.40 $ 14.75
------- ------------ ------------ ------------ ------------
------- ------------ ------------ ------------ ------------
TOTAL RETURN....................... (6.50)% 4.28% 44.24% 6.95% 12.11%
------- ------------ ------------ ------------ ------------
------- ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)....................... $11,257 $11,739 $19,918 $78,935 $81,685
Ratio of Expenses to Average Net
Assets (1)(2)..................... 1.00%** 1.00%** 1.00% 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1)(2)......... 1.00%** 0.69%** 0.84% 0.87% 1.68%**
Portfolio Turnover Rate............ 10% 5% 42% 12% 19%
</TABLE>
- --------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income........... $ 0.08 $ 0.02 $ 0.01 $ 0.02 $ 0.01
Ratios before expense limitation:
Expenses to Average Net
Assets...................... 5.22%** 2.49%** 1.66% 1.24% 1.18%**
Net Investment Income (Loss)
to Average Net Assets....... (3.22)%** (0.80)%** 0.18% 0.63% 1.50%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is
entitled to receive a management fee calculated at an annual rate of 0.80%
of the average daily net assets of the Global Equity Portfolio. The Adviser
has agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 1.00% of the average daily net assets of the Class A shares and
1.25% of the average daily net assets of the Class B shares. In the fiscal
period ended October 31, 1992, the two months ended December 31, 1992, the
years ended December 31, 1993 and 1994 and the six months ended June 30,
1995, the Adviser waived management fees and/or reimbursed expense
totalling $97,000, $28,000, $101,000, $126,000 and $71,584, respectively,
for the Global Equity Portfolio.
* Commencement of Operations.
** Annualized.
7
<PAGE>
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
TWO MONTHS
AUGUST 4, 1989* YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED
TO OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1989 1990 1991 1992 1992 1993 1994
--------------- ----------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 10.00 $ 9.72 $ 10.05 $ 10.52 $ 9.83 $ 9.98 $ 14.09
------- ----------- ----------- ----------- ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)(2)................ 0.05 0.19 0.12 0.12 0.01 0.15 0.16
Net Realized and
Unrealized Gain/(Loss)
on Investments........ (0.33) 0.20 0.58 (0.59) 0.14 4.36 1.54
------- ----------- ----------- ----------- ------------ ------------ ------------
Total from Investment
Operations.............. (0.28) 0.39 0.70 (0.47) 0.15 4.51 1.70
------- ----------- ----------- ----------- ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income.. -- (0.06) (0.15) (0.17) -- (0.01) (0.18)
In Excess of Net
Investment Income..... -- -- -- -- -- (0.13) --
Net Realized Gain...... -- -- (0.08) (0.05) -- (0.26) (0.27)
------- ----------- ----------- ----------- ------------ ------------ ------------
Total Distributions...... -- (0.06) (0.23) (0.22) -- (0.40) (0.45)
------- ----------- ----------- ----------- ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD.................. $ 9.72 $ 10.05 $ 10.52 $ 9.83 $ 9.98 $ 14.09 $ 15.34
------- ----------- ----------- ----------- ------------ ------------ ------------
------- ----------- ----------- ----------- ------------ ------------ ------------
TOTAL RETURN............. (2.80)% 3.99% 7.17% (4.56)% 1.53% 46.50% 12.39%
------- ----------- ----------- ----------- ------------ ------------ ------------
------- ----------- ----------- ----------- ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands)............. $7,811 $110,716 $283,776 $486,836 $510,727 $947,045 $1,304,770
Ratio of Expenses to
Average Net Assets
(1)(2).................. 1.35%** 1.03% 1.00% 1.00% 1.00%** 1.00% 1.00%
Ratio of Net Investment
Income to Average Net
Assets (1)(2)........... 2.34% 3.51% 2.27% 1.46% 0.68%** 1.25% 1.12%
Portfolio Turnover
Rate.................... 0% 38% 22% 12% 5% 23% 16%
<CAPTION>
SIX MONTHS
ENDED JUNE
30, 1995
(UNAUDITED)
------------
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 15.34
------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)(2)................ 0.15
Net Realized and
Unrealized Gain/(Loss)
on Investments........ 0.56
------------
Total from Investment
Operations.............. 0.71
------------
DISTRIBUTIONS
Net Investment Income.. --
In Excess of Net
Investment Income..... --
Net Realized Gain...... (0.80)
------------
Total Distributions...... (0.80)
------------
NET ASSET VALUE, END OF
PERIOD.................. $ 15.25
------------
------------
TOTAL RETURN............. 4.88%
------------
------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands)............. $1,438,303
Ratio of Expenses to
Average Net Assets
(1)(2).................. 1.00%**
Ratio of Net Investment
Income to Average Net
Assets (1)(2)........... 2.28%**
Portfolio Turnover
Rate.................... 13%
</TABLE>
- --------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit
to net investment
income........... $ 0.00 $ 0.01 $ 0.01 $ 0.00 $ 0.00 $ 0.01 $ 0.004 $ .002
Ratios before expense limitation:
Expenses to
Average Net
Assets........... 2.58%** 1.24% 1.09% 1.02% 1.14%** 1.06% 1.03% 1.03%**
Net Investment
Income to Average
Net Assets....... 1.11%** 3.30% 2.18% 1.44% 0.54%** 1.19% 1.09% 2.25%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is
entitled to receive a management fee calculated at an annual rate of 0.80%
of the average daily net assets of the International Equity Portfolio. The
Adviser has agreed to waive a portion of this fee and/or reimburse expenses
of the Portfolio to the extent that the total operating expenses of the
Portfolio exceed 1.00% of the average daily net assets of the Class A
shares and 1.25% of the average daily net assets of the Class B shares. In
the year ended October 31, 1991, the year ended October 31, 1992, the two
months ended December 31, 1992, the years ended December 31, 1993 and 1994,
and the six months ended June 30, 1995, the Adviser waived management fees
and/or reimbursed expenses totaling $147,000, $78,000, $116,000, $405,000,
$344,000 and $158,357, respectively, for the International Equity
Portfolio.
* Commencement of Operations.
** Annualized.
8
<PAGE>
INTERNATIONAL SMALL CAP PORTFOLIO
<TABLE>
<CAPTION>
SIX MONTHS
DECEMBER 15, 1992* YEAR ENDED YEAR ENDED ENDED JUNE
TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 30, 1995
1992 1993+ 1994 (UNAUDITED)
------------------ ------------ ------------ ------------
<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)(3).......... 0.01 0.09 0.14 0.20
Net Realized and Unrealized Gain on
Investments (2)...................... 0.08 4.48 0.62 0.11
------- ------ ------ ------------
Total from Investment Operations........ 0.09 4.57 0.76 0.31
------- ------ ------ ------------
DISTRIBUTIONS
Net Investment Income................. -- -- (0.03) (0.03)
In Excess of Net Investment Income.... -- (0.02) -- --
Net Realized Gain..................... -- -- (0.22) --
------- ------ ------ ------------
Total Distributions..................... -- (0.02) (0.25) (0.03)
------- ------ ------ ------------
NET ASSET VALUE, END OF PERIOD.......... $10.09 $ 14.64 $ 15.15 $ 15.43
------- ------ ------ ------------
------- ------ ------ ------------
TOTAL RETURN............................ 0.90% 45.34% 5.25% 2.03%
------- ------ ------ ------------
------- ------ ------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)... $3,824 $52,834 $160,101 $187,018
Ratio of Expenses to Average Net Assets
(1)(3)................................. 1.15%** 1.15% 1.15% 1.15%**
Ratio of Net Investment Income to
Average Net Assets (1)(3).............. 1.37%** 0.66% 1.18% 2.81%**
Portfolio Turnover Rate................. 0% 14% 8% 14%
</TABLE>
- ------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
(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% 1.25%**
Net Investment Income/(Loss) to
Average Net Assets.............. (19.15)%** (0.05)% 1.04% 2.71%**
</TABLE>
(2) Reflects a 1% transaction fee on purchases and redemptions of capital
shares.
(3) Under the terms of an Investment Advisory Agreement, the Adviser is
entitled to receive a management fee calculated at an annual rate of 0.95%
of the average daily net assets of the Class A shares of the Portfolio. The
Adviser has agreed to waive a portion of this fee and/or reimburse expenses
of the Portfolio to the extent that the total operating expenses of the
Portfolio exceed 1.15% of the average daily net assets of the Class A
shares of the Portfolio. In the period ended December 31, 1992, the years
ended December 31, 1993 and 1994, and the six months ended June 30, 1995,
the Adviser waived management fees and/or reimbursed expenses totaling
$32,000, $151,000, $174,000 and $90,944 respectively, for the International
Small Cap Portfolio.
* Commencement of Operations.
** Annualized.
+ Per share amounts for the year ended December 31, 1993 are based on average
outstanding shares.
9
<PAGE>
ASIAN EQUITY PORTFOLIO
<TABLE>
<CAPTION>
TWO MONTHS
JULY 1, 1991, TO YEAR ENDED ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1992 1993 1994
------------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 10.00 $ 9.67 $ 13.63 $ 13.11 $ 26.20
------- ----------- ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)(2).......... 0.03 0.14 0.01 0.10 0.11
Net Realized and Unrealized
Gain/(Loss) on Investments........... (0.36) 3.86 (0.53) 13.38 (4.15)
------- ----------- ------------ ------------ ------------
Total from Investment Operations........ (0.33) 4.00 (0.52) 13.48 (4.04)
------- ----------- ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income................. -- (0.04) -- (0.01) (0.09)
In Excess of Net Investment Income.... -- -- -- (0.13) --
Net Realized Gain..................... -- -- -- (0.12) (0.53)
In Excess of Net Realized Gain........ -- -- -- (0.13) --
------- ----------- ------------ ------------ ------------
Total Distributions..................... -- (0.04) -- (0.39) (0.62)
------- ----------- ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD.......... $ 9.67 $ 13.63 $ 13.11 $ 26.20 $ 21.54
------- ----------- ------------ ------------ ------------
------- ----------- ------------ ------------ ------------
TOTAL RETURN............................ (3.30)% 41.50% (3.82)% 105.71% (15.81)%
------- ----------- ------------ ------------ ------------
------- ----------- ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)... $10,719 $41,017 $41,978 $287,136 $276,906
Ratio of Expenses to Average Net Assets
(1)(2)................................. 1.00%** 1.00% 1.00%** 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets (1)(2).............. 1.13%** 1.53% 0.61%** 0.83% 0.52%
Portfolio Turnover Rate................. 2% 33% 10% 18% 47%
<CAPTION>
SIX MONTHS
ENDED JUNE
30, 1995
(UNAUDITED)
------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 21.54
------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)(2).......... 0.16
Net Realized and Unrealized
Gain/(Loss) on Investments........... 1.17
------------
Total from Investment Operations........ 1.33
------------
DISTRIBUTIONS
Net Investment Income................. 01.15)
In Excess of Net Investment Income.... --
Net Realized Gain..................... (2.26)
In Excess of Net Realized Gain........ --
------------
Total Distributions..................... (2.41)
------------
NET ASSET VALUE, END OF PERIOD.......... $ 20.46
------------
------------
TOTAL RETURN............................ 7.04%
------------
------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)... $290,397
Ratio of Expenses to Average Net Assets
(1)(2)................................. 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1)(2).............. 1.58%**
Portfolio Turnover Rate................. 29%
</TABLE>
- ------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
(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 $ 0.02
Ratios before expense limitation:
Expenses to Average Net
Assets................. 2.52%** 1.63% 2.02%** 1.38% 1.20% 1.16%**
Net Investment
Income/(Loss) to
Average Net Assets.... (0.39)%** 0.90% (0.41)%** 0.45% 0.32% 1.41%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is
entitled to receive a management fee calculated at an annual rate of 0.80%
of the average daily net assets of the Asian Equity Portfolio. The Adviser
has agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 1.00% of the average daily net assets of the Class A shares and
1.25% of the average daily net assets of the Class B shares. In the fiscal
period ended October 31, 1991, the year ended October 31, 1992, the two
months ended December 31, 1992, years ended December 31, 1993 and 1994, and
the six months ended June 30, 1995, the Adviser waived management fees
and/or reimbursed expenses totaling $44,000, $167,000, $70,000, $477,000,
$535,000 and $227,610, respectively, for the Asian Equity Portfolio.
* Commencement of Operations.
** Annualized.
10
<PAGE>
EUROPEAN EQUITY PORTFOLIO
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE
APRIL 2, 1993* TO DECEMBER 31, 30, 1995
DECEMBER 31, 1993 1994 (UNAUDITED)
------------------- ------------ ------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 10.00 $ 12.91 $ 13.94
---------- ------------ ------------
---------- ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)(2).......... 0.08 0.08 0.15
Net Realized and Unrealized Gain on
Investments.......................... 2.83 1.29 1.27
---------- ------------ ------------
Total from Investment Operations........ 2.91 1.37 1.42
---------- ------------ ------------
DISTRIBUTIONS
Net Investment Income................. -- (0.09) --
Net Realized Gain..................... -- (0.25) (1.24)
---------- ------------ ------------
Total Distributions..................... -- (0.34) (1.24)
---------- ------------ ------------
NET ASSET VALUE, END OF PERIOD.......... $ 12.91 $ 13.94 $ 14.12
---------- ------------ ------------
---------- ------------ ------------
TOTAL RETURN............................ 29.10% 10.88% 11.10%
---------- ------------ ------------
---------- ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)... $12,681 $27,634 $48,624
Ratio of Expenses to Average Net Assets
(1)(2)................................. 1.00%** 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1)(2).............. 1.23%** 0.87% 2.68%**
Portfolio Turnover Rate................. 15% 79% 3%
</TABLE>
- ------------------
<TABLE>
<S> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income................ $ 0.09 $ 0.06 $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets... 2.43%** 1.62% 1.32%**
Net Investment Income/(Loss) to
Average Net Assets............... (0.21)%** 0.25% 2.36%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is
entitled to receive a management fee calculated at an annual rate of 0.80%
of the average daily net assets of the European Equity Portfolio. The
Adviser has agreed to waive a portion of this fee and/or reimburse expenses
of the Portfolio to the extent that the total operating expenses of the
Portfolio exceed 1.00% of the average daily net assets of the Class A
shares and 1.25% of the average daily net assets of the Class B shares. In
the fiscal period ended December 31, 1993, the year ended December 31, 1994
and the six months ended June 30, 1995, the Adviser waived management fees
and/or reimbursed expenses totaling $88,000, $112,000 and $62,293,
respectively, for the European Equity Portfolio.
* Commencement of Operations.
** Annualized.
11
<PAGE>
JAPANESE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 25,
1994* SIX MONTHS
TO DECEMBER ENDED JUNE
31, 30, 1995
1994 (UNAUDITED)
------------ ------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.00 $ 9.83
------------ ------------
------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (1)................................... (0.01) (0.05)
Net Realized and Unrealized Loss on Investments........... (0.16) (1.59)
------------ ------------
Total from Investment Operations............................ (0.17) (1.64)
------------ ------------
NET ASSET VALUE, END OF PERIOD.............................. $ 9.83 $ 8.19
------------ ------------
------------ ------------
TOTAL RETURN................................................ (1.70)% (16.68)%
------------ ------------
------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)....................... $50,332 $21,746
Ratio of Expenses to Average Net Assets (1)(2).............. 1.00%** 1.00%**
Ratio of Net Investment Loss to Average Net Assets (1)(2)... (0.10)%** (0.05)%**
Portfolio Turnover Rate..................................... 1% 11%
</TABLE>
- ------------------
<TABLE>
<S> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income........... $ 0.02 $ 0.35
Ratios before expense limitation:
Expenses to Average Net Assets....................... 1.27%** 1.33%**
Net Investment Loss to Average Net Assets............ (0.37)%** (0.38)%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is
entitled to receive a management fee calculated at an annual rate of 0.80%
of the average daily net assets of the Japanese Equity Portfolio. The
Adviser has agreed to waive a portion of this fee and/or reimburse expenses
of the Portfolio to the extent that the total operating expenses of the
Portfolio exceed 1.00% of the average daily net assets of the Class A
shares and 1.25% of the average daily net assets of the Class B shares. In
the fiscal period ended December 31, 1994 and the six months ended June 30,
1995, the Adviser waived management fees and/or reimbursed expenses
totaling $80,000 and $55,499, respectively, for the Japanese Equity
Portfolio.
* Commencement of Operations.
** Annualized.
12
<PAGE>
LATIN AMERICAN PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 18,
1995*
TO JUNE 30,
1995
(UNAUDITED)
------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.00
------------
------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)................................. (0.01)
Net Realized and Unrealized Loss on Investments........... (1.21)
------------
Total from Investment Operations............................ (1.20)
------------
NET ASSET VALUE, END OF PERIOD.............................. $ 8.80
------------
------------
TOTAL RETURN................................................ (12.00)%
------------
------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)....................... $13,953
Ratio of Expenses to Average Net Assets (1)(2).............. 2.56%**+
Ratio of Net Investment Income to Average Net Assets
(1)(2)..................................................... 0.41%**
Portfolio Turnover Rate..................................... 62%
</TABLE>
- ------------------
<TABLE>
<S> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income........... $ 0.05
Ratios before expense limitation:
Expenses to Average Net Assets....................... 3.97%**
Net Investment Loss to Average Net Assets............ (1.01)%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is
entitled to receive a management fee calculated at an annual rate of 1.10%
of the average daily net assets of the Latin American Portfolio. The
Adviser has agreed to waive a portion of this fee and/or reimburse expenses
of the Portfolio to the extent that the total operating expenses of the
Portfolio exceed 1.70% of the average daily net assets of the Class A
shares and 1.95% of the average daily net assets of the Class B shares. In
the six months ended June 30, 1995, the Adviser waived management fees
and/or reimbursed expenses totalling $72,744 for the Portfolio.
* Commencement of Operations.
** Annualized.
+ The ratio of expenses to average net assets includes Brazilian tax expense.
Without the effect of the Brazilian tax expense, the ratio of expenses to
average net assets would have been 1.70% annualized.
13
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-seven portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except for the
International Small Cap, Money Market and Municipal Money Market Portfolios,
also offers Class B shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. The investment objective of each
Portfolio described in this Prospectus is as follows:
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of issuers throughout
the world, including U.S. issuers.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital
appreciation by investing primarily in equity securities of
non-U.S. issuers.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital
appreciation by investing primarily in equity securities of
non-U.S. issuers with equity market capitalizations of less than
$500 million.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of Asian issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital
appreciation by investing primarily in equity securities of
European issuers.
-The JAPANESE EQUITY PORTFOLIO seeks long term capital
appreciation by investing primarily in equity securities of
Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of Latin American
issuers and debt securities issued or guaranteed by Latin
American governments or governmental entities.
The other portfolios of the Fund are described in other Prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The objectives of these other portfolios are listed
below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings
determined by the Adviser in equity securities of non-U.S.
issuers which, in the aggregate, replicate broad country indices.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of
issuers in The People's Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital
appreciation by investing primarily in equity securities of
emerging country issuers.
14
<PAGE>
-The GOLD PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of foreign and domestic
issuers engaged in gold-related activities.
U.S. EQUITY:
-THE AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by
investing primarily in corporate equity and equity-linked
securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital
appreciation by investing primarily in growth-oriented equity
securities of small- to medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation
by investing in growth-oriented equity securities of large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small
corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total
return by investing in undervalued equity securities of small- to
medium-sized companies.
-The U.S. REAL ESTATE 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 VALUE EQUITY PORTFOLIO seeks high total return by investing
in equity securities which the Adviser believes to be undervalued
relative to the stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving
capital by investing in a combination of undervalued equity
securities and fixed income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by
investing primarily in debt securities of government,
government-related and corporate issuers located in emerging
countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return
consistent with the preservation of capital by investing in a
diversified portfolio of fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive
real rate of return while preserving capital by investing in
fixed income securities of issuers throughout the world,
including U.S. issuers.
-The HIGH YIELD PORTFOLIO seeks to maximize total return by
investing in a diversified portfolio of high yield fixed income
securities that offer a yield above that generally available on
debt securities in the three highest rating categories of the
recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high
a level of current income as is consistent with the preservation
of capital by investing primarily in a variety of investment
grade mortgage-backed securities.
15
<PAGE>
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of
current income consistent with preservation of principal through
investment primarily in municipal obligations, the interest on
which is exempt from federal income tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and
preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with
remaining maturities of one year or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current
tax-exempt income and preserve capital while maintaining high
levels of liquidity through investing in high quality money
market instruments with remaining maturities of one year or less
which are exempt from federal income tax.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at September 30, 1995 had approximately $55.2 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares, offered
only by the Multiclass Portfolios, are offered at net asset value with no sales
commission, but with a 12b-1 fee, which is accrued daily and paid quarterly,
equal to 0.25% of the Class B shares' average daily net assets on an annualized
basis. Share purchases may be made by sending investments directly to the Fund
or through the Distributor. Shares in a Portfolio account opened prior to
January 2, 1996 were designated Class A shares on January 2, 1996. For a
Multiclass Portfolio account opened on or after January 2, 1996 (a "New
Multiclass Account"), the minimum initial investment is $500,000 for Class A
shares of each Multiclass Portfolio and $100,000 for Class B shares of each
Multiclass Portfolio. The International Equity Portfolio is currently closed to
new investors with the exception of certain Morgan Stanley customers. The
minimum initial investment for Class A shares of the International Small Cap
Portfolio is $500,000. Certain exceptions to the foregoing minimums apply to (1)
shares in a Multiclass Portfolio account opened prior to January 2, 1996 (each,
a "Pre-1996 Multiclass Account") with a value of $100,000 or more on March 1,
1996 (a "Grandfathered Class A Account"); (2) Portfolio accounts held by
officers of the Adviser and its affiliates; and (3) certain advisory or asset
allocation accounts, such as Total Funds Management accounts, managed by Morgan
Stanley or its affiliates, including the Adviser ("Managed Accounts"). The
Adviser reserves the right in its sole discretion to determine which of such
advisory or asset allocation accounts shall be Managed Accounts. For information
regarding Managed Accounts, please contact your Morgan Stanley account
representative or the Fund at the telephone number provided on the cover of this
Prospectus. Shares in a Pre-1996 Multiclass Account with a value of less than
$100,000 on March 1, 1996 (a "Grandfathered Class B Account") convert to Class B
shares on March 1, 1996. See "Purchase of Shares -- Minimum Investment and
Account Sizes; Conversion from Class A to Class B Shares."
16
<PAGE>
The minimum subsequent investment for each Portfolio account is $1,000
(except for automatic reinvestment of dividends and capital gains distributions
for which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
HOW TO REDEEM
Class A shares of each Portfolio or Class B shares of each Multiclass
Portfolio may be redeemed at any time, without cost, at the net asset value per
share of shares of the applicable class next determined after receipt of the
redemption request. The redemption price may be more or less than the purchase
price. Certain redemptions may cause involuntary redemption or automatic
conversion. Class A or Class B shares held in New Multiclass Accounts are
subject to involuntary redemption if shareholder redemption(s) of such shares
reduces the value of such account to less than $100,000 for a continuous 60-day
period. Involuntary redemption does not apply to Managed Accounts, Grandfathered
Class A Accounts and Grandfathered Class B Accounts, regardless of the value of
such accounts. Class A shares in a New Multiclass Account will convert to Class
B shares if shareholder redemption(s) of such shares reduces the value of such
account to less than $500,000 for a continuous 60-day period. Class B shares in
a New Multiclass Account will convert to Class A shares if shareholder purchases
of additional Class B shares or market activity cause the value of the Class B
shares in the New Multiclass Account to increase to $500,000 or more. If a
shareholder reduces its total investment in Class A shares of the International
Small Cap Portfolio to less than $500,000, the investment may be subject to
redemption. See "Purchase of Shares -- Minimum Account Sizes and Involuntary
Redemption of Shares" and "Redemption of Shares."
RISK FACTORS
The investment policies of each of the Portfolios entail certain risks and
considerations of which an investor should be aware. Each Portfolio will invest
in securities of foreign issuers, which are subject to certain risks not
typically associated with domestic securities. The Latin American Portfolio
invests in securities of issuers located in developing countries and emerging
markets. These securities may impose greater liquidity risks and other risks not
typically associated with investing in more established markets. The Latin
American Portfolio may invest up to 20% of its total assets in lower rated debt
securities ("junk bonds"), including sovereign debt, which securities are
considered speculative with regard to the payment of interest and return of
principal. See "Investment Objectives and Policies" and "Additional Investment
Information." In addition, each Portfolio may invest in repurchase agreements,
lend its portfolio securities, purchase securities on a when issued basis or
delayed delivery basis and invest in forward foreign currency exchange
contracts, and the Latin American Portfolio may invest in foreign currency
exchange options to hedge currency risk associated with investment in non-U.S.
dollar denominated securities. Each Portfolio may invest in short-term or
medium-term debt securities or hold cash or cash equivalents for temporary
defensive purposes. The International Small Cap Portfolio may invest in
securities that are neither listed on a stock exchange nor traded
over-the-counter, including private placement securities. The Global Equity,
Japanese Equity, Latin American and Asian Equity Portfolios may also invest
indirectly in securities through sponsored or unsponsored American Depositary
Receipts. Each of these investment strategies involves specific risks which are
described under "Investment Objectives and Policies" and "Additional Investment
Information" herein and under "Investment Objectives and Policies" in the
Statement of Additional Information.
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies the Fund employs in its efforts to achieve these objectives. Each
Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Fund will attain its objectives. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval.
THE GLOBAL EQUITY PORTFOLIO
The Global Equity Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers. With respect to the Portfolio, equity securities include
common and preferred stocks, convertible securities, and rights and warrants to
purchase common stocks. The Adviser expects that, under normal circumstances, at
least 20% of the Portfolio's total assets will be invested in the common stocks
of U.S. issuers. The remainder of the Portfolio will be invested in issuers
located throughout the world, including those located in emerging markets. At
least 65% of the total assets of the Portfolio will be invested in equity
securities under normal circumstances. Securities in emerging markets may not be
as liquid as those in developed markets and pose greater risks. Although the
Portfolio intends to invest primarily in securities listed on stock exchanges,
it will also invest in securities traded in over-the-counter markets. The
Adviser's orientation to individual stock selection and value driven approach in
selecting investments for the Portfolio are the same as those described for the
International Equity Portfolio discussed below. The Portfolio may invest in
American, Global or other types of Depositary Receipts.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that the annual turnover rate of
the Portfolio will not exceed 100% under normal circumstances.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE INTERNATIONAL EQUITY PORTFOLIO
The investment objective of the International Equity Portfolio is to provide
long-term capital appreciation. The production of any current income is
incidental to this objective. The Portfolio seeks to achieve its objective by
investing primarily in equity securities of non-U.S. issuers. With respect to
the Portfolio, equity securities include common and preferred stocks,
convertible securities, and rights and warrants to purchase common stocks. At
least 65% of the total assets of the Portfolio will be invested in such equity
securities under normal circumstances.
The Adviser's approach in selecting investments for the Portfolio is
oriented to individual stock selection, and is value driven. In selecting stocks
for the Portfolio, the Adviser initially identifies those stocks which it
believes to be undervalued in relation to the issuer's assets, cash flow,
earnings and revenues, and then evaluates the future value of such stocks by
running the results of an in-depth study of the issuer through a dividend
discount model. The Adviser utilizes the research of a number of sources,
including its affiliate in Geneva, Switzerland, Morgan Stanley Capital
International, in identifying attractive securities, and applies a number of
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proprietary screening criteria to identify those securities it believes to be
undervalued. Portfolio holdings are regularly reviewed and subjected to
fundamental analysis to determine whether they continue to conform to the
Adviser's value criteria. Securities which no longer conform to such value
criteria are sold.
While the Portfolio is not subject to any specific geographic
diversification requirements, it currently intends to diversify investments
among countries to reduce currency risk. Investments will be made primarily in
equity securities of companies domiciled in developed countries, but may also be
made in equity securities of companies domiciled in developing countries as
well. Although the Portfolio intends to invest primarily in equity securities
listed on stock exchanges, it will also invest in equity securities traded in
over-the-counter markets. Securities of companies in developing countries may
pose liquidity risks. The Portfolio will not, under normal circumstances, invest
in equity securities of U.S. issuers. For a description of special
considerations and certain risks associated with investments in foreign issuers,
see "Additional Investment Information." The Portfolio may temporarily reduce
its equity holdings for defensive purposes in response to adverse market
conditions and invest in domestic, Eurodollar and foreign short-term money
market instruments. See "Investment Objectives and Policies" in the Statement of
Additional Information.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that the annual turnover rate of
the Portfolio will not exceed 100% under normal circumstances.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE INTERNATIONAL SMALL CAP PORTFOLIO
The investment objective of the International Small Cap Portfolio is to
provide long-term capital appreciation. The production of any current income is
incidental to this objective. The Portfolio seeks to achieve its objective by
investing primarily in equity securities of non-U.S. issuers with equity market
capitalizations of less than $500 million. With respect to the Portfolio, equity
securities include common and preferred stocks, convertible securities, and
rights and warrants to purchase common stocks. At least 65% of the total assets
of the Portfolio will be invested in such equity securities under normal
circumstances. The Portfolio will invest a minimum of 80% of its total assets in
companies with market capitalizations of less than $500 million and may invest
up to an additional 20% of its total assets in companies with total market
capitalizations up to a maximum of $1 billion, for which the actual market float
as represented by the value of the securities that may be freely traded falls
below $500 million. The Adviser's orientation to individual stock selection and
value driven approach in selecting investments for the Portfolio are the same as
those described for the International Equity Portfolio discussed above.
While the Portfolio is not subject to any specific geographic
diversification requirements, it currently intends to diversify investments
among countries to reduce currency risk. Investments will be made primarily in
equity securities of companies domiciled in developed countries, but limited
investments may also be made in the securities of companies domiciled in
developing countries as well, and will not normally exceed 5% of the total
assets of the Portfolio. Although the Portfolio intends to invest primarily in
equity securities listed on stock exchanges, it may also invest in equity
securities traded in over-the-counter markets. Small capitalization securities
involve greater issuer risk and the markets for such securities may be more
volatile and less liquid. Securities of companies in developing countries may
pose liquidity risks. The Portfolio will not, under normal
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circumstances, invest in equity securities of U.S. issuers. For a description of
special considerations and certain risks associated with investments in foreign
issuers, see "Additional Investment Information." The Portfolio may temporarily
reduce its equity holdings for defensive purposes in response to adverse market
conditions and invest in domestic, Eurodollar and foreign short-term money
market instruments. See "Investment Objectives and Policies" in the Statement of
Additional Information.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that the annual turnover rate of
the Portfolio will not exceed 100% under normal circumstances.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE ASIAN EQUITY PORTFOLIO
The investment objectives of the Asian Equity Portfolio is to provide
long-term capital appreciation. The production of any current income is
incidental to this objective. The Portfolio seeks to achieve its objective by
investing primarily in equity securities which are traded on recognized stock
exchanges of the countries in Asia described below and in equity securities of
companies organized under the laws of an Asian country whose business is
conducted principally in Asia. The Portfolio does not intend to invest in equity
securities which are principally traded in markets in Japan or in companies
organized under the laws of Japan. The Portfolio may also invest in American
Depositary Receipts of Asian issuers that are traded on stock exchanges in the
U.S.
The Asian countries to be represented in the Portfolio, which include the
following countries, have the more established markets in the region: Hong Kong,
Singapore, Malaysia, Thailand, the Philippines and Indonesia. The Portfolio may
also invest in common stocks traded on markets in Taiwan, South Korea, India,
Pakistan, Sri Lanka and other developing markets that are open to foreign
investment. There is no requirement that the Fund, at any given time, invest in
any or all of the countries listed above or in any other Asian countries. The
Fund has no set policy for allocating investments among the various Asian
countries. Allocation of investments will depend on the relative attractiveness
of the stocks of issuers in the respective countries. Government regulation and
restrictions in many of the countries of interest may limit the amount, mode and
extent of investment in companies of such countries.
At least 65% of the total assets of the Portfolio will be invested in common
stocks of Asian countries under normal circumstances. The remaining portion of
the Fund will be kept in any combination of debt instruments, bills and bonds of
governmental entities in Asia and the U.S., in notes, debentures, and bonds of
companies in Asia and in money market instruments of the U.S. With respect to
the Portfolio, equity securities include common and preferred stocks,
convertible securities, and rights and warrants to purchase common stocks.
The Adviser's orientation to individual stock selection and value driven
approach in selecting investments for the Portfolio are similar to those
described for the International Equity Portfolio discussed above. The Adviser
will analyze assets, revenues and earnings of an issuer. In selecting industries
and particular issuers, the Adviser will evaluate costs of labor and raw
materials, access to technology, export of products and government regulation.
Although the Portfolio seeks to invest in larger companies, it may invest in
medium and small companies that, in the Adviser's view, have potential for
growth.
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The Portfolio's investments will include securities of issuers located in
developing countries and traded in emerging markets. These securities pose
greater liquidity risks and other risks than securities of companies located in
developed countries and traded in more established markets. For a description of
special considerations and certain risks associated with investment in foreign
issuers, see "Additional Investment Information -- Foreign Investment." See also
"Investment Objectives and Policies" in the Statement of Additional Information.
Although the Portfolio intends to invest primarily in equity securities
listed on stock exchanges, it will also invest in equity securities traded in
over-the-counter markets. Securities traded in over-the-counter markets pose
liquidity risks. The Portfolio may also invest in initial public offerings in
the form of oversubscriptions or private placements. Such investments generally
entail short-term liquidity risks.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that the annual turnover rate of
the Portfolio will not exceed 100% under normal circumstances.
Pending investment or settlement, and for liquidity purposes, the Portfolio
may invest in domestic, Eurodollar and foreign short-term money market
instruments. The Portfolio may also purchase such instruments to temporarily
reduce its equity holdings for defensive purposes in response to adverse market
conditions.
Because of the lack of hedging facilities in the currency markets of Asia,
no active currency hedging strategy is anticipated currently. Instead, each
investment will be considered on a total currency adjusted basis with the U.S.
dollar as a base currency. The Portfolio may engage in currency exchange
contracts. See "Statement of Additional Information -- Forward Foreign Currency
Exchange Contracts" in this Prospectus.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE EUROPEAN EQUITY PORTFOLIO
The investment objective of the European Equity Portfolio is to provide
long-term capital appreciation. The Portfolio seeks to achieve this objective by
investing primarily in equity securities of European issuers, including those
located in Germany, France, Switzerland, Belgium, Italy, Finland, Sweden,
Denmark, Norway and the United Kingdom. Investments may also be made in equity
securities of issuers located in the smaller and emerging markets of Europe.
With respect to the Portfolio, equity securities include common and preferred
stocks, convertible securities, and rights and warrants to purchase common
stocks. At least 65% of the total assets of the Portfolio will be invested in
equity securities of European issuers under normal circumstances. The Adviser's
orientation to individual stock selection and value-driven approach in selecting
investments for the Portfolio are the same as those described for the
International Equity Portfolio discussed above. Securities in emerging markets
may not be as liquid as those in developed markets and pose greater risks.
Although the Portfolio intends to invest primarily in equity securities listed
on stock exchanges, it will also invest in equity securities traded in
over-the-counter markets.
While the Portfolio is not subject to any specific geographic
diversification requirements, it currently intends to diversify investments
among countries to reduce currency risk. Investments may be made primarily in
equity securities of companies domiciled in developed countries, but may also be
made in equity securities of companies domiciled in developing countries as
well. Although the Portfolio intends to invest primarily in
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equity securities listed on stock exchanges, it will also invest in securities
traded in over-the-counter markets. Securities of companies in developing
countries may pose liquidity risks. The Portfolio will not, under normal
circumstances, invest in equity securities of U.S. issuers. For a description of
special considerations and certain risks associated with investments in foreign
issuers, see "Additional Investment Information." The Portfolio may temporarily
reduce its equity holdings for defensive purposes in response to adverse market
conditions and invest in domestic, Eurodollar and foreign short-term money
market instruments. See "Investment Objectives and Policies" in the Statement of
Additional Information.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that the annual turnover rate of
the Portfolio will not exceed 100% under normal circumstances.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
THE JAPANESE EQUITY PORTFOLIO
The investment objective of the Japanese Equity Portfolio is to provide
long-term capital appreciation. The Portfolio seeks to achieve this objective by
investing primarily in equity securities of Japanese issuers. With respect to
the Portfolio, equity securities include common and preferred stocks,
convertible securities, and rights and warrants to purchase common stocks.
Under normal conditions, the Portfolio will invest at least 80% of its total
assets in securities issued by entities that are organized under the laws of
Japan, affiliates of Japanese companies (wherever organized or traded), and
issuers not organized under the laws of Japan but deriving 50% or more of their
revenues from Japan. These securities may include debt securities (issued by the
Japanese government or by Japanese companies) when the Adviser believes that the
potential for capital appreciation from investment in debt securities equals or
exceeds that available from investment in equity securities. In making
investment decisions, the Adviser will consider, among other factors, the size
of the company, its financial condition, its marketing and technical strengths
and its competitiveness in its industry. All debt securities in which the
Portfolio may invest will be rated no lower than BBB by Standard & Poor's
Corporation ("S&P"), Baa by Moody's Investors Service, Inc. ("Moody's") or BBB
by Mikuni Inc. ("Mikuni") (a Japanese rating agency) or, if unrated, of
comparable quality as determined by the Adviser. Securities rated BBB by S&P,
Baa by Moody's or BBB by Mikuni have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments on such securities than would
be the case with higher rated securities. The convertible securities in which
the Portfolio may invest include bonds, notes, debentures, preferred stocks and
other securities convertible into common stocks and may be fixed-income or zero
coupon debt securities. Prior to their conversion, convertible securities may
have characteristics similar to nonconvertible debt securities.
The Portfolio currently intends to focus its investments in Japanese
companies that have an active market for their shares and that the Adviser
believes show a potential for better than average growth. The Portfolio
anticipates that most equity securities of Japanese companies in which it
invests, either directly or indirectly by means of American Depositary Receipts
or convertible debentures, will be listed on securities exchanges in Japan. The
Portfolio may also invest in equity securities of Japanese companies that are
traded in an over-the-counter market.
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The Portfolio may also invest up to 20% of its total assets in cash or
short-term government or other short-term prime obligations or repurchase
agreements so that funds may be readily available for general corporate
purposes, including the payment of dividends, redemptions and operating
expenses, for investment in securities through exercise of rights or otherwise.
For temporary defensive purposes, the Portfolio may invest some or all of its
assets in cash or such short-term obligations.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that the annual portfolio
turnover rate of the Portfolio will not exceed 100% under normal circumstances.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
RISK FACTORS RELATING TO JAPANESE EQUITY PORTFOLIO. Investors should
consider the following factors inherent in investment in Japan.
TRADE ISSUES. Because of the concentration of Japanese exports in highly
visible products such as automobiles, machine tools and semiconductors, and the
large trade surpluses ensuing therefrom, Japan is in a difficult phase in its
relation with its trading partners, particularly the U.S., where the trade
imbalance is the greatest. Retaliatory action taken by such trading partners
could affect the ability of Japanese companies to export goods to these
countries, which could negatively impact the value of securities in the
Portfolio.
CURRENCY FACTORS. Over a long period of years, the yen has generally
appreciated in relation to the dollar. The yen's appreciation would add to the
returns of dollars invested through the Portfolio in Japan. A decline in the
value of the yen would have the opposite effect, adversely affecting the value
of the Portfolio in dollar terms.
THE JAPANESE STOCK MARKET. Like other stock markets, the Japanese stock
market can be volatile. A decline in the market may have an adverse effect on
the availability of credit and on the value of the substantial stock holdings of
Japanese companies in particular, Japanese banks, insurance companies and other
financial institutions. A decline in the market may contribute to weakness in
Japan's economy. The common stocks of many Japanese companies continue to trade
at high price-earnings ratios even after the recent market decline. Differences
in accounting methods make it difficult to compare the earnings of Japanese
companies with those of companies in other countries, especially the U.S. In
general, however, reported net income in Japan is understated relative to U.S.
accounting standards. In addition, Japanese companies have tended historically
to have higher growth rates than U.S. companies, and Japanese interest rates
have generally been lower than in the U.S., both of which factors tend to result
in lower discount rates and higher price-earnings ratios in Japan than in the
U.S.
THE LATIN AMERICAN PORTFOLIO
The investment objective of the Latin American Portfolio is long-term
capital appreciation. The Portfolio seeks to achieve this objective by investing
primarily in equity securities (i) of companies organized in or for which the
principal securities trading market is in Latin America, (ii) denominated in a
Latin American currency issued by companies to finance operations in Latin
America, or (iii) of companies that alone or on a consolidated basis derive 50%
or more of their annual revenues from either goods produced, sales made or
services
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performed in Latin America (collectively, "Latin American issuers") and by
investing, from time to time, in debt securities issued or guaranteed by a Latin
American government or governmental entity ("Sovereign Debt"). Income is not a
consideration in selecting investments or an investment objective.
Under normal conditions, substantially all, but not less than 80%, of the
Portfolio's total assets are invested in equity securities of Latin American
issuers and in Sovereign Debt. For purposes of this Prospectus, unless otherwise
indicated, Latin America consists of Argentina, Bolivia, Brazil, Chile,
Colombia, Costa Rica, Cuba, the Dominican Republic, Ecuador, El Salvador,
Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and
Venezuela. See "Additional Investment Information -- Foreign Investment Risk
Factors" for a discussion of the nature of information publicly available for
non-U.S. companies. With respect to the Portfolio, equity securities include
common and preferred stocks, convertible securities, rights and warrants to
purchase common stocks, equity interests in trusts or partnerships, and
American, Global or other types of Depositary Receipts. See "Additional
Investment Information -- Depositary Receipts."
The Portfolio focuses its investments in listed equity securities in
Argentina, Brazil, Chile and Mexico, the most developed capital markets in Latin
America. The Portfolio expects, under normal market conditions, to have at least
55% of its total assets invested in listed equity securities of issuers in these
four countries. In addition, the Portfolio actively invests in markets in other
Latin American countries such as Colombia, Peru and Venezuela. The Portfolio is
not limited in the extent to which it may invest in any Latin American country
and intends to invest opportunistically as markets develop. The portion of the
Portfolio's holdings in any Latin American country will vary from time to time,
although the portion of the Portfolio's assets invested in Chile may tend to
vary less than the portions invested in other Latin American countries because,
with limited exceptions, capital invested in Chile currently cannot be
repatriated for one year. See "Additional Investment Information -- Investment
Procedures: Argentina, Brazil, Chile and Mexico" in the Statement of Additional
Information.
The governments of some Latin American countries have been engaged in
programs of selling part or all of their stakes in government owned or
controlled enterprises ("privatizations"). The Adviser believes that
privatizations may offer investors opportunities for significant capital
appreciation and intends to invest assets of the Portfolio in privatizations in
appropriate circumstances. In certain Latin American countries, the ability of
foreign entities, such as the Portfolio, to participate in privatizations may be
limited by local law, or the terms on which the Portfolio may be permitted to
participate may be less advantageous than those for local investors. There can
be no assurance that Latin American governments will continue to sell companies
currently owned or controlled by them or that any privatization programs in
which the Portfolio participates will be successful.
Several Latin American countries have adopted debt conversion programs,
pursuant to which investors may use Sovereign Debt of a country, directly or
indirectly, to make investments in local companies. The terms of the various
programs vary from country to country although each program includes significant
restrictions on the application of the proceeds received in the conversion and
on the remittance of profits on the investment and of the invested capital. The
Portfolio may participate in Latin American debt conversion programs. The
Adviser will evaluate opportunities to enter into debt conversion transactions
as they arise.
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Equity securities in which the Portfolio may invest include those that are
neither listed on a stock exchange nor traded over-the-counter. As a result of
the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. See "Additional Investment Information
- -- Non-Publicly Traded Securities, Private Placements and Restricted Securities"
below.
To the extent that the Portfolio's assets are not invested in equity
securities of Latin American issuers or in Sovereign Debt, the remainder of the
assets may be invested in (i) debt securities of Latin American issuers, (ii)
equity or debt securities of corporate or governmental issuers located in
countries outside Latin America, and (iii) short-term and medium-term debt
securities of the type described under "Additional Investment Information --
Temporary Investments" below. The Portfolio's assets may be invested in debt
securities when the Portfolio believes that, based upon factors such as relative
interest rate levels and foreign exchange rates, such debt securities offer
opportunities for long-term capital appreciation. It is likely that many of the
debt securities in which the Portfolio will invest will be unrated. The
Portfolio may invest up to 20% of its total assets in securities that are
determined by the Adviser to be comparable to securities rated below investment
grade by S&P or Moody's ("junk bonds"). Such lower-quality securities are
regarded as being predominantly speculative and involve significant risks. See
"Additional Investment Information -- Lower Rated Debt Securities."
The Portfolio's holdings of lower-quality debt securities will consist
predominantly of Sovereign Debt, much of which trades at substantial discounts
from face value and which may include Sovereign Debt comparable to securities
rated as low as D by S&P or C by Moody's. The Portfolio may invest in Sovereign
Debt to hold and trade in appropriate circumstances, as well as to use to
participate in debt for equity conversion programs. The Portfolio will invest in
Sovereign Debt only when the Portfolio believes such investments offer
opportunities for long-term capital appreciation. Investment in Sovereign Debt
involves a high degree of risk and such securities are generally considered to
be speculative in nature. See "Additional Investment Information -- Sovereign
Debt."
For temporary defensive purposes, the Portfolio may invest less than 80% of
its total assets in Latin American equity securities and Sovereign Debt, in
which case the Portfolio may invest in other equity or debt securities or may
invest in certain short-term (less than twelve months to maturity) and
medium-term (not greater than five years to maturity) debt securities or hold
cash. See "Additional Investment Information -- Temporary Investments."
The Portfolio may enter into forward foreign currency exchange contracts and
foreign currency futures contracts, purchase and write (sell) put and call
options on securities, foreign currency and on foreign currency futures
contracts, and enter into stock index and interest rate futures contracts and
options thereon. See "Additional Investment Information." There currently are
limited options and futures markets for Latin American currencies, securities
and indexes, and the nature of the strategies adopted by the Adviser and the
extent to which those strategies are used depends on the development of those
markets. The Portfolio may also from time to time lend securities (but not in
excess of 20% of its total assets) from its portfolio to brokers, dealers and
financial institutions. See "Additional Investment Information -- Loans of
Portfolio Securities."
The Portfolio will not invest more than 25% of its total assets in one
industry except and to the extent, and only for such period of time as, the
Board of Directors determines in view of the considerations discussed below that
it is appropriate and in the best interest of the Portfolio and its shareholders
to invest more than 25% of the Portfolio's total assets in companies involved in
the telecommunications industry or financial services industry,
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respectively. Since the securities markets of Latin American countries are
emerging markets characterized by a relatively small number of issues, it is
possible that one or more markets may on occasion be dominated by issues of
companies engaged in these two industries. In addition, it is possible that
government privatizations in certain Latin American countries, which currently
represent a primary source of new issues in many Latin American markets and
often represent attractive investment opportunities, will occur in these two
industries. As a result, the Portfolio has adopted a policy under which it may
invest more than 25% of its total assets in securities of issuers in such
industries. The Portfolio would only take this action if the Board of Directors
determines that the Latin American markets are dominated by securities of
issuers in such industries and that, in light of the anticipated return,
investment quality, availability and liquidity of the issues in such industries,
the Portfolio's ability to achieve its investment objective would, in light of
its investment policies and limitations, be materially adversely affected if the
Portfolios were not able to invest greater than 25% of its total assets in such
industries. In the event that the Board of Directors permits greater than 25% of
the Portfolio's total assets to be invested in the telecommunications or
financial services industry, the Portfolio may be exposed to increased
investment risks peculiar to that industry. The Portfolio will notify its
shareholders of any decision by the Board of Directors to permit (or cease)
investments of more than 25% of the Portfolio's total assets in the
telecommunications or financial services industry. Such notice will, to the
extent applicable, include a discussion of any increased investment risks
peculiar to such industry to which the Portfolio may be exposed.
The Portfolio intends to purchase and hold securities for long-term capital
appreciation and does not expect to trade for short-term gain. Accordingly, it
is anticipated that the annual portfolio turnover rate normally will not exceed
50%, although in any particular year, market conditions could result in
portfolio activity at a greater or lesser rate than anticipated. The rate of
portfolio turnover will not be a limiting factor when the Portfolio deems it
appropriate to purchase or sell securities. However, the U.S. federal tax
requirement that the Portfolio derive less than 30% of its gross income from the
sale or disposition of securities held less than three months may limit the
Portfolio's ability to dispose of its securities.
Any remaining assets of the Portfolio not invested as described above may be
invested in certain securities or obligations as set forth in "Additional
Investment Information" below.
ADDITIONAL INVESTMENT INFORMATION
BORROWING AND OTHER FORMS OF LEVERAGE. The Latin American Portfolio is
authorized to borrow money from banks and other entities in an amount equal to
up to 33 1/3% of its total assets (including the amount borrowed) less all
liabilities and indebtedness other than the borrowing, and may use the proceeds
of the borrowing for investment purposes or to pay dividends. Borrowing creates
leverage which is a speculative characteristic. Although the Portfolio is
authorized to borrow, it will do so only when the Adviser believes that
borrowing will benefit the Portfolio after taking into account considerations
such as the costs of borrowing and the likely investment returns on securities
purchased with borrowed monies. Borrowing by the Portfolio will create the
opportunity for increased net income but, at the same time, will involve special
risk considerations. Leveraging resulting from borrowing will magnify declines
as well as increases in the Portfolio's net asset value per share and net yield.
The Portfolio expects that all of its borrowing will be made on a secured basis.
The Portfolio's Custodian will either segregate the assets securing the
borrowing for the benefit of the lenders or
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arrangements will be made with a suitable sub-custodian. If assets used to
secure the borrowing decrease in value, the Portfolio may be required to pledge
additional collateral to the lender in the form of cash or securities to avoid
liquidation of those assets.
DEPOSITARY RECEIPTS. The Asian Equity, Global Equity, Latin American and
Japanese Equity Portfolios may invest in American Depositary Receipts ("ADRs")
and the Global Equity and Latin American Portfolios may also invest in other
Depositary Receipts, including Global Depositary Receipts ("GDRs"), European
Depositary Receipts ("EDRs") and other Depositary Receipts (which, together with
ADRs, GDRs and EDRs, are hereinafter collectively referred to as "Depositary
Receipts"), to the extent that such Depositary Receipts become available. ADRs
are securities, typically issued by a U.S. financial institution (a
"depositary"), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer (the "underlying issuer") and deposited
with the depositary. ADRs include American Depositary Shares and New York Shares
and may be "sponsored" or "unsponsored." Sponsored ADRs are established jointly
by a depositary and the underlying issuer, whereas unsponsored ADRs may be
established by a depositary without participation by the underlying issuer.
GDRs, EDRs and other types of Depositary Receipts are typically issued by
foreign depositaries, although they may also be issued by U.S. depositaries, and
evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation. Generally, Depositary Receipts in
registered form are designed for use in the U.S. securities market and
Depositary Receipts in bearer form are designed for use in securities markets
outside the United States. The Portfolio may invest in sponsored and unsponsored
Depositary Receipts. For purposes of the Portfolio's investment policies, the
Portfolio's investments in Depositary Receipts will be deemed to be investments
in the underlying securities.
FOREIGN INVESTMENT. Investment in securities of foreign issuers and in
foreign branches of domestic banks involves somewhat different investment risks
than those affecting securities of U.S. domestic issuers. There may be limited
publicly available information with respect to foreign issuers, and foreign
issuers are not generally subject to uniform accounting, auditing and financial
and other reporting standards and requirements comparable to those applicable to
U.S. companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the U.S. Many
foreign securities markets have substantially less volume than U.S. national
securities exchanges, and securities of some foreign issuers are less liquid and
more volatile than securities of comparable domestic issuers. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the U.S. Dividends and interest paid by foreign issuers
may be subject to withholding and other foreign taxes, which may decrease the
net return on foreign investments as compared to dividends and interest paid to
the Portfolios by U.S. companies, and it is not expected that a Portfolio or its
shareholders would be able to claim a credit for U.S. tax purposes with respect
to any such foreign taxes. See "Taxes." Additional risks include future
political and economic developments, the possibility that a foreign jurisdiction
might impose or change withholding taxes on income payable with respect to
foreign securities, possible seizure, nationalization or expropriation of the
foreign issuer or foreign deposits and the possible adoption of foreign
governmental restrictions such as exchange controls. Many of the emerging or
developing countries may have less stable political environments than more
developed countries. Also, it may be more difficult to obtain a judgment in a
court outside the United States. Investments in securities of foreign issuers
are frequently denominated in foreign currencies, and the Portfolios may
temporarily hold uninvested reserves in bank deposits in foreign currencies.
Therefore, the value
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of each Portfolio's assets as measured in U.S. dollars may be affected favorably
or unfavorably by changes in currency rates and in exchange control regulations,
and the Portfolios may incur costs in connection with conversions between
various currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each Portfolio may enter into
forward foreign currency exchange contracts ("forward contracts") that provide
for the purchase of or sale of an amount of a specified currency at a future
date. Purposes for which such contracts may be used include protecting against a
decline in a foreign currency against the U.S. dollar between the trade date and
settlement date when a Portfolio purchases or sells securities, locking in the
U.S. dollar value of dividends declared on securities held by a Portfolio and
generally protecting the U.S. dollar value of securities held by a Portfolio
against exchange rate fluctuations. Such contracts may also be used as a
protective measure against the effects of fluctuating rates of currency exchange
and exchange control regulations. While such forward contracts may limit losses
to a Portfolio as a result of exchange rate fluctuation, they will also limit
any gains that may otherwise have been realized. The Latin American Portfolio
may also enter into foreign currency futures contracts. See "Investment
Objectives and Policies -- Forward Currency Exchange Contracts" in the Statement
of Additional Information. Except in circumstances where segregated accounts are
not required by the 1940 Act and the rules adopted thereunder, the Portfolio's
Custodian will place cash, U.S. government securities, or high-grade debt
securities into a segregated account of a Portfolio in an amount equal to the
value of such Portfolio's total assets committed to the consummation of forward
foreign currency exchange contracts. If the value of the securities placed in
the segregated account declines, additional cash or securities will be placed in
the account on a daily basis so that the value of the account will be at least
equal to the amount of such Portfolio's commitments with respect to such
contracts. See "Investment Objectives and Policies -- Forward Foreign Currency
Exchange Contracts" in the Statement of Additional Information.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In order to remain
fully invested, and to reduce transaction costs, the Latin American Portfolio
may utilize appropriate securities index futures contracts, options on
securities index futures contracts, appropriate interest rate futures contracts
and options on interest rate futures contracts to a limited extent. Because
transactions costs associated with futures and options may be lower than the
costs of investing in securities directly, it is expected that the use of index
futures and options to facilitate cash flows may reduce a Portfolio's overall
transactions costs. The Portfolio may sell indexed financial futures contracts
in anticipation of or during a market decline to attempt to offset the decrease
in market value of securities in its portfolio that might otherwise result. When
the Portfolio is not fully invested and the Adviser anticipates a significant
market advance, it may purchase stock index futures in order to gain rapid
market exposure that may in part or entirely offset increases in the cost of
securities that it intends to purchase. In a substantial majority of these
transactions, the Portfolio will purchase such securities upon termination of
the futures position but under unusual market conditions, a futures position may
be terminated without the corresponding purchase of securities. The Portfolio
will engage in futures and options transactions only for hedging purposes. The
Portfolio will engage only in transactions in securities index futures
contracts, interest rate futures contracts and options thereon which are traded
on a recognized securities or futures exchange. There currently are limited
securities index futures, interest rate futures and options on such futures
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Adviser and
the extent to which those strategies are used will depend on the development of
such markets. The Portfolio may enter into futures contracts and options thereon
provided that not more than 5% of the Portfolio's total assets are required as
deposit to secure obligations under such contracts,
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and provided further that not more than 20% of the Portfolio's total assets, in
the aggregate are invested in futures contracts and options transactions. The
primary risks associated with the use of futures and options are (i) imperfect
correlation between the change in market value of the stocks held by the
Portfolio and the prices of futures and options relating to the stocks purchased
or sold by the Portfolio, and (ii) possible lack of a liquid secondary market
for a futures contract and the resulting inability to close a futures position
which could have an adverse impact on the Portfolio's ability to hedge. The risk
of loss in trading on futures contracts in some strategies can be substantial,
due both to the low margin deposits required and the extremely high degree of
leverage involved in futures pricing. Gains and losses on futures and options
depend on the Adviser's ability to predict correctly the direction of stock
prices, interest rates, and other economic factors. In the opinion of the
Directors, the risk that the Portfolio will be unable to close out a futures
position or options contract will be minimized by only entering into futures
contracts or options transactions for which there appears to be a liquid
secondary market. For more detailed information about futures transactions see
"Investment Objectives and Policies" in the Statement of Additional Information.
INVESTMENT FUNDS. Some emerging countries have laws and regulations that
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of companies
listed and traded on the stock exchanges in these countries is permitted by
certain emerging countries through investment funds which have been specifically
authorized. The Latin American Portfolio may invest in these investment funds
subject to the provisions of the Investment Company Act of 1940, as amended (the
"1940 Act"), and other applicable laws as discussed below under "Investment
Restrictions." If the Portfolio invests in such investment funds, the
Portfolio's shareholders will bear not only their proportionate share of the
expenses of the Portfolio (including operating expenses and the fees of the
Adviser), but also will indirectly bear similar expenses of the underlying
investment funds. Certain of the investment funds referred to in the preceding
paragraph are advised by the Adviser. The Portfolio may, to the extent permitted
under the 1940 Act and other applicable law, invest in these investment funds.
If the Portfolio does elect to make an investment in such an investment fund, it
will only purchase the securities of such investment fund in the secondary
market.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. A Portfolio will not enter into securities loan transactions
exceeding in the aggregate 33 1/3% of the market value of the Portfolio's total
assets (exceeding in the aggregate 20% of such value with respect to the Latin
American Portfolio). For more detailed information about securities lending, see
"Investment Objectives and Policies" in the Statement of Additional Information.
LOWER RATED DEBT SECURITIES. The Latin American Portfolio may invest in
lower rated or unrated debt securities, commonly referred to as "junk bonds." In
addition, the emerging country debt securities in which the Portfolio may invest
are subject to risk and will not be required to meet a minimum rating standard
and may not be rated. Fixed income securities are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
(credit risk) and may also be subject to price volatility due to such factors as
interest rate sensitivity, market perception of the creditworthiness of the
issuer and general market liquidity (market risk). Lower rated or unrated
securities are more likely to react to developments affecting market and credit
risk
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than are more highly rated securities, which react primarily to movements in the
general level of interest rates. The market values of fixed-income securities
tend to vary inversely with the level of interest rates. Yields and market
values of lower rated and unrated debt securities will fluctuate over time,
reflecting not only changing interest rates but the market's perception of
credit quality and the outlook for economic growth. When economic conditions
appear to be deteriorating, medium to lower rated securities may decline in
value due to heightened concern over credit quality, regardless of prevailing
interest rates. Fluctuations in the value of the Portfolio's investments will be
reflected in the Portfolio's net asset value per share. The Adviser considers
both credit risk and market risk in making investment decisions for the
Portfolio. Investors should carefully consider the relative risks of investing
in lower rated and unrated debt securities and understand that such securities
are not generally meant for short-term investing. The U.S. corporate lower rated
and unrated debt securities market is relatively new and its recent growth
paralleled a long period of economic expansion and an increase in merger,
acquisition and leveraged buyout activity. Adverse economic developments may
disrupt the market for U.S. corporate lower rated and unrated debt securities
and for emerging country debt securities. Such disruptions may severely affect
the ability of issuers, especially highly leveraged issuers, to service their
debt obligations or to repay their obligations upon maturity. In addition, the
secondary market for lower rated and unrated debt securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities. As a result, the Adviser
could find it more difficult to sell these securities or may be able to sell the
securities only at prices lower than if such securities were widely traded. In
addition there may be limited trading markets for debt securities of issuers
located in emerging countries. Prices realized upon the sale of such lower rated
or unrated securities, under these circumstances, may be less than the prices
used in calculating the Portfolio's net asset value. Prices for lower rated and
unrated debt securities may be affected by legislative and regulatory
developments. These laws could adversely affect the Portfolio's net asset value
and investment practices, the secondary market for lower rated and unrated debt
securities, the financial condition of issuers of such securities and the value
of outstanding lower rated and unrated debt securities. For example, U.S.
federal legislation requiring the divestiture by federally insured savings and
loan associations of their investments in lower rated and unrated debt
securities and limiting the deductibility of interest by certain corporate
issuers of lower rated and unrated debt securities adversely affected the market
in recent years. Lower rated or unrated debt obligations also present risks
based on payment expectations. If an issuer calls the obligations for
redemption, the Portfolio may have to replace the security with a lower yielding
security, resulting in a decreased return for investors. If the Portfolio
experiences unexpected net redemptions, it may be forced to sell its higher
rated securities, resulting in a decline in the overall credit quality of the
Portfolio's investment portfolio and increasing the exposure of the Portfolio to
the risks of lower rated and unrated debt securities.
MONEY MARKET INSTRUMENTS. The Portfolios are permitted to invest in money
market instruments, although each Portfolio intends to stay invested in
securities satisfying their primary investment objective to the extent
practical. Each Portfolio may make money market investments pending other
investment or settlement for liquidity, or in adverse market conditions. The
money market investments permitted for the Portfolios include obligations of the
U.S. Government and its agencies and instrumentalities, obligations of foreign
sovereignties, other debt securities, commercial paper including bank
obligations, certificates of deposit (including Eurodollar certificates of
deposit) and repurchase agreements. For more detailed information about these
money market investments, see "Description of Securities and Ratings" in the
Statement of Additional Information.
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NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The International Small Cap Portfolio and the Latin American
Portfolio may invest in securities that are neither listed on a stock exchange
nor traded over-the-counter, including privately placed securities. Such
unlisted equity securities may involve a higher degree of business and financial
risk that can result in substantial losses. As a result of the absence of a
public trading market for these securities, they may be less liquid than
publicly traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized from these sales could be less than
those originally paid by the Portfolio or less than what may be considered the
fair value of such securities. Further, more companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements which might be applicable if their securities were
publicly traded. If such securities are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Portfolio
may be required to bear the expenses of registration. As a general matter, each
Portfolio may not invest more than 15% of its net assets in illiquid securities,
including securities for which there is no readily available secondary market,
nor more than 10% of its total assets in securities that are restricted from
sale to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act"). Nevertheless, to the extent
it can do so consistent with the foregoing limits, each Portfolio may invest up
to 25% of its total assets in Restricted Securities that can be offered and sold
to qualified institutional buyers under Rule 144A under that Act ("144A
Securities"). The Board of Directors has adopted guidelines and delegated to the
Adviser, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of 144A securities. Rule
144A securities may become illiquid if qualified institutional buyers are not
interested in acquiring the securities. Investors should note that investments
of 5% of a Portfolio's total assets may be considered a speculative activity and
may involve greater risk and expense to the Portfolio.
OPTIONS TRANSACTIONS. The Latin American Portfolio may seek to increase its
return or may hedge all or a portion of its portfolio investments through
options with respect to securities in which the Portfolio may invest. The
Portfolio will engage in transactions in such options which are traded on a
recognized securities or futures exchange and in over-the-counter options where
the option counterparty has a minimum net worth of $20 million. There currently
are limited options markets in emerging countries, including Latin American
countries and the nature of the strategies adopted by the Adviser and the extent
to which those strategies are used will depend on the development of such option
markets. The Latin American Portfolio may write (i.e., sell) covered call
options which give the purchaser the right to buy the underlying security
covered by the option from the Portfolio at the stated exercise price. A
"covered" call option means that so long as the Portfolio is obligated as the
writer of the option, it will own (i) the underlying securities subject to the
option, or (ii) securities convertible or exchangeable without the payment of
any consideration into the securities subject to the option. As a matter of
operating policy, the value of the underlying securities on which options will
be written at any one time will not exceed 5% of the total assets of the
Portfolio. In addition, as a matter of operating policy, the Portfolio will
neither purchase or write put options on securities nor purchase call options on
securities (except in connection with closing purchase transactions). The Latin
American Portfolio will receive a premium from writing call options, which
increases the Portfolio's return on the underlying security in the event the
option expires unexercised or is closed out at a profit. By writing a call, the
Portfolio will limit its opportunity to profit from an increase in the market
value of the underlying security above the exercise price of the option for as
long as the Portfolio's obligation as writer of the option continues. Thus, in
some periods the Portfolio will receive less total return and in other periods
greater total return from writing covered call options than it would have
received from its
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underlying securities had it not written call options. The Latin American
Portfolio may also write (i.e., sell) covered put options. By selling a covered
put option, the Portfolio incurs an obligation to buy the security underlying
the option from the purchaser of the put at the option's exercise price at any
time during the option period, at the purchaser's election (certain options
written by the Portfolio will be exercisable by the purchaser only on a specific
date). Generally, a put option is "covered" if the Portfolio maintains cash,
U.S. Government securities or other high grade debt obligations equal to the
exercise price of the option or if the Portfolio holds a put option on the same
underlying security with a similar or higher exercise price. The Portfolio may
sell put options to receive the premiums paid by purchasers and to close out a
long put option position. In addition, when the Adviser wishes to purchase a
security at a price lower than its current market price, the Portfolio may write
a covered put at an exercise price reflecting the lower purchase price sought.
The Portfolio may also purchase put or call options on individual securities or
baskets of securities. When the Portfolio purchases a call option it acquires
the right to buy a designated security at a designated price (the "exercise
price"), and when the Portfolio purchases a put option it acquires the right to
sell a designated security at the exercise price, in each case on or before a
specified date (the "termination date"), usually not more than nine months from
the date the option is issued. The Portfolio may purchase call options to close
out a covered call position or to protect against an increase in the price of a
security it anticipates purchasing. The Portfolio may purchase put options on
securities which it holds in its portfolio only to protect against an increase
in the price of a security it anticipates purchasing. The Portfolio may purchase
put options on securities which it holds in its portfolio only to protect itself
against a decline in the value of the security. If the value of the underlying
security were to fall below the exercise price of the put purchased in an amount
greater than the premium paid for the option, the Portfolio would incur no
additional loss. The Portfolio may also purchase put options to close out
written put positions in a manner similar to call option closing purchase
transactions. There are no other limits on the Portfolio's ability to purchase
call and put options. The primary risks associated with the use of options are
(i) imperfect correlation between the change in market value of the securities
held by the Portfolio and the prices of options relating to the securities
purchased or sold by the Portfolio; and (ii) possible lack of a liquid secondary
market for an option. Options that are not traded on an exchange (OTC options)
are often considered illiquid and may be difficult to value. In the opinion of
the Adviser, the risk that that Portfolio will be unable to close out an options
contract will be minimized by only entering into options transactions for which
there appears to be a liquid secondary market.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The aggregate of certain repurchase
agreements and certain other investments is limited as set forth under
"Investment Limitations."
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SHORT SALES
The Latin American Portfolio may from time to time sell securities short
without limitation, although initially the Portfolio does not intend to sell
securities short. A short sale is a transaction in which the Portfolio would
sell securities it does not own (but has borrowed) in anticipation of a decline
in the market price of securities. When the Portfolio makes a short sale, the
proceeds it receives from the sale will be held on behalf of a broker until the
Portfolio replaces the borrowed securities. To deliver the securities to the
buyer, the Portfolio will need to arrange through a broker to borrow the
securities and, in so doing, the Portfolio will become obligated to replace the
securities borrowed at their market price at the time of replacement, whatever
that price may be. The Portfolio may have to pay a premium to borrow the
securities and must 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 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 can equal only the total amount invested.
SOVEREIGN DEBT. The Latin American Portfolio's holdings of lower-quality
debt securities will consist predominantly of Sovereign Debt, much of which
trades at substantial discounts from face value. The Portfolio may invest in
Sovereign Debt of emerging market countries to hold and trade in appropriate
circumstances and to participate in debt to equity conversion programs.
Investment in Sovereign Debt involves a high degree of risk and such securities
are generally considered speculative in nature. The issuer or governmental
authorities that control the repayment of Sovereign Debt may not be able or
willing to repay the principal and/or interest when due in accordance with the
terms of such debt. A sovereign debtor's willingness or ability to repay
principal and interest due in a timely manner may be affected by, among other
factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
sovereign debtor's policy towards the International Monetary Fund (the "IMF")
and the political constraints to which a sovereign debtor may be subject.
Sovereign debtors may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce principal and
interest arrearages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a sovereign debtor's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the sovereign debtor, which may further
impair such debtor's ability or willingness to timely service its debts. In
certain instances, the Portfolio may invest in Sovereign Debt that is in default
as to payments of principal and/or interest. To the extent the Portfolio is
holding any non-performing Sovereign Debt, it may incur additional expenses in
connection with any restructuring of the issuer's obligations or in otherwise
enforcing its rights thereunder.
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TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, for temporary
defensive purposes the Latin American Portfolio may reduce its holdings in
equity and other securities and may invest in certain short-term (less than
twelve months to maturity) and medium- term (not greater than five years to
maturity) debt securities or may hold cash. The short-term and medium-term debt
securities in which the Portfolio may invest consist of (a) obligations of the
United States or emerging country governments (Latin American governments),
their respective agencies or instrumentalities; (b) bank deposits and bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances) of United States or emerging country banks (Latin American banks)
denominated in any currency; (c) floating rate securities and other instruments
denominated in any currency issued by international development agencies; (d)
finance company and corporate commercial paper and other short-term corporate
debt obligations of United States and emerging country corporations (Latin
American corporations) meeting the Portfolio's credit quality standards; and (e)
repurchase agreements with banks and broker-dealers with respect to such
securities. See "Additional Investment Information -- Repurchase Agreements."
For temporary defensive purposes, the Portfolio intends to invest only in
short-term and medium-term debt securities that the Adviser believes to be of
high quality, i.e., subject to relatively low risk of loss of interest or
principal (there is currently no rating system for debt securities in most
emerging countries, including most Latin American countries.)
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio of the Fund may
purchase securities on a when-issued or delayed delivery basis. In such
transactions, instruments are bought with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous yield or
price at the time of the transaction. Delivery of and payment for these
securities may take as long as a month or more after the date of the purchase
commitment but will take place no more than 120 days after the trade date. Each
Portfolio will maintain with the Custodian a separate account with a segregated
portfolio of high-grade debt securities or equity securities or cash in an
amount at least equal to these commitments. The payment obligation and the
interest rates that will be received are each fixed at the time a Portfolio
enters into the commitment and no interest accrues to the Portfolio until
settlement. Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if, among other factors, the
general level of interest rates has changed. It is a current policy of each
Portfolio not to enter into when-issued commitments or delayed delivery
securities exceeding in the aggregate 15% of the market value of the Portfolio's
total assets less liabilities, other than the obligations created by these
commitments.
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INVESTMENT LIMITATIONS
Each Portfolio, except the Latin American Portfolio, is a diversified
investment company under the 1940 Act and is therefore subject to the following
limitations: (a) as to 75% of its total assets, a Portfolio may not invest more
than 5% of its total assets in the securities of any one issuer, except
obligations of the U.S. Government and its agencies and instrumentalities, and
(b) a Portfolio may not own more than 10% of the outstanding voting securities
of any one issuer. The Latin American Portfolio is a non-diversified investment
company under the 1940 Act, which means that the Latin American Portfolio is not
limited by the 1940 Act in the proportion of its total assets that may be
invested in the obligations of a single issuer. Thus, the Latin American
Portfolio may invest a greater proportion of its total assets in the securities
of a smaller number of issuers and, as a result, will be subject to greater risk
with respect to their respective portfolio securities. The Latin American
Portfolio, however, intends to comply with the diversification requirements
imposed by the Internal Revenue Code of 1986, as amended, for qualification as a
regulated investment company. See "Taxes."
Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, each
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. Each Portfolio
may not (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 15% of the market value of the Portfolio's
total assets would be invested in these agreements and other investments for
which market quotations are not readily available or which are otherwise
illiquid; (ii) borrow money, except from banks for extraordinary or emergency
purposes, and then only in amounts up to 10% of the value of the Portfolio's
total assets, taken at cost at the time of borrowing, or purchase securities
while borrowings exceed 5% of its total assets, except the Latin American
Portfolio is not subject to such limits on borrowing and may borrow from banks
and other entities in amounts not in excess of 33 1/3% of its total assets
(including the amount borrowed) less liabilities; (iii) mortgage, pledge or
hypothecate any assets except in connection with any such borrowing in amounts
up to 10% of the value of the Portfolio's net assets at the time of borrowing;
(iv) invest in fixed time deposits with a duration of over seven calendar days;
or (v) invest in fixed time deposits with a duration of from two business days
to seven calendar days if more than 10% of the Portfolio's total assets would be
invested in these deposits.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment
Adviser and Administrator of the Fund and each of its portfolios. The Adviser
provides investment advice and portfolio management services, pursuant to an
Investment Advisory Agreement and, subject to the supervision of the Fund's
Board of Directors, makes each of the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages each of the Portfolio's investments. Set forth below as an annual
percentage of average daily net assets are the management fees payable to the
Adviser quarterly by each Portfolio pursuant to the terms of the Investment
Advisory Agreement. The fees of each of the Portfolios, which involve
international investments, are higher than those of most investment companies
because they involve international investments but the Adviser believes the fees
are comparable to those of investment companies with similar
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objectives. The Adviser has agreed to a reduction in the fees payable to it and
to reimburse the Portfolios, if necessary, if such fees would cause total annual
operating expenses of the Portfolios to exceed the maximums set forth in the
table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL ANNUAL
OPERATING EXPENSES
AFTER FEE WAIVERS
MANAGEMENT FEE ------------------------
PORTFOLIO ABSENT WAIVERS CLASS A CLASS B
- -------------------------- ------------------- ------------ ----------
<S> <C> <C> <C>
Global Equity 0.80% 1.00% 1.25 %
International Equity 0.80% 1.00% 1.25 %
International Small Cap 0.95% 1.15% N/A
Asian Equity 0.80% 1.00% 1.25 %
European Equity 0.80% 1.00% 1.25 %
Japanese Equity 0.80% 1.00% 1.25 %
Latin American 1.10% 1.70% 1.95 %
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
provides a broad range of portfolio management services to customers in the
United States and abroad. At September 30, 1995, 1994, the Adviser, together
with its affiliated asset management companies, managed investments totaling
approximately $55.2 billion, including approximately $40.1 billion under active
management and $15.1 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS -- The following individuals have primary portfolio
management responsibility for the Portfolios noted below:
GLOBAL EQUITY PORTFOLIO -- FRANCES CAMPION. Frances Campion joined the
Adviser in January 1990 as a Global Equity Fund Manager and became a Vice
President of Morgan Stanley in 1992. Her responsibilities include day to day
management of the Global Equity product. Prior to joining the Adviser, Ms.
Campion was a U.S. equity analyst with Lombard Odler Limited where she had
responsibility for the management of global portfolios. Ms. Campion has ten
years global investment experience. She is a graduate of University of College,
Dublin.
INTERNATIONAL EQUITY PORTFOLIO -- DOMINIC CALDECOTT. Dominic Caldecott is a
Managing Director and is responsible for research and stock selection in the
Pacific Basin and has been primarily responsible for managing the Portfolio's
assets since its inception. He has ten years professional experience, primarily
in Tokyo, Hong Kong, and Seoul. Prior to joining Morgan Stanley, he worked with
GT Management Group in Tokyo and Hong Kong, specializing in Pacific Basin
investment management. He became a Vice President of Morgan Stanley in 1987, a
principal in 1989, and a Managing Director in 1991. He is responsible for a
number of Pacific Basin investment programs for clients of Morgan Stanley. Mr.
Caldecott is a graduate of New College, Oxford, England.
INTERNATIONAL SMALL CAP PORTFOLIO -- MARGARET NAYLOR. Margaret Naylor is a
Principal of Morgan Stanley and works with Dominic Caldecott on Pacific Basin
research and stock selection. She joined the Adviser in March 1987 and has been
primarily responsible for managing the Portfolio's assets since December 1992.
Prior
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<PAGE>
to joining the Adviser she spent three years at the Trade Policy Research
Centre, an independent research unit. Ms. Naylor is a graduate of the University
of York. Ms. Naylor became a Vice President of Morgan Stanley in 1993.
ASIAN EQUITY PORTFOLIO -- EAN WAH CHIN AND JAMES CHENG. Ean Wah Chin is a
Managing Director of Morgan Stanley, and is responsible for the Adviser's
regional Asia ex-Japan operations based in Singapore. She has been primarily
responsible for managing the Portfolio's assets since its inception. Prior to
joining Morgan Stanley in 1986, Ms. Chin spent eight years with the Monetary
Authority of Singapore and the Government of Singapore Investment Corporation,
where she was a portfolio manager of one of the largest portfolios in Asia. Ms.
Chin was an ASEAN scholar educated at the University of Singapore. James Cheng
joined the Adviser in 1988 as a portfolio manager for Asian markets and is a
Vice President of Morgan Stanley. Mr. Cheng is currently responsible for
investments in Hong Kong, China, Taiwan, and South Korea. He has been primarily
responsible for managing the Portfolio's assets since its inception. Prior to
joining Morgan Stanley, he was affiliated with American Express and with Arthur
Andersen, where he spent three years as an auditor/consultant. Mr. Cheng holds
an M.B.A. from the University of Michigan, Ann Arbor, Michigan.
EUROPEAN EQUITY PORTFOLIO -- ROBERT SARGENT. Robert Sargent joined Morgan
Stanley International in May, 1986, and transferred to the Adviser in June,
1987. Mr. Sargent is now a Principal of Morgan Stanley and has been primarily
responsible for managing the Portfolio's assets since its inception. As the fund
manager with primary responsibility for continental European stock selection and
portfolio management, Mr. Sargent is closely involved with the Adviser's
fundamental research effort and company visiting program. He is a graduate of
York University, Toronto, Canada.
JAPANESE EQUITY PORTFOLIO -- DOMINIC CALDECOTT AND KUNIHIKO
SUGIO. Information about Mr. Caldecott is included under International Equity
Portfolio above. Mr. Caldecott is responsible for research and stock selection
in the Pacific Basin and has been primarily responsible for managing the
Portfolio's assets since its inception. Kunihiko Sugio joined the Adviser in
December 1993 as a Vice President and manages dedicated Japanese equity
portfolios. He has been primarily responsible for managing the Portfolio's
assets since its inception. Prior to joining Morgan Stanley, he worked with
Baring International Investment Management, Tokyo, where he was a Director and
fund manager. He graduated from Wakayama Kokuritsu University.
LATIN AMERICAN PORTFOLIO -- ROBERT L. MEYER. Robert Meyer joined the
Adviser in 1989 and is now a Principal of Morgan Stanley, with primary
responsibility for the Adviser's investments in all of Latin America and Israel.
He has had primary responsibility for managing the Portfolio's assets since its
inception. Robert is co-manager of the Latin American Discovery Fund, Inc. and
worked previously in the U.S. equity group at the Adviser. He was born in
Argentina and has a B.A. in Economics and Political Science from Yale College
and a J.D. from Harvard Law School.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian, assistance in the preparation of the Fund's registration statements
under federal and state laws. The Administration Agreement also provides that
the Administrator through its agents
37
<PAGE>
will provide the Fund dividend disbursing and transfer agent services. For its
services under the Administration Agreement, the Fund pays the Adviser a monthly
fee which on an annual basis equals 0.15% of the average daily net assets of
each Portfolio.
In a merger completed on September 1, 1995, The Chase Manhattan Bank, N.A.
("Chase") succeeded to all of the rights and obligations under the U.S. Trust
Administration Agreement between the Adviser and the United States Trust Company
of New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide
certain administrative services to the Fund. Pursuant to a delegation clause in
the U.S. Trust Administration Agreement, U.S. Trust delegated its administration
responsibilities to Chase Global Funds Services Company ("CGFSC"), formerly
known as Mutual Funds Service Company, which after the merger with Chase is a
subsidiary of Chase and will continue to provide certain administrative services
to the Fund. The Adviser supervises and monitors such administrative services
provided by CGFSC. The services provided under the Administration Agreement and
the U.S. Trust Administration Agreement are also subject to the supervision of
the Board of Directors of the Fund. The Board of Directors of the Fund has
approved the provision of services described above pursuant to the
Administration Agreement and the U.S. Trust Administration Agreement as being in
the best interests of the Fund. CGFSC's business address is 73 Tremont Street,
Boston, Massachusetts 02108-3913. For additional information regarding the
Administration Agreement, or the U.S. Trust Administration Agreement, see
"Management of the Fund" in the Statement of Additional Information.
LOCAL ADMINISTRATORS FOR THE LATIN AMERICAN PORTFOLIO
The Portfolio has entered into an administration agreement (the "Chilean
Administration Agreement") with Bice Chileconsult Agente de Valores S.A. (the
"Chilean Administrator"), a Chilean corporation, pursuant to which the Chilean
Administrator acts as the Portfolio's legal representative in Chile. Under the
Chilean Administration Agreement, the Chilean Administrator performs various
services for the Portfolio, including making and obtaining all exchange control
filings and approvals required for the Portfolio to effect investment and other
transactions in Chile and to remit moneys and other assets outside of Chile,
obtaining from the relevant authorities in Chile all confirmations or consents
relating to the tax status of the Portfolio and all tax rebates and other
payments which may be due to the Portfolio, and performing all other
administrative duties in Chile required by Chilean law or Chilean authorities
through instructions or regulations to be performed. For its services, the
Chilean Administrator is paid an annual fee by the Fund equal to the greater of
0.125% of the Portfolio's average weekly net assets invested in Chile or
$20,000, paid monthly. Unless terminated by the Fund's Board of Directors upon
60 days' prior written notice, or by the Chilean Administration upon 90 days'
prior written notice, the Chilean Administration Agreement will continue
automatically from year to year.
The Latin American Portfolio is required under Brazilian law to have a local
administrator in Brazil. Unibanco-Uniao (the "Brazilian Administrator"), a
Brazilian corporation, acts as the Portfolio's Brazilian administrator pursuant
to an agreement with the Portfolio (the "Brazilian Administration Agreement").
Under the Brazilian Administration Agreement, the Brazilian Administrator
performs various services for the Portfolio, including effecting the
registration of the Portfolio's foreign capital with the Central Bank of Brazil,
effecting all foreign exchange transactions related to the Portfolio's
investments in Brazil and obtaining all approvals required for the Portfolio to
make remittances of income and capital gains and for the repatriation of the
Portfolio's investments pursuant to Brazilian law. For its services, the
Brazilian Administrator is paid an annual fee equal to 0.125% of the Portfolio's
average weekly net assets invested in Brazil, paid monthly. The principal office
of the Brazilian Administrator is located at Avenida Eusebio Matoso, 891, Sao
Paulo, S.P., Brazil. The
38
<PAGE>
Brazilian Administration Agreement is terminable upon six months' notice by
either party; the Brazilian Administrator may be replaced only by an entity
authorized to act as a joint manager of a managed portfolio of bonds and
securities under Brazilian law.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio and receives no compensation
for its distribution services.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that ate different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each Multiclass Portfolio pursuant to Rule 12b-1 under the 1940 Act
(each, a "Plan"). Under each Plan, the Distributor is entitled to receive from
each Multiclass Portfolio a distribution fee, which is accrued daily and paid
quarterly, of 0.25% of the Class B shares' average daily net assets on an
annualized basis. The distributor expects to reallocate most of its fee to its
investment representatives. The Distributor may, in its discretion, voluntarily
waive from time to time all or any portion of its distribution fee and each of
the Distributor and the Adviser is free to make additional payments out of its
own assets to promote the sale of Fund shares, including payments that
compensate financial institutions for distribution services or shareholder
services.
Each Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountant's fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
39
<PAGE>
PURCHASE OF SHARES
Class A shares of each Portfolio and Class B shares of each Multiclass
Portfolio may be purchased, without sales commission, at the net asset value per
share next determined after receipt of the purchase order by the Portfolio. See
"Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Multiclass Portfolio account opened on or after January 2, 1996 (a
"New Multiclass Account"), the minimum initial investment and minimum account
size are $500,000 for Class A shares of each Portfolio and $100,000 for Class B
shares of each Multiclass Portfolio. The International Equity Portfolio is
currently closed to new investors, with the exception of certain Morgan Stanley
customers. The minimum initial investment for Class A shares of the
International Small Cap Portfolio is $500,000. Managed Accounts may purchase
Class A shares without being subject to such minimum initial investment or
minimum account size requirements for a Portfolio account. Officers of the
Adviser and its affiliates are subject to the minimums for a Portfolio account,
except they may purchase Class B shares subject to a minimum initial investment
and minimum account size of $5,000 for a Multiclass Portfolio account.
If the value of a New Multiclass Account containing Class A shares falls
below $500,000 (but remains at or above $100,000) because of shareholder
redemption(s), the Fund will notify the shareholders, and if the account value
remains below $500,000 (but remains at or above $100,000) for a continuous
60-day period, the Class A shares in such account will convert to Class B shares
and will be subject to the distribution fee and other features applicable to the
Class B shares. The Fund, however, will not convert Class A shares to Class B
shares based solely upon changes in the market that reduce the net asset value
of shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 were
designated Class A shares on January 2, 1996. Shares in a Multiclass Portfolio
account opened prior to January 2, 1996 (each, a "Pre-1996 Multiclass Account")
with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A
Account") remain Class A shares regardless of account size thereafter. Except
for shares in a Managed Account, shares in a Pre-1996 Multiclass Account with a
value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account")
convert to Class B shares on March 1, 1996. Grandfathered Class A Accounts and
Managed Accounts are not subject to conversion from Class A shares to Class B
shares.
The Fund reserves the right to modify or terminate the conversion features
of the shares as stated above at any time upon 60-days' notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Multiclass Account falls below $100,000 because of
shareholder redemptions(s), the Fund will notify the shareholder, and if the
account value remains below $100,000 for a continuous 60-day period, the shares
in such account are subject to redemption by the Fund and, if redeemed, the net
asset value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to New Multiclass Accounts containing Class B shares
held by officers of the Adviser or its affiliates. However, if the value of such
account held by an officer of the Adviser or its affiliates falls below $5,000
because of
40
<PAGE>
shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains below $5,000 for a continuous 60-day period, the shares in
such account are subject to redemption by the Fund and, if redeemed, the net
asset value of such shares will be promptly paid to the shareholder.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption.
If a shareholder reduces its total investment in Class A shares of the
International Small Cap Portfolio to less than $500,000, the investment may be
subject to redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Multiclass Portfolio account increases,
whether due to shareholder share purchases or market activity, to $500,000 or
more, the Class B shares will convert to Class A shares. Under current tax law,
such conversion is not a taxable event to the shareholder. Class A shares
converted from Class B shares are subject to the same minimum account size
requirements that are applicable to New Multiclass Accounts containing Class A
shares, as stated above. The Fund reserves the right to modify or terminate this
conversion feature at any time upon 60-days' notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of each Portfolio and $100,000 minimum for Class B shares of
each Multiclass Portfolio, with certain exceptions for Morgan Stanley
employees and select customers) payable to "Morgan Stanley Institutional
Fund, Inc. -- [portfolio name]", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in United States dollars, unless prior approval
for payment in other currencies is given by the Fund. The Portfolio(s) to be
purchased should be designated on the Account Registration Form. For purchases
by check, the Fund is ordinarily credited with Federal Funds within one
business day. Thus your purchase of shares by check is ordinarily credited to
your account at the net asset value per share of the relevant Portfolio
determined on the next business day after receipt.
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<PAGE>
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund
prior to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected, and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Funds at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
Purchase orders for shares of the Portfolios which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed
at the price computed on the date of receipt as long as the Transfer Agent
receives payment by check or in Federal Funds prior to the regular close of
the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested
and, therefore, will not be earning dividends. Your bank may charge a service
fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000 for each portfolio, except for automatic reinvestment of dividends and
capital gains distributions for which there are no minimums) by purchasing
shares at net asset value by mailing a check to the Fund (payable to "Morgan
Stanley Institutional Fund -- [portfolio name]") at the above address or by
wiring monies to the Custodian Bank as outlined above. It is very important that
your account name, the portfolio name and the class selected be specified in the
letter or wire to assure proper crediting to your account. In order to ensure
that your wire orders are invested promptly,
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<PAGE>
you are requested to notify one of the Fund's representatives (toll-free
1-800-548-7786) prior to the wire date. Additional investments will be applied
to purchase additional shares in the same class held by a shareholder in a
Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of each Portfolio is
the net asset value next determined after the order is received. See "Valuation
of Shares." An order received prior to the regular close of the New York Stock
Exchange ("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed
at the price computed on the date of receipt; an order received after the
regular close of the NYSE will be executed at the price computed on the next day
the NYSE is open as long as the Transfer Agent receives payment by check or in
Federal Funds prior to the regular close of the NYSE on such day.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio(s)
will not be issued. All shares purchased are confirmed to you and credited to
your account on the Fund's books maintained by the Adviser or its agents. You
will have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolios and the Portfolios' performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging Class
A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class
A shares of Portfolio B for Class A shares of Portfolio C and again exchanging
Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day
43
<PAGE>
period. Two types of transactions are exempt from these excessive trading
restrictions: (1) trades exclusively between money market portfolios; and (2)
trades done in connection with an asset allocation service, such as TFM
Accounts, managed or advised by MSAM and/or any of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase has been collected, which
may take up to eight business days after purchase. The Fund will redeem Class A
shares of each Portfolio or Class B shares of each Multiclass Portfolio at the
next determined net asset value of shares of the applicable class. On days that
both the NYSE and the Custodian Bank are open for business, the net asset values
per share of each of the Portfolios are determined at the regular close of
trading of the NYSE (currently 4:00 p.m. Eastern Time). Shares of each Portfolio
may be redeemed by mail or telephone. No charge is made for redemptions, except
for the imposition of the 1% transaction fee described under "Fund Expenses"
above, which may be assessed in connection with redemptions of shares of the
International Small Cap Portfolio. Any redemption proceeds may be more or less
than the purchase price of your shares depending on, among other factors, the
market value of the investment securities held by a Portfolio.
BY MAIL
Each Portfolio will redeem its Class A or Class B shares at the net asset
value determined on the date the request is received, if the request is received
in "good order" before the regular close of the NYSE. Your request should be
addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston,
Massachusetts 02208-2798, except that deliveries by overnight courier should be
addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global Funds
Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a)A letter of instruction or a stock assignment specifying the class and
number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b)Any required signature guarantees (see "Further Redemption Information"
below); and
(c)Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and profit
sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by regular
mail or express mail and it will be implemented at the net asset value next
determined after it is received.
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<PAGE>
Redemption requests sent to the Fund through express mail must be mailed to the
address of the Dividend Disbursing and Transfer Agent listed under "General
Information". The Fund and the Fund's transfer agent (the "Transfer Agent") will
employ reasonable procedures to confirm that the instructions communicated by
telephone are genuine. Redemption requests sent to the Fund through express mail
must be mailed to the address of the Dividend Disbursing and Transfer Agent
listed under "General Information". These procedures include requiring the
investor to provide certain personal identification information at the time an
account is opened and prior to effecting each transaction requested by
telephone. In addition, all telephone transaction requests will be recorded and
investors may be required to provide additional telecopied written instructions
regarding transaction requests. Neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by a Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in any Portfolio for shares of any
other available portfolio(s) of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available
45
<PAGE>
without shareholder election. Before you make an exchange, you should read the
prospectus of the portfolio(s) in which you seek to invest. Because an exchange
transaction is treated as a redemption followed by a purchase, an exchange would
be considered a taxable event for shareholders subject to tax. The exchange
privilege is only available with respect to portfolios that are registered for
sale in a shareholder's state of residence. The exchange privilege may be
modified or terminated by the Fund at any time upon 60-days' notice to
shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the name(s) of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of your current Portfolio, the name(s) of the portfolio into
which you intend to exchange shares, your Social Security number or Tax I.D.
number, and your account address. Requests for telephone exchanges received
prior to 4:00 p.m. (Eastern Time) are processed at the close of business that
same day based on the net asset value of the class(es) of the portfolios
involved in the exchange of shares at the close of business. Requests received
after 4:00 p.m. (Eastern Time) are processed the next business day based on the
net asset value determined at the close of business on such day. For additional
information regarding responsibility for the authenticity of telephoned
instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolio's shares may result in involuntary
conversion or redemption of your shares. See "Purchase of Shares" above.
VALUATION OF SHARES
The net asset value per share of a class of shares of each of the Portfolios
is determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such class, less any liabilities attributable
to such class, by the total number of outstanding shares of each class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolios. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. 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 not readily available are valued
at a price within a range not exceeding the current asked price nor less than
the current bid price. The current bid and asked prices are determined based on
the average bid and asked prices quoted on such valuation date by reputable
brokers.
46
<PAGE>
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices but take into account institutional size trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recently quoted bid price, or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determine the prices in accordance
with the above-stated procedures are determined in good faith at fair value
using methods determined by the Board of Directors. For purposes of calculating
net asset value per share, all assets and liabilities initially expressed in
foreign currencies will be translated into U.S. dollars at the mean of the bid
price and asked price for such currencies against the U.S. dollar last quoted by
any major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expenses charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise the "total return" for each class
of a Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE.
Each of the Portfolios may advertise "total return" which shows what an
investment in a class of a Portfolio would have earned over a specified period
of time (such as one, five or ten years) assuming that all distributions and
dividends by the Portfolio were reinvested in the same class on the reinvestment
dates during the period. Total return does not take into account any federal or
state income taxes that may be payable on dividends and distributions or on
redemption. The Fund may also include comparative performance information in
advertising or marketing the Portfolios' shares, including data from Lipper
Analytical Services, Inc., other industry publications, business periodicals,
rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
47
<PAGE>
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will automatically be reinvested in additional shares at net asset value, except
that, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
may elect to receive income dividends and capital gains distributions in cash.
Each Portfolio expects to distribute substantially all of its net investment
income in the form of annual dividends. Net realized gains, if any, after
reduction for any available tax loss carryforwards will also be distributed
annually. Confirmations of the purchase of shares of the Portfolio through the
automatic reinvestment of income dividends and capital gains distributions will
be provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act of
1934, as amended, on the next monthly client statement following such purchase
of shares. Consequently, confirmation of such purchases will not be provided at
the time of completion of such purchases as might otherwise be required by Rule
10b-10. Net capital gains, if any, will be distributed annually.
Undistributed net investment income is included in a Portfolio's net assets
for the purpose of calculating net asset value per share. Therefore, on the
"ex-dividend" date, the net asset value per share excludes the dividend (i.e.,
is reduced by the per share amount of the dividend). Dividends paid shortly
after the purchase of shares by an investor, although in effect a return of
capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolios will differ at times.
Expenses of the Portfolios allocated to a particular class of shares thereof
will be borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolios or their shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other Portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), so that the Portfolio will be relieved of federal income tax on
that part of its net investment income and net capital gain that is distributed
to shareholders.
Each Portfolio distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to shareholders.
Dividends from a Portfolio's net investment income are taxable to shareholders
as ordinary income, whether received in cash or in additional shares. Such
dividends paid by a Portfolio will generally qualify for the 70%
dividends-received deduction for corporate shareholders only to the extent of
the aggregate qualifying dividend income received by the Portfolio from U.S.
corporations. Each Portfolio will report annually to its shareholders the amount
of dividend income qualifying for such treatment.
48
<PAGE>
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. Each
Portfolio sends reports annually to its shareholders of the federal income tax
status of all distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses), including any available capital loss carryforwards, prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The sale or redemption of shares may result in taxable gain or loss to the
redeeming shareholder, depending upon whether the fair market value of the
redemption proceeds exceeds or is less than the Shareholder's adjusted basis in
the redeemed shares. If capital gain distributions have been made with respect
to shares that are sold at a loss after being held for six months or less, then
the loss is treated as a long-term capital loss to the extent of the capital
gain distributions.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
Investment income received by a Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that a Portfolio is liable for foreign income taxes so withheld, each
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although each
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that each Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for each of the Fund's Portfolios and directs the Adviser to use its
best efforts to obtain the best available price and most favorable execution
with respect to all transactions for the Portfolios. The Fund has authorized the
Adviser to pay higher commissions in recognition of brokerage services which, in
the opinion of the Adviser, are necessary for the achievement of better
execution, provided the Adviser believes this to be in the best interest of the
Fund.
49
<PAGE>
Since shares of the Portfolios are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Portfolios or who act as agents in the purchase of shares of
the Portfolios for their clients.
In purchasing and selling securities for a Portfolio, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by a Portfolio may also be appropriate for
other clients served by the Adviser. If purchase or sale of securities
consistent with the investment policies of a Portfolio and one or more of these
other clients served by the Adviser is considered at or about the same time,
transactions in such securities will be allocated among the Portfolio and such
other clients in a manner deemed fair and reasonable by the Adviser. Although
there is no specified formula for allocating such transactions, the various
allocation methods used by the Adviser, and the results of such allocations, are
subject to periodic review by the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of the Fund's portfolio brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Portfolios, the commissions, fees or other remuneration received by Morgan
Stanley or such affiliates must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
a securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of those Directors who are not
"interested persons," as defined in the 1940 Act, have adopted procedures which
are reasonably designed to provide that any commissions, fees or other
remuneration paid to Morgan Stanley or such affiliates are consistent with the
foregoing standard.
Portfolio securities will not be purchased from or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act, of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by shareholders, the Board of Directors has the power to
designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with
50
<PAGE>
respect to such classes. The shares of common stock of each Portfolio are
currently classified into two classes, the Class A shares and the Class B
shares, except for the International Small Cap, Money Market and Municipal Money
Market Portfolios, which only offer Class A shares.
The shares of each Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative rights, which means that the holders of more than 50% of the
shares voting for the election of Directors can elect 100% of the Directors if
they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of a Portfolio may be presumed to "control" (as defined in
the 1940 Act) such Portfolio. As of December 18, 1995, Robert College of
Istanbul, Turkey was presumed to "control" the Global Equity Portfolio based
solely on their ownership of 25% or more of the outstanding voting shares of
such Portfolio. Under Maryland law, the Fund is not required to hold an annual
meeting of its shareholders unless required to do so under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
As of September 1, 1995, domestic securities and cash are held by Chase
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
51
<PAGE>
<TABLE>
<CAPTION>
<S><C>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
GLOBAL EQUITY, INTERNATIONAL EQUITY, INTERNATIONAL SMALL CAP,
ASIAN EQUITY, EUROPEAN EQUITY, JAPANESE EQUITY AND LATIN AMERICAN PORTFOLIOS
P.O. Box 2798, Boston, MA 02208-2798
- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT REGISTRATION FORM
- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, please contact your Morgan Stanley representative or call us
toll free 1-(800)-548-7786. Please print all items except signature, and mail to
the Fund at the address above.
- -----------------------------------------------------------------------------------------------------------------------------------
A) REGISTRATION
1. INDIVIDUAL 1.
------------------------------------------------------------------------------------------------
2. JOINT TENANTS First Name Initial Last Name
(RIGHTS OF SURVIVORSHIP 2.
PRESUMED UNLESS ------------------------------------------------------------------------------------------------
TENANCY IN COMMON First Name Initial Last Name
IS INDICATED)
------------------------------------------------------------------------------------------------
First Name Initial Last Name
- -----------------------------------------------------------------------------------------------------------------------------------
3. CORPORATIONS, 3.
TRUSTS AND OTHERS ------------------------------------------------------------------------------------------------
Please call the Fund
for additional documents ------------------------------------------------------------------------------------------------
that may be required to
set up account and to ------------------------------------------------------------------------------------------------
authorize transactions Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/
ASSOCIATION TRANSFER TO
MINOR (ONLY ONE
CUSTODIAN AND
MINOR PERMITTED)
/ / TRUST / / OTHER (Specify)
------------------------ -------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box
-------------------------------------------------------------------------------
Please fill in City State Zip
completely, including -------------------------------------- ---- --------------------------------------
telephone number(s). Home Telephone No. - - Business Telephone No. - -
------------ ------------
/ / United States Citizen / / Resident Alien / / Non-Resident Alien: Indicate Country of Residence
------------------
- -----------------------------------------------------------------------------------------------------------------------------------
C) TAXPAYER PART 1. Enter your Taxpayer IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For You (as a payee) are required by law to provide us
NUMBER most individual taxpayers, (as payer) with your correct taxpayer identification
If the account is in more than this is your Social Security number. Accounts that have a missing or incorrect taxpayer
one name, CIRCLE THE NAME OF Number. identification number will be subject to backup withholding
THE PERSON WHOSE TAXPAYER TAXPAYER IDENTIFICATION at a 31% rate on dividends, distributions and other payments.
IDENTIFICATION NUMBER IS NUMBER If you have not provided us with your correct taxpayer
PROVIDED IN SECTION A) ABOVE. -------------------------- identification number, you may be subject to a $50 penalty
If no name is circled, the imposed by the Internal Revenue Service.
number will be considered to OR Backup withholding is not an additional tax; the tax
be that of the last name SOCIAL SECURITY NUMBER liability of persons subject to backup withholding will be
listed. For Custodian account -------------------------- reduced by the amount of tax withheld. If withholding
of a minor (Uniform Gifts/ results in an overpayment of taxes, a refund may be
Transfers to Minors Acts), PART 2. BACKUP WITHHOLDING obtained.
give the Social Security / / Check this box if you are You may be notified that you are subject to backup
Number of the minor. NOT subject to Backup withholding under Section 3406(a)(1)(C) of the Internal
Withholding under the Revenue Code because you have underreported interest or
provisions of Section dividends or you were required to but failed to file a return
3406(a)(1)(C) of the Internal which would have included a reportable interest or
Revenue Code. dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK
THE BOX IN PART 2 AT LEFT.
- -----------------------------------------------------------------------------------------------------------------------------------
D) PORTFOLIO AND CLASS For Purchase of the following Portfolio(s):
SECTION (Class A Shares GLOBAL EQUITY PORTFOLIO / / Class A Shares $ / / Class B Shares $
minimum $500,000 for each ------- -------
Portfolio and Class B shares INTERNATIONAL SMALL CAP PORTFOLIO / / Class A Shares $
minimum $100,000 for the -------
Global Equity, International EUROPEAN EQUITY PORTFOLIO / / Class A Shares $ / / Class B Shares $
Equity, Asian Equity, ------- -------
European Equity, Japanese LATIN AMERICAN PORTFOLIO / / Class A Shares $ / / Class B Shares $
Equity and Latin American ------- -------
Equity Portfolios). Please INTERNATIONAL EQUITY PORTFOLIO / / Class A Shares $ / / Class B Shares $
indicate Portfolio, class ------- -------
and amount. ASIAN EQUITY PORTFOLIO / / Class A Shares $ / / Class B Shares $
------- -------
JAPANESE EQUITY PORTFOLIO / / Class A Shares $ / / Class B Shares $
------- -------
Total Initial Investment $
------------
- -----------------------------------------------------------------------------------------------------------------------------------
<PAGE>
<S> <C>
E) METHOD OF INVESTMENT Payment by:
Please indicate portfolio, / / check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--
manner of payment. PORTFOLIO NAME)
/ / Exchange $ From -
---------------- ------------------------ -------------------------
Name of Portfolio Account No.
/ / Account previously established by:
/ / Phone exchange / / Wire on
--------------------------- --------------------------
Date Account No. (Check
(Previously assigned Digit)
by the Fund)
- -----------------------------------------------------------------------------------------------------------------------------------
F) DISTRIBUTION Income dividends and capital gains distributions (if any) will be reinvested in
OPTION additional shares unless either box below is checked.
/ / Income dividends to be paid in cash, capital gains distributions (if any) in
shares.
/ / Income dividends and capital gains distributions (if any) to be paid in
cash.
- -----------------------------------------------------------------------------------------------------------------------------------
G) TELEPHONE / / I/we hereby authorize the Fund and its
REDEMPTION AND agents to honor any telephone requests to ------------------------- -------------------------
EXCHANGE OPTION wire redemption proceeds to the Name of COMMERCIAL Bank Bank Account No.
Please select at time of commercial bank indicated at rights and/or (Not Savings Bank)
initial application if mail redemption proceeds to the name -------------------------
you wish to redeem or and address in which my/our fund account Bank ABA No.
exchange shares by is registered if such requests are believed
telephone. A to be authentic.
SIGNATURE GUARANTEE IS THE FUND AND THE FUND'S TRANSFER AGENT ---------------------------------------------------
REQUIRED IF BANK ACCOUNT WILL EMPLOY REASONABLE PROCEDURES TO Name(s) in which your Bank Account is Established
IS NOT REGISTERED CONFIRM THAT INSTRUCTIONS COMMUNICATED BY
IDENTICALLY TO YOUR TELEPHONE ARE GENUINE. THESE PROCEDURES ---------------------------------------------------
FUND ACCOUNT. INCLUDE REQUIRING THE INVESTOR TO PROVIDE Bank's Street Address
CERTAIN PERSONAL IDENTIFICATION INFORMATION AT
TELEPHONE REQUESTS FOR THE TIME AN ACCOUNT IS OPENED AND PRIOR TO ---------------------------------------------------
REDEMPTIONS OR EXCHANGES EFFECTING EACH TRANSACTION REQUESTED BY City State Zip
WILL NOT BE HONORED UNLESS TELEPHONE. IN ADDITION, ALL TELEPHONE
THE BOX IS CHECKED. TRANSACTION REQUESTS WILL BE RECORDED AND
INVESTORS MAY BE REQUIRED TO PROVIDE
ADDITIONAL TELECOPIED WRITTEN INSTRUCTIONS OF
TRANSACTION REQUESTS. NEITHER THE FUND NOR
THE TRANSFER AGENT WILL BE RESPONSIBLE FOR
ANY LOSS, LIABILITY, COST OR EXPENSE FOR
FOLLOWING INSTRUCTIONS RECEIVED BY TELEPHONE
THAT IT REASONABLY BELIEVES TO BE GENUINE.
- -----------------------------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION ------------------------------------------------------------------------------------------------
Name
In addition to the ac-
count statement sent to ------------------------------------------------------------------------------------------------
my/our registered ad-
dress, I/we hereby au-
thorize the fund to mail ------------------------------------------------------------------------------------------------
duplicate statements to Address
the name and address
provide at right. ------------------------------------------------------------------------------------------------
City State Zip Code
- -----------------------------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION -------------------- -------------------- --------------------
Representative Name Representative No. Branch No.
- -----------------------------------------------------------------------------------------------------------------------------------
J) SIGNATURE OF The undersigned certify that I/we have full authority and legal capacity to purchase and redeem
ALL HOLDERS shares of the Fund and affirm that I/we have received a current Prospectus of the Morgan Stanley
AND TAXPAYER Institutional Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF PERJURY,
CERTIFICATION I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE.
Sign Here -- (X) (X)
----------------------------------------- ----------------------------------------------------
Signature Date Signature Date
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Fund Expenses..................................... 2
Financial Highlights.............................. 6
Prospectus Summary................................ 14
Investment Objectives and Policies................ 18
Additional Investment Information................. 26
Investment Limitations............................ 35
Management of the Fund............................ 35
Purchase of Shares................................ 40
Redemption of Shares.............................. 44
Shareholder Services.............................. 45
Valuation of Shares............................... 46
Performance Information........................... 47
Dividends and Capital Gains Distributions......... 48
Taxes............................................. 48
Portfolio Transactions............................ 49
General Information............................... 50
Account Registration Form
</TABLE>
GLOBAL EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
INTERNATIONAL SMALL CAP PORTFOLIO
ASIAN EQUITY PORTFOLIO
EUROPEAN EQUITY PORTFOLIO
JAPANESE EQUITY PORTFOLIO
LATIN AMERICAN PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
EMERGING MARKETS DEBT PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-seven portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and the Class B
shares of the Emerging Markets Portfolio and the Emerging Markets Debt Portfolio
(the "Portfolios"). On January 2, 1996, the Portfolios began offering two
classes of shares, the Class A shares and the Class B shares. All shares of the
Portfolios owned prior to January 2, 1996 were redesignated Class A shares on
January 2, 1996. The Class A and Class B shares currently offered by the
Portfolios have different minimum investment requirements and fund expenses.
Shares of the portfolios are offered with no sales charge or exchange or
redemption fee (with the exception of one of the portfolios).
The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and corporate
issuers located in emerging countries.
Emerging markets securities are subject to special risks. See "Foreign
Investment Risk Factors."
INVESTORS SHOULD NOTE THAT EACH PORTFOLIO MAY INVEST UP TO 10% OF ITS TOTAL
ASSETS IN RESTRICTED SECURITIES AND UP TO 25% OF ITS NET ASSETS IN RESTRICTED
SECURITIES THAT ARE RULE 144A SECURITIES. SEE "ADDITIONAL INVESTMENT INFORMATION
- -- NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES." INVESTMENTS IN RESTRICTED SECURITIES IN EXCESS OF 5% OF A
PORTFOLIO'S TOTAL ASSETS MAY BE CONSIDERED A SPECULATIVE ACTIVITY, MAY INVOLVE
GREATER RISK AND MAY INCREASE THE PORTFOLIO'S EXPENSES.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator") and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional investors and high net
worth individual investors a series of portfolios which benefit from the
investment expertise and commitment to excellence associated with Morgan Stanley
and its affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional Portfolios which are
described in other prospectuses and under the Prospectus Summary section herein.
The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL
EQUITY -- Active Country Allocation, Asian Equity, China Growth, Emerging
Markets, European Equity, Global Equity, Gold, International Equity,
International Small Cap, Japanese Equity and Latin American Portfolios; (ii)
U.S. EQUITY -- Aggressive Equity, Emerging Growth, Equity Growth, MicroCap,
Small Cap Value Equity, U.S. Real Estate and Value Equity Portfolios; (iii)
BALANCED -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt,
Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and
Municipal Bond Portfolios; and (v) MONEY MARKET -- Money Market and Municipal
Money Market Portfolios. Additional information about the Fund is contained in a
"Statement of Additional Information," dated January 2, 1996, which is
incorporated herein by reference. The Statement of Additional Information and
the prospectuses pertaining to the other portfolios of the Fund are available
upon request and without charge by writing or calling the Fund at the address
and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY 2, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Portfolios indicated below will incur:
<TABLE>
<CAPTION>
EMERGING
EMERGING MARKETS
MARKETS DEBT
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A..................................................................... None None
Class B..................................................................... None None
Maximum Sales Load Imposed on Reinvested Dividends
Class A..................................................................... None None
Class B..................................................................... None None
Deferred Sales Load
Class A..................................................................... None None
Class B..................................................................... None None
Redemption Fees
Class A..................................................................... None None
Class B..................................................................... None None
Exchange Fees
Class A..................................................................... None None
Class B..................................................................... None None
</TABLE>
<TABLE>
<CAPTION>
EMERGING
EMERGING MARKETS
ANNUAL FUND OPERATING EXPENSES MARKETS DEBT
(AS A PERCENTAGE OF AVERAGE NET ASSETS) PORTFOLIO PORTFOLIO
----------- -----------
<S> <C> <C>
Management Fee*
Class A..................................................................... 1.25% 1.00%
Class B..................................................................... 1.25% 1.00%
12b-1 Fees
Class A..................................................................... None None
Class B..................................................................... 0.25% 0.25%
Other Expenses
Class A..................................................................... 0.50% 0.40%
Class B..................................................................... 0.50% 0.40%
----------- -----------
Total Operating Expenses*
Class A..................................................................... 1.75% 1.40%
Class B..................................................................... 2.00% 1.65%
----------- -----------
----------- -----------
</TABLE>
- ------------------------
*The Adviser has agreed to waive its management fees and/or to reimburse the
Portfolios, if necessary, if such fees would cause the Portfolios' total annual
operating expenses, as a percentage of average daily net assets, to exceed the
percentages set forth in the table
2
<PAGE>
above. The management fees are 1.25% for the Emerging Markets Portfolio and
1.00% for the Emerging Markets Debt Portfolio. The Adviser reserves the right
to terminate any of its fee waivers and/or expense reimbursements at any time
in its sole discretion. For further information on Fund expenses, see
"Management of the Fund."
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. The Class A expenses and fees for each Portfolio have been restated
to reflect current fees. The Class B expenses and fees for each Portfolio are
based on estimates, assuming that the average daily net assets of the Class B
shares of each Portfolio will be $50,000,000. "Other Expenses" include Board of
Directors' fees and expenses, amortization of organizational costs, filing fees,
professional fees and costs for shareholder reports. Due to the continuous
nature of Rule 12b-1 fees, long term Class B shareholders may pay more than the
equivalent of the maximum front-end sales charges otherwise permitted by the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
("NASD").
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The following example is based on total
operating expenses of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Emerging Markets Portfolio
Class A......................................................... $ 17 $ 54 $ 93 $ 203
Class B......................................................... 20 63 108 233
Emerging Markets Debt Portfolio
Class A......................................................... 15 47 81 178
Class B......................................................... 17 52 90 195
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Fund intends to continue to comply with all state laws that restrict
investment company expenses. Currently, the most restrictive state law requires
that the aggregate annual expenses of an investment company shall not exceed two
and one-half percent (2 1/2%) of the first $30 million of average net assets,
two percent (2%) of the next $70 million of average net assets, and one and
one-half percent (1 1/2%) of the remaining net assets of such investment
company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse the Portfolios, if necessary, if in any fiscal year the sum of the
Portfolio's expenses exceeds the limit set by applicable state laws.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A shares for
the Emerging Markets and Emerging Markets Debt Portfolios for each of the
periods presented. The new Class B shares were not offered prior to the date of
this Prospectus. The audited financial highlights for the Class A shares for the
fiscal year ended December 31, 1994 and the unaudited financial highlights for
the Class A shares for the six months ended June 30, 1995 are part of the Fund's
financial statements which appear in the Fund's December 31, 1994 Annual Report
to Shareholders and June 30, 1995 Semi-Annual Report to Shareholders,
respectively, and which are included in the Fund's Statement of Additional
Information. The Portfolios' financial highlights for each of the periods
presented, except for the six months ended June 30, 1995, have been audited by
Price Waterhouse LLP, whose unqualified report thereon is also included in the
Statement of Additional Information. Additional performance information for the
Class A shares of the Portfolios is included in the Annual Report. The Annual
Report, Semi-Annual Report and the financial statements therein, along with the
Statement of Additional Information, are available at no cost from the Fund at
the address and telephone number noted on the cover page of this Prospectus.
Subsequent to October 31, 1992 (the Fund's prior fiscal year end), the Fund
changed its fiscal year end to December 31. The following information should be
read in conjunction with the financial statements and notes thereto.
4
<PAGE>
EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 25, TWO MONTHS SIX MONTHS
1992* TO ENDED YEAR ENDED YEAR ENDED ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, 1995
1992 1992 1993+ 1994 (UNAUDITED)
------------- ------------- ------------- ------------- -------------
<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 Gain/(Loss) (1)... -- -- (0.01) (0.04) 0.07
Net Realized and Unrealized Gain/
(Loss) on Investments........... 0.11 0.11 8.79 (2.56) (1.24)
------------- ------------- ------------- ------------- -------------
Total from Investment
Operations...................... 0.11 0.11 8.78 (2.60) (1.17)
------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Realized Gain/(Loss)......... -- -- -- (0.10) (0.92)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD..... $ 10.11 $ 10.22 $ 19.00 $ 16.30 $ 14.21
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
TOTAL RETURN....................... 1.10% 1.09% 85.91% (9.63)% (7.46)%
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)....................... $ 28,806 $ 74,219 $ 735,352 $ 929,638 $ 969,631
Ratio of Expenses to Average Net
Assets (1)(2)..................... 1.75%** 1.75%** 1.75% 1.75% 1.75%
Ratio of Net Investment Gain/(Loss)
to
Average Net Assets (1)(2)......... (0.53)%** (0.33)%** (0.06)% (0.26)% 0.99%
Portfolio Turnover Rate............ 0% 2% 52% 32% 21%
</TABLE>
- ------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income........ $ 0.02 $ 0.00 $ 0.01 N/A $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets.................... 4.82%** 2.48%** 1.79% N/A 1.85%
Net Investment Gain/(Loss) to Average Net
Assets........................................... (3.60)%** (1.06)%** (0.10)% N/A 0.89%
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 1.25% of the
average daily net assets of the Emerging Markets Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the Portfolio
exceed 1.75% of the average daily net assets of the Class A shares and 2.00%
of the average net assets of the Class B shares. The Adviser did not waive
fees or reimburse expenses for the year ended December 31, 1994. In the
period ended October 31, 1992, the two month period ended December 31, 1992,
the year ended December 31, 1993 and the six months ended June 30, 1995, the
Adviser waived advisory fees and/or reimbursed expenses totalling $58,000,
$50,000, $122,000 and $447,000, respectively, for the Emerging Markets
Portfolio.
* Commencement of Operations.
** Annualized.
+ Per share amounts for the year ended December 31, 1993 are based on average
outstanding shares.
5
<PAGE>
EMERGING MARKETS DEBT PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1, 1994*
TO DECEMBER 31, SIX MONTHS ENDED
1994 JUNE 30, 1995
------------------- -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................................ $ 10.00 $ 8.59
-------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income..................................................... 0.50 0.67
Net Realized and Unrealized Gain/(Loss) on Investments.................... (1.91) 0.24
-------- --------
Total from Investment Operations.......................................... (1.41) 0.91
-------- --------
DISTRIBUTIONS
Net Investment Income..................................................... -- (0.48)
-------- --------
NET ASSET VALUE, END OF PERIOD.............................................. $ 8.59 $ 9.02
-------- --------
-------- --------
TOTAL RETURN................................................................ (14.10)% 11.32%
-------- --------
-------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)....................................... $ 144,949 $ 179,543
Ratio of Expenses to Average Net Assets..................................... 1.49%** 1.46%**
Ratio of Net Investment Income to Average Net Assets........................ 9.97%** 16.61%**
Portfolio Turnover Rate..................................................... 273% 201%
</TABLE>
- ------------------------
* Commencement of Operations.
** Annualized.
6
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-seven portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except for the
International Small Cap, Money Market and Municipal Money Market Portfolios,
also offers Class B shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. The investment objective of each
Portfolio described in this Prospectus is as follows:
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and telephone number noted on the
cover page of this Prospectus. The objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in the equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of under $500 million.
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and debt
securities issued or guaranteed by Latin American governments or
governmental entities.
7
<PAGE>
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
-The U.S. REAL ESTATE 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 VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
BALANCED:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
8
<PAGE>
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at September 30, 1995 had approximately $55.2 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. Shares in a Portfolio account opened prior to January 2, 1996
(each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996.
For a Portfolio account opened on or after January 2, 1996 (a "New Account"),
the minimum initial investment is $500,000 for Class A shares and $100,000 for
Class B shares. Certain exceptions to the foregoing minimums apply to (1) shares
in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the
Adviser and its affiliates; and (3) certain advisory or asset allocation
accounts, such as Total Funds Management accounts, managed by Morgan Stanley or
its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves
the right in its sole discretion to determine which of such advisory or asset
allocation accounts shall be Managed Accounts. For information regarding Managed
Accounts please contact your Morgan Stanley account representative or the Fund
at the telephone number provided on the cover of this Prospectus. Shares in a
Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a
"Grandfathered Class B Account") convert to Class B shares on March 1, 1996. See
"Purchase of Shares -- Minimum Investment and Account Sizes; Conversion from
Class A to Class B Shares."
The minimum subsequent investment for each Portfolio account is $1,000
(except for automatic reinvestment of dividends and capital gains distributions
for which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
HOW TO REDEEM
Class A shares or Class B shares of each Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions may cause
involuntary redemption or conversion. Class A or Class B shares held in New
Accounts are subject to involuntary redemption if shareholder redemption(s) of
such shares reduces the value of such account to less than $100,000 for a
continuous 60-day period. Involuntary redemption does not apply to Managed
Accounts, Grandfathered Class A Accounts and Grandfathered Class B Accounts,
regardless of the value of such accounts. Class A shares in a New Account will
convert to Class B shares if shareholder redemption(s) of such shares reduces
the value of such account to less than $500,000 for a continuous 60-day period.
Class B shares in a New Account will convert to Class A shares if shareholder
purchases of additional Class B shares or market activity cause the value of the
9
<PAGE>
Class B shares in the New Account to increase to $500,000 or more. See "Purchase
of Shares -- Minimum Account Sizes and Involuntary Redemption of Shares" and
"Redemption of Shares."
RISK FACTORS
Investing in emerging country securities involves certain considerations not
typically associated with investing in securities of U.S. companies, including
(1) restrictions on foreign investment and on repatriation of capital invested
in emerging countries, (2) currency fluctuations, (3) the cost of converting
foreign currency into U.S. dollars, (4) potential price volatility and lesser
liquidity of shares traded on emerging country securities markets or lack of a
secondary trading market for such securities and (5) political and economic
risks, including the risk of nationalization or expropriation of assets and the
risk of war. In addition, accounting, auditing, financial and other reporting
standards in emerging countries are not equivalent to U.S. standards and
therefore, disclosure of certain material information may not be made and less
information may be available to investors investing in emerging countries than
in the U.S. There is also generally less governmental regulation of the
securities industry in emerging countries than in the United States. Moreover,
it may be more difficult to obtain a judgment in a court outside the U.S. See
"Investment Objectives and Policies" and "Additional Investment Information." In
addition, each Portfolio may invest in repurchase agreements, lend its portfolio
securities and purchase securities on a when-issued basis. Each Portfolio may
invest in foreign currency futures contracts and options to hedge currency risk
associated with investment in non-U.S. dollar denominated securities. Each of
these investment strategies involves specific risks which are described under
"Investment Objectives and Policies" and "Additional Investment Information"
herein and under "Investment Objectives and Policies" in the Statement of
Additional Information.
10
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies the Fund employs in its efforts to achieve these objectives. There
is no assurance that each Portfolio will attain its objective. Each Portfolio's
investment objective is a fundamental policy which may not be changed without
the approval of a majority of the Portfolio's outstanding voting securities. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval.
THE EMERGING MARKETS PORTFOLIO
The investment objective of the Portfolio is to provide long-term capital
appreciation by investing primarily in equity securities of emerging country
issuers. With respect to the Portfolio, equity securities include common and
preferred stocks, convertible securities, rights and warrants to purchase common
stocks. Under normal conditions, at least 65% of the Portfolio's total assets
will be invested in emerging country equity securities. As used in this
Prospectus, the term "emerging country" applies to any country which, in the
opinion of the Adviser, is generally considered to be an emerging or developing
country by the international financial community, which includes the
International Bank for Reconstruction and Development (more commonly known as
the World Bank) and the International Finance Corporation. There are currently
over 130 countries which, in the opinion of the Adviser, are generally
considered to be emerging or developing countries by the international financial
community, approximately 40 of which currently have stock markets. These
countries generally include every nation in the world except the United States,
Canada, Japan, Australia, New Zealand and most nations located in Western
Europe. Currently, investing in many emerging countries is not feasible or may
involve unacceptable political risks. The Portfolio will focus its investments
on those emerging market countries in which it believes the economies are
developing strongly and in which the markets are becoming more sophisticated.
The Portfolio intends to invest primarily in some or all of the following
countries:
<TABLE>
<S> <C> <C> <C>
Argentina Botswana Brazil Chile
China Colombia Greece Hong Kong
Hungary India Indonesia Jamaica
Jordan Kenya Malaysia Mexico
Nigeria Pakistan Peru Philippines
Poland Portugal Russia South Africa
South Korea Sri Lanka Taiwan Thailand
Turkey Venezuela Zimbabwe
</TABLE>
As markets in other countries develop, the Portfolio expects to expand and
further diversify the emerging countries in which it invests. The Portfolio does
not intend to invest in any security in a country where the currency is not
freely convertible to U.S. dollars, unless the Portfolio has obtained the
necessary governmental licensing to convert such currency or other appropriately
licensed or sanctioned contractual guarantees to protect such investment against
loss of that currency's external value, or the Portfolio has a reasonable
expectation at the time the investment is made that such governmental licensing
or other appropriately licensed or sanctioned guarantees would be obtained or
that the currency in which the security is quoted would be freely convertible at
the time of any proposed sale of the security by the Portfolio.
An emerging country security is one issued by a company that, in the opinion
of the Adviser, has one or more of the following characteristics: (i) its
principal securities trading market is in an emerging country,
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(ii) alone, or on a consolidated basis, the company derives 50% or more of its
annual revenue from either goods produced, sales made or services performed in
emerging countries; or (iii) the company is organized under the laws of, and has
a principal office in, an emerging country. The Adviser will base determinations
as to eligibility on publicly available information and inquiries made to the
companies. (See "Foreign Investment Risk Factors" for a discussion of the nature
of information publicly available for non-U.S. companies.)
To the extent that the Portfolio's assets are not invested in emerging
country equity securities, the remainder of the assets may be invested in (i)
debt securities denominated in the currency of an emerging country or issued or
guaranteed by an emerging country company or the government of an emerging
country, (ii) equity or debt securities of corporate or governmental issuers
located in industrialized countries, and (iii) short-term and medium-term debt
securities of the type described below under "Temporary Instruments." The
Portfolio's assets may be invested in debt securities when the Portfolio
believes that, based upon factors such as relative interest rate levels and
foreign exchange rates, such debt securities offer opportunities for long-term
capital appreciation. It is likely that many of the debt securities in which the
Portfolio will invest will be unrated, and whether or not rated, such securities
may have speculative characteristics. When deemed appropriate by the Adviser,
the Portfolio may invest up to 10% of its total assets (measured at the time of
the investment) in lower quality debt securities. Lower quality debt securities,
also known as "junk bonds," are often considered to be speculative and involve
greater risk of default or price changes due to changes in the issuer's
creditworthiness. The market prices of these securities may fluctuate more than
those of higher quality securities and may decline significantly in periods of
general economic difficulty, which may follow periods of rising interest rates.
Securities in the lowest quality category may present the risk of default, or
may be in default. For temporary defensive purposes, the Portfolio may invest
less than 65% of its total assets in emerging country equity securities, in
which case the Portfolio may invest in other equity securities or may invest in
debt securities of the kind described under "Temporary Investments" below.
The Portfolio may invest indirectly in securities of emerging country
issuers through sponsored or unsponsored American Depositary Receipts ("ADRs").
ADRs may not necessarily be denominated in the same currency as the underlying
securities into which they may be converted. In addition, the issuers of the
stock of unsponsored ADRs are not obligated to disclose material information in
the U.S. and, therefore, there may not be a correlation between such information
and the market value of the ADR.
THE EMERGING MARKETS DEBT PORTFOLIO
The investment objective of the Portfolio is to seek high total return. In
seeking to achieve this objective, the Portfolio will seek to invest at least
65% of its total assets in debt securities of government and government-related
issuers located in emerging countries (including participations in loans between
governments and financial institutions), and of entities organized to
restructure outstanding debt of such issuers. In addition, the Portfolio may
invest up to 35% of its total assets in debt securities of corporate issuers
located in or organized under the laws of emerging countries. See "The Emerging
Markets Portfolio" above for a definition of emerging countries.
The Adviser intends to invest the Portfolio's assets in emerging country
debt securities that provide a high level of current income, while at the same
time holding the potential for capital appreciation if the perceived
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creditworthiness of the issuer improves due to improving economic, financial,
political, social or other conditions in the country in which the issuer is
located. Currently, investing in many emerging country securities is not
feasible or may involve unacceptable political risks. Initially, the Portfolio
expects that its investments in emerging country debt securities will be made
primarily in some or all of the following emerging countries:
<TABLE>
<S> <C> <C>
Algeria India Philippines
Argentina Indonesia Poland
Brazil Ivory Coast Portugal
Bulgaria Jamaica Russia
Chile Jordan Slovakia
China Malaysia South Africa
Colombia Mexico Thailand
Costa Rica Morocco Trinidad & Tobago
Czech Republic Nicaragua Tunisia
Dominican Republic Nigeria Turkey
Ecuador Pakistan Uruguay
Egypt Panama Venezuela
Greece Paraguay Zaire
Hungary Peru
</TABLE>
In selecting emerging country debt securities for investment by the Investment
Fund, the Adviser will apply a market risk analysis contemplating assessment of
factors such as liquidity, volatility, tax implications, interest rate
sensitivity, counterparty risks and technical market considerations. Currently,
investing in many emerging country securities is not feasible or may involve
unacceptable political risks. As opportunities to invest in debt securities in
other countries develop, the Portfolio expects to expand and further diversify
the emerging countries in which it invests. While the Portfolio generally is not
restricted in the portion of its assets which may be invested in a single
country or region, it is anticipated that, under normal conditions, the
Portfolio's assets will be invested in issuers in at least three countries.
The Portfolio's investments in government, government-related and
restructured debt securities will consist of (i) debt securities or obligations
issued or guaranteed by governments, governmental agencies or instrumentalities
and political subdivisions located in emerging countries (including
participations in loans between governments and financial institutions), (ii)
debt securities or obligations issued by government owned, controlled or
sponsored entities located in emerging countries, and (iii) interests in issuers
organized and operated for the purpose of restructuring the investment
characteristics of instruments issued by any of the entities described above.
Such type of restructuring involves the deposit with or purchase by an entity of
specific instruments and the issuance by that entity of one or more classes of
securities backed by, or representing interests in, the underlying instruments.
Certain issuers of such structured securities may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940 (the "1940 Act"). As
a result, the Portfolio's investment in such securities may be limited by
certain investment restrictions contained in the 1940 Act. See "Additional
Investment Information -- Structured Securities."
The Portfolio's investments in debt securities of corporate issuers in
emerging countries may include debt securities or obligations issued (i) by
banks located in emerging countries or by branches of emerging country banks
located outside the country or (ii) by companies organized under the laws of an
emerging country.
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Determinations as to eligibility will be made by the Adviser based on publicly
available information and inquiries made to the issuer. (See "Foreign Investment
Risk Factors" for a discussion of the nature of information publicly available
for non-U.S. issuers.) The Portfolio may also invest in certain debt obligations
customarily referred to as "Brady Bonds," which are created through the exchange
of existing commercial bank loans to foreign entities for new obligations in
connection with debt restructurings under a plan introduced by former U.S.
Secretary of the Treasury Nicholas F. Brady. See "Investment Objectives and
Policies -- Emerging Country Equity and Debt Securities" in the Statement of
Additional Information for further information about Brady Bonds.
Emerging country debt securities held by the Portfolio will take the form of
bonds, notes, bills, debentures, convertible securities, warrants, bank debt
obligations, short-term paper, mortgage and other asset-backed securities, loan
participations, loan assignments and interests issued by entities organized and
operated for the purpose of restructuring the investment characteristics of
instruments issued by emerging country issuers. U.S. dollar-denominated emerging
country debt securities held by the Portfolio will generally be listed but not
traded on a securities exchange, and non-U.S. dollar-denominated securities held
by the Portfolio may or may not be listed or traded on a securities exchange.
Investments in emerging country debt securities entail special investment risks.
See "Additional Investment Information -- Foreign Investment Risk Factors." The
Portfolio will be subject to no restrictions on the maturities of the emerging
country debt securities it holds; those maturities may range from overnight to
30 years.
The Portfolio is not restricted in the portion of its assets which may be
invested in securities denominated in a particular currency and a substantial
portion of the Portfolio's assets may be invested in non-U.S. dollar-denominated
securities. The portion of the Portfolio's assets invested in securities
denominated in currencies other than the U.S. dollar will vary depending on
market conditions. Although the Portfolio is permitted to engage in a wide
variety of investment practices designed to hedge against currency exchange rate
risks with respect to its holdings of non-U.S. dollar-denominated debt
securities, the Portfolio may be limited in its ability to hedge against these
risks. See "Additional Investment Information -- Forward Foreign Currency
Exchange Contracts" and "Foreign Currency Futures Contracts and Options" in the
Statement of Additional Information.
In selecting particular emerging country debt securities for investment by
the Portfolio, the Adviser will apply a market risk analysis contemplating
assessment of factors such as liquidity, volatility, tax implications, interest
rate sensitivity, counterparty risks and technical market considerations.
Emerging country debt securities in which the Portfolio may invest will be
subject to high risk and will not be required to meet a minimum rating standard
and may not be rated for creditworthiness by any internationally recognized
credit rating organization. The Portfolio's investments are expected to be rated
in the lower and lowest rating categories of internationally recognized credit
rating organizations or are expected to be unrated securities of comparable
quality. These types of debt obligations are predominantly speculative with
respect to the capacity to pay interest and repay principal in accordance with
their terms and generally involve a greater risk of default and of volatility in
price than securities in higher rating categories. Ratings of a non-U.S. debt
instrument, to the extent that those ratings are undertaken, are related to
evaluations of the country in which the issuer of the instrument is located.
Ratings generally take into account the currency in which a non-U.S. debt
instrument is denominated. Instruments issued by a foreign government in other
than the local currency, for example, typically have a lower rating than local
currency instruments due to the existence of an additional risk that the
government will be unable to obtain the required foreign currency to service its
foreign currency-denominated debt. In general, the
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<PAGE>
ratings of debt securities or obligations issued by a non-U.S. public or private
entity will not be higher than the rating of the currency or the foreign
currency debt of the central government of the country in which the issuer is
located, regardless of the intrinsic creditworthiness of the issuer.
The Portfolio is authorized to borrow up to 33 1/3% of its total assets
(including the amount borrowed), less all liabilities and indebtedness other
than the borrowing, for investment purposes to increase the opportunity for
greater return and for payment of dividends. Such borrowings would constitute
leverage, which is a speculative characteristic. Leveraging will magnify
declines as well as increases in the net asset value of the Portfolio's shares
and increases in the yield on the Portfolio's investments. See "Additional
Investment Information -- Borrowing and Other Forms of Leverage."
The Portfolio may also invest in zero coupon, pay-in-kind or deferred
payment securities and in securities that may be collateralized by zero coupon
securities (such as Brady Bonds). Zero coupon securities are securities that are
sold at a discount to par value and on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled to
receive the par value of the security. While interest payments are not made on
such securities, holders of such securities are deemed to have received annually
"phantom income." Because the Portfolio will distribute its "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares, the Portfolio will
have fewer assets with which to purchase income producing securities. The
Portfolio accrues income with respect to these securities prior to the receipt
of cash payments. Pay-in-kind securities are securities that have interest
payable by delivery of additional securities. Upon maturity, the holder is
entitled to receive the aggregate par value of the securities. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. Zero coupon, pay-in-kind and
deferred payment securities may be subject to greater fluctuation in value and
lesser liquidity in the event of adverse market conditions than comparably rated
securities paying cash interest at regular interest payment periods.
The Portfolio may also invest up to 5% of its total assets in
mortgage-backed securities and in other asset-backed securities issued by
non-governmental entities, such as banks and other financial institutions.
Mortgage-backed securities include mortgage pass-through securities and
collateralized mortgage obligations. Asset-backed securities are collateralized
by such assets as automobile or credit card receivables and are securitized
either in a pass-through structure or in a pay-through structure similar to a
CMO.
The Portfolio's investments in government, government-related and
restructured debt instruments are subject to special risks, including the
inability or unwillingness to repay principal and interest, requests to
reschedule or restructure outstanding debt and requests to extend additional
loan amounts. The Portfolio may have limited recourse in the event of default on
such debt instruments. The Portfolio may invest in loans, assignments of loans
and participations in loans. See "Additional Investment Information."
ADDITIONAL INVESTMENT INFORMATION
AMERICAN DEPOSITARY RECEIPTS. The Portfolios may on occasion invest in
American Depositary Receipts ("ADRs"). ADRs are securities, typically issued by
a U.S. financial institution (a "depositary"), that evidence ownership interests
in a security or a pool of securities issued by a foreign issuer (the
"underlying issuer") and deposited with the depositary. ADRs include American
Depositary Shares and New York Shares and may be
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<PAGE>
"sponsored" or "unsponsored." Sponsored ADRs are established jointly by a
depositary and the underlying issuer, whereas unsponsored ADRs may be
established by a depositary without participation by the underlying issuer.
Holders of an unsponsored ADR generally bear all the costs associated with
establishing the unsponsored ADR. The depositary of an unsponsored ADR is under
no obligation to distribute shareholder communications received from the
underlying issuer or to pass through to the holders of the unsponsored ADR
voting rights with respect to the deposited securities or pool of securities.
The Portfolios may invest in sponsored and unsponsored ADRs.
BORROWING AND OTHER FORMS OF LEVERAGE. The Emerging Markets Debt Portfolio
is authorized to borrow money from banks and other entities in an amount equal
to up to 33 1/3% of the Portfolio's total assets (including the amount borrowed)
less all liabilities and indebtedness other than the borrowing, and may use the
proceeds of the borrowing for investment purposes or to pay dividends.
Borrowings create leverage, which is a speculative characteristic. Although the
Portfolio is authorized to borrow, it will do so only when the Adviser believes
that borrowing will benefit the Portfolio after taking into account
considerations such as the costs of the borrowing and the likely investment
returns on the securities purchased with borrowed monies. Borrowing by the
Portfolio will create the opportunity for increased net income but, at the same
time, will involve special risk considerations. Leveraging resulting from
borrowing will magnify declines as well as increases in the Portfolio's net
asset value per share and net yield. The Portfolio expects that all of its
borrowing will be made on a secured basis. The Portfolio's Custodian will either
segregate the assets securing the borrowing for the benefit of the lenders or
arrangements will be made with a suitable sub-custodian. If assets used to
secure the borrowing decrease in value, the Portfolio may be required to pledge
additional collateral to the lender in the form of cash or securities to avoid
liquidation of those assets.
FOREIGN INVESTMENT. Investment in obligations of foreign issuers and in
foreign branches of domestic banks involves somewhat different investment risks
than those affecting obligations of U.S. issuers. There may be limited publicly
available information with respect to foreign issuers, and foreign issuers are
not generally subject to uniform accounting, auditing and financial standards
and requirements comparable to those applicable to U.S. companies. There may
also be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the U.S. Many foreign securities
markets have substantially less volume than U.S. national securities exchanges,
and securities of some foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the U.S. Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid by U.S.
companies. Additional risks include future political and economic developments,
the possibility that a foreign jurisdiction might impose or change withholding
taxes on income payable with respect to foreign securities, and the possible
adoption of foreign governmental restrictions such as exchange controls. Prior
governmental approval for foreign investments may be required under certain
circumstances in some emerging countries, and the extent of foreign investment
in certain debt securities and 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. Repatriation of
investment income, capital and the proceeds of sales by foreign investors may
require governmental registration and/or approval in some emerging countries.
The Portfolios could be adversely affected by delays in, or a refusal to grant,
any required governmental registration or approval for such repatriation. Any
investment subject to such repatriation controls
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will be considered illiquid if it appears reasonably likely that this process
will take more than seven days. The economies of individual emerging countries
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position. Further, the economies of developing countries generally are heavily
dependent upon international trade and, accordingly, have been, and may continue
to be, adversely affected by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade. These economies also have
been, and may continue to be, adversely affected by economic conditions in the
countries with which they trade. With respect to any emerging country, there is
the possibility of nationalization, expropriation or confiscatory taxation,
political changes, government regulation, social instability or diplomatic
developments (including war) which could affect adversely the economies of such
countries or the value of each Portfolio's investments in those countries. In
addition, it may be difficult to obtain and enforce a judgment in a court
outside of the U.S. Investments in securities of foreign issuers are frequently
denominated in foreign currencies, and because each Portfolio may temporarily
hold uninvested reserves in bank deposits in foreign currencies, the value of
each Portfolio's assets, as measured in U.S. dollars, may be affected favorably
or unfavorably by changes in currency rates and in exchange control regulations
and the Portfolios may incur costs in connection with conversions between
various currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Portfolios may enter into
forward foreign currency exchange contracts that provide for the purchase or
sale of an amount of a specified foreign currency at a future date. Purposes for
which such contracts may be used include protecting against a decline in a
foreign currency against the U.S. dollar between the trade date and settlement
date when the Portfolio purchases or sells securities, locking in the U.S.
dollar value of dividends declared on securities held by a Portfolio and
generally protecting the U.S. dollar value of securities held by the Portfolio
against exchange rate fluctuation. Such contracts may also be used as a
protective measure against the effects of fluctuating rates of currency exchange
and exchange control regulations. While such forward contracts may limit losses
to the Portfolio as a result of exchange rate fluctuation, they will also limit
any gains that may otherwise have been realized. See "Investment Objectives and
Policies -- Forward Foreign Currency Exchange Contracts" in the Statement of
Additional Information. As another means of reducing the risks associated with
investing in securities denominated in foreign currencies, the Portfolios may
enter into contracts for the future acquisition or delivery of foreign
currencies and may purchase foreign currency options. These investment
techniques are designed primarily to hedge against anticipated future changes in
currency prices, that otherwise might adversely affect the value of the
Portfolio's portfolio securities. A Portfolio will incur brokerage fees when it
purchases or sells futures contracts or options, and it will be required to
maintain margin deposits. As set forth below, futures contracts and options
entail risks, but the Adviser believes that use of such contracts and options
may benefit the Portfolio by diminishing currency risks. A Portfolio will not
enter into any futures contract or option if immediately thereafter the value of
all the foreign currencies underlying its futures contracts and foreign currency
options would exceed 10% of the value of its total assets. In addition, a
Portfolio may enter into a futures contract only if immediately thereafter not
more than 5% of its total assets are required as deposit to secure obligations
under such contracts. The primary risks associated with the use of futures and
options are (i) failure to predict accurately the direction of currency
movements and (ii) market risks (e.g., lack of liquidity or lack of correlation
between the change in value of underlying currencies and that of the value of
the Portfolio's futures or options contracts). The risk that a Portfolio will be
unable to close out a futures position or options contract will be
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minimized by the Portfolio only entering into futures contracts or options
transactions for which there appears to be a liquid secondary market. For more
detailed information about futures transactions, see "Investment Objectives and
Policies" in the Statement of Additional Information. The Emerging Markets Debt
Portfolio may attempt to accomplish objectives similar to those described above
with respect to forward and futures contracts for currency by means of
purchasing put or call options on foreign currencies on exchanges. A put option
gives the Portfolio the right to sell a currency at the exercise price until the
expiration of the option. A call option gives the Portfolio the right to
purchase a currency at the exercise price until the expiration of the option.
The Portfolio's Custodian will place cash, U.S. government securities or
high-grade debt securities into a segregated account of a Portfolio in an amount
equal to the value of such Portfolio's total assets committed to the
consummation of forward foreign currency exchange contracts. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will be at least equal to the amount of such Portfolio's commitments
with respect to such contracts. See "Investment Objectives and Policies --
Forward Currency Exchange Contracts" in the Statement of Additional Information.
INVESTMENT FUNDS. Some emerging countries have laws and regulations that
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of companies
listed and traded on the stock exchanges in these countries is permitted by
certain emerging countries through investment funds which have been specifically
authorized. The Portfolios may invest in these investment funds subject to the
provisions of the 1940 Act, and other applicable laws as discussed below under
"Investment Restrictions." If a Portfolio invests in such investment funds, the
Portfolio's shareholders will bear not only their proportionate share of the
expenses of the Portfolio (including operating expenses and the fees of the
Adviser), but also will indirectly bear similar expenses of the underlying
investment funds. Certain of the investment funds referred to in the preceding
paragraph are advised by the Adviser. These Portfolios may, to the extent
permitted under the 1940 Act and other applicable law, invest in these
investment funds. If a Portfolio does elect to make an investment in such an
investment fund, it will only purchase the securities of such investment fund in
the secondary market.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Emerging Markets and Emerging
Markets Debt Portfolios may invest in fixed rate and floating rate loans
("Loans") arranged through private negotiations between an issuer of sovereign
debt obligations and one or more financial institutions ("Lenders"). The
Portfolio's investments in Loans are expected in most instances to be in the
form of participation in Loans ("Participations") and assignments of all or a
portion of Loans ("Assignments") from third parties. The Portfolio will have 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. In the event of the insolvency of
the Lender selling a Participation, the Portfolio may be treated as a general
creditor of the Lender and may not benefit from any set-off between the Lender
and the borrower. Certain Participations may be structured in a manner designed
to avoid purchasers of Participations being subject to the credit risk of the
Lender with respect to the Participation. Even under such a structure, in the
event of the Lender's insolvency, the Lender's servicing of the Participation
may be delayed and the assignability of the Participation may be impaired. The
Portfolio will acquire Participations only if the Lender interpositioned between
the Portfolio and the borrower is determined by the Adviser to be creditworthy.
When the Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, the rights and
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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.
Because there is no liquid market for such securities, the Portfolio anticipates
that such securities could be sold only to a limited number of institutional
investors. The lack of a liquid secondary market may have an adverse impact on
the value of such securities and the Portfolio's ability to dispose of
particular Assignments or Participations when necessary to meet the Portfolio's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the borrower. The lack of a liquid
secondary market for Assignments and Participations also may make it more
difficult for the Portfolio to assign a value to these securities for purposes
of valuing the Portfolio's portfolio and calculating its net asset value.
LOANS OF PORTFOLIO SECURITIES. The Portfolios may lend securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing their net investment income. These loans must be
secured continuously by cash or equivalent collateral, or by a letter of credit
at least equal to the market value of the securities loaned plus accrued
interest or income. There may be a risk of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. Each Portfolio will not enter into securities loan
transactions exceeding in the aggregate, 33 1/3% of the market value of its
total assets. For more detailed information about securities lending see
"Investment Objectives and Policies" in the Statement of Additional Information.
MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money
market instruments, although each Portfolios intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
The Portfolios may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. The money market
investments permitted for the Portfolios include: obligations of the United
States government and its agencies and instrumentalities; obligations of foreign
sovereignties; other debt securities; commercial paper including bank
obligations; certificates of deposit (including Eurodollar certificates of
deposit); and repurchase agreements. For more detailed information about these
money market investments, see "Description of Securities and Ratings" in the
Statement of Additional Information.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolios may invest in securities that are neither listed on
a stock exchange nor traded over-the-counter, including privately placed
securities. Investing in such unlisted emerging country equity securities,
including investments in new and early stage companies, may involve a high
degree of business and financial risk that can result in substantial losses. As
a result of the absence of a public trading market for these securities, they
may be less liquid than publicly traded securities. Although these securities
may be resold in privately negotiated transactions, the prices realized from
these sales could be less than those originally paid by the Portfolio, or less
than what may be considered the fair value of such securities. Further,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which might be applicable
if their securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration. As a
general matter, each Portfolio may not invest more than 15% of its net assets in
illiquid securities, including securities for which there is no readily
available secondary market nor more than 10% of its total assets in securities
that are restricted from sale to the public without registration ("Restricted
Securities") under the Securities Act of 1933 (the "1933 Act"). Nevertheless,
subject to the foregoing limit on illiquid securities, the
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Portfolio may invest up to 25% of its total assets in Restricted Securities that
can be offered and sold to qualified institutional buyers under Rule 144A under
that Act ("144A Securities"). The Board of Directors has adopted guidelines and
delegated to the Adviser, subject to the supervision of the Board of Directors,
the daily function of determining and monitoring the liquidity of 144A
Securities. Rule 144A securities may become illiquid if qualified institutional
buyers are not interested in acquiring the securities.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The aggregate of certain repurchase
agreements and certain other investments is limited as set forth under
"Investment Limitations."
REVERSE REPURCHASE AGREEMENTS. The Emerging Markets Debt Portfolio may
enter into reverse repurchase agreements with brokers, dealers, domestic and
foreign banks or other financial institutions. In a reverse repurchase
agreement, the Portfolio sells a security and agrees to repurchase it at a
mutually agreed upon date and price, reflecting the interest rate effective for
the term of the agreement. It may also be viewed as the borrowing of money by
the Portfolio. The Portfolio's investment of the proceeds of a reverse
repurchase agreement is the speculative factor known as leverage. The Portfolio
may enter into a reverse repurchase agreement only if the interest income from
investment of the proceeds is greater than the interest expense of the
transaction and the proceeds are invested for a period no longer than the term
of the agreement. The Portfolio will maintain with the Custodian a separate
account with a segregated portfolio of cash, U.S. Government securities or other
liquid high grade debt obligations in an amount at least equal to its purchase
obligations under these agreements. If interest rates rise during a reverse
repurchase agreement, it may adversely affect the Portfolio's ability to
maintain a stable net asset value. The aggregate of these agreements is limited
as set forth under "Investment Limitations." Reverse repurchase agreements are
considered to be borrowings and are subject to the percentage limitations on
borrowings set forth in "Investment Limitations."
SHORT SALES. The Emerging Markets Debt Portfolio may from time to time sell
securities short without limitation, although initially the Portfolio does not
intend to sell securities short. A short sale is a transaction in which the
Investment Fund would sell securities it does not own (but has borrowed) in
anticipation of a decline in the market price of the securities. When the
Portfolio makes a short sale, the proceeds it receives from the sale will be
held on behalf of a broker until the Portfolio replaces the borrowed securities.
To deliver the securities to the buyer, the Portfolio will need to arrange
through a broker to borrow the securities and, in so doing, the Investment Fund
will become obligated to replace the securities borrowed at their market price
at the time of replacement, whatever that price may be. The Portfolio may have
to pay a premium to borrow the securities and must 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 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,
20
<PAGE>
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 Investment Fund 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 can equal only the total amount
invested.
STOCK OPTION AND INDEX FUTURES CONTRACTS. Each Portfolio may seek to
increase its return or may hedge all or a portion of its portfolio investments
through stock options and stock index futures contracts with respect to
securities in which the Portfolio may invest. There currently are limited
options and stock index futures markets in emerging countries and the nature of
the strategies adopted by the Adviser and the extent to which those strategies
are used will depend on the development of stock option and stock index futures
contracts by emerging country stock exchanges. Each Portfolio will only engage
in transactions in stock options and stock index futures contracts which are
traded on a recognized securities or futures exchange. The Emerging Markets Debt
Portfolio may write (i.e., sell) covered call options on securities and loan
participations and assignments held in its portfolio, which options give the
purchaser the right to buy the underlying security, loan participation or
assignment covered by the option from the Portfolio at the stated exercise
price. A "covered" call option means that so long as the Portfolio is obligated
as the writer of the option, it will own (i) the underlying security, loan
participation or assignment subject to the option, or (ii) securities
convertible or exchangeable without the payment of any consideration into the
security, loan participation or assignment subject to the option. As a matter of
operating policy, the aggregate value of the underlying securities, loan
participations and assignments on which options will be written at any one time
will not exceed 5% of the total assets of the Portfolio. In addition, as a
matter of operating policy, the Portfolio may purchase put and call options on
securities, loan participations or assignments. The Portfolio will receive a
premium from writing call options, which increases the Portfolio's return on the
underlying security, loan participation or assignment in the event the option
expires unexercised or is closed out at a profit. By writing a call, the
Portfolio will limit its opportunity to profit from an increase in the market
value of the underlying security, loan participation or assignment above the
exercise price of the option for as long as the Portfolio's obligation as writer
of the option continues. Thus, in some periods the Portfolio will receive less
total return and in other periods greater total return from writing covered call
options than it would have received from its underlying securities, loan
participations and assignments had it not written call options. The Portfolio
pays a premium to purchase an option and the risk assumed by the Portfolio when
it purchases an option is the loss of this premium. Because the price of an
option tends to move with that of its underlying security, if the Portfolio is
to make a profit, the price of the underlying security, loan participation or
assignment must change and the change must be sufficient to cover the premiums
and commissions paid. A price change in the security, loan participation or
assignment underlying the option does not assure a profit because prices in the
options markets may not always reflect such change. The Emerging Markets Debt
Portfolio may purchase and sell indexed financial futures contracts. An indexed
futures contract is an agreement to take or make delivery of an amount of cash
equal to the difference between the value of the index at the beginning and at
the end of the contract period. Successful use of indexed futures will be
subject to the Adviser's ability to predict correctly movements in the direction
of the relevant debt market. No assurance can be given that the Adviser's
judgment in this respect will be correct. The Portfolio may sell indexed
financial futures
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<PAGE>
contracts in anticipation of or during a market decline to attempt to offset the
decrease in market value of securities in its portfolio that might otherwise
result. When the Portfolio is not fully invested in emerging country debt
securities and anticipates a significant market advance, it may purchase indexed
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of securities that it intends to purchase. In a
substantial majority of these transactions, the Portfolio will purchase such
securities upon termination of the futures position but, under unusual market
conditions, a futures position may be terminated without the corresponding
purchase of debt securities.
STRUCTURED SECURITIES. The Emerging Markets Debt Portfolio may invest a
portion of its assets in entities organized and operated solely for the purpose
of restructuring the investment characteristics of sovereign debt obligations.
This type of restructuring involves the deposit with, or purchase by, an entity,
such as a corporation or trust, of specified instruments (such as commercial
bank loans or Brady Bonds) and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured Securities to
create securities with different investment characteristics, such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to Structured Securities is dependent on the
extent of the cash flow on the underlying instruments. Because Structured
Securities of the type in which the Portfolio anticipates it will invest
typically involve no credit enhancement, their credit risk generally will be
equivalent to that of the underlying instruments. The Portfolio is permitted to
invest in a class of Structured Securities that is either subordinated or
unsubordinated to the right of payment of another class. Subordinated Structured
Securities typically have higher yields and present greater risks than
unsubordinated Structured Securities. Structured Securities are typically sold
in private placement transactions, and there currently is no active trading
market for Structured Securities.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, the Emerging
Markets Portfolio may reduce its holdings in equity and other securities, and
the Emerging Markets Debt Portfolio may reduce its holdings in emerging country
debt securities, for temporary defensive purposes, and the Portfolios may invest
in certain short-term (less than twelve months to maturity) and medium-term (not
greater than five years to maturity) debt securities or may hold cash. The
short-term and medium-term debt securities in which the Portfolio may invest
consist of (a) obligations of the U.S. or emerging country governments, their
respective agencies or instrumentalities; (b) bank deposits and bank obligations
(including certificates of deposit, time deposits and bankers' acceptances) of
U.S. or emerging country banks denominated in any currency; (c) floating rate
securities and other instruments denominated in any currency issued by
international development agencies; (d) finance company and corporate commercial
paper and other short-term corporate debt obligations of United States and
emerging country corporations meeting the Portfolio's credit quality standards;
and (e) repurchase agreements with banks and broker-dealers with respect to such
securities. For temporary defensive purposes, the Portfolios intend to invest
only in short-term and medium-term debt securities that the Adviser believes to
be of high quality, i.e., subject to relatively low risk of loss of interest or
principal (there is currently no rating system for debt securities in most
emerging countries).
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of
22
<PAGE>
the transaction. Each Portfolio will maintain with the Custodian a separate
account with a segregated portfolio of high grade debt securities or equity
securities or cash in an amount at least equal to these commitments. The payment
obligation and the interest rates that will be received are each fixed at the
time the Portfolio enters into the commitment and no interest accrues to the
Portfolio until settlement. Thus, it is possible that the market value at the
time of settlement could be higher or lower than the purchase price if, among
other factors, the general level of interest rates has changed. It is a current
policy of each Portfolio not to enter into when-issued commitments or delayed
delivery securities exceeding, in the aggregate, 15% of the market value of the
Portfolio's total assets less liabilities, other than the obligations created by
these commitments.
INVESTMENT LIMITATIONS
Each Portfolio is a non-diversified portfolio under the 1940 Act, which
means that the Portfolio is not limited by the 1940 Act in the proportion of its
assets that may be invested in the obligations of a single issuer. Thus, each
Portfolio may invest a greater proportion of its assets in the securities of a
smaller number of issuers and, as a result, will be subject to greater risk with
respect to its portfolio securities. However, each Portfolio intends to comply
with the diversification requirements imposed by the Internal Revenue Code of
1986, as amended, for qualification as a regulated investment company. See
"Taxes" below and "Investment Limitations" in the Statement of Additional
Information.
Each Portfolio operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, each
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. Each Portfolio
may not (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 15% of the market value of the Portfolio's
total assets would be invested in such repurchase agreements and other
investments for which market quotations are not readily available or which are
otherwise illiquid; (ii) borrow money, except from banks for extraordinary or
emergency purposes, and then only in amounts up to 10% of the value of the
Portfolio's total assets taken at cost at the time of borrowing; or purchase
securities while borrowings exceed 5% of its total assets, except the Emerging
Markets Debt Portfolio is not subject to such limits on borrowing and may borrow
from banks and other entities in amounts not in excess of 33 1/3% of its total
assets (including the amount borrowed) less liabilities; (iii) mortgage, pledge
or hypothecate any assets except in connection with any such borrowing in
amounts up to 10% of the value of the Portfolio's net assets at the time of
borrowing; (iv) invest in fixed time deposits with a duration of over seven
calendar days; or (v) invest in fixed time deposits with a duration of from two
business days to seven calendar days if more than 10% of the Portfolio's total
assets would be invested in these deposits.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment
Adviser and Administrator of the Fund and each of the Portfolios. The Adviser
provides investment advice and portfolio management services, pursuant to an
Investment Advisory Agreement and, subject to the supervision of the Fund's
Board of Directors, makes each of the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages each of the Portfolio's investments. The Adviser is entitled to receive
from each Portfolio an annual management fee, payable quarterly, equal to the
percentage of average daily net assets
23
<PAGE>
set forth in the table below. However, the Adviser has agreed to a reduction in
the fees payable to it and to reimburse the Portfolio, if necessary, if such
fees would cause the total annual operating expenses of either Portfolio to
exceed the respective percentage of average daily net assets set forth in the
table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL ANNUAL
OPERATING
EXPENSES AFTER FEE WAIVERS
--------------------------
<S> <C> <C> <C>
MANAGEMENT
PORTFOLIO FEE CLASS A CLASS B
- ------------------------------------ --------------- ------------ ------------
Emerging Markets Portfolio 1.25% 1.75% 2.00%
Emerging Markets Debt Portfolio 1.00% 1.40% 1.65%
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
United States and abroad. At September 30, 1995, the Adviser, together with its
affiliated asset management companies, managed investments totaling
approximately $55.2 billion, including approximately $40.1 billion under active
management and $15.1 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. The following individuals have primary responsibility
for the Portfolio indicated below.
EMERGING MARKETS PORTFOLIO -- MADHAV DHAR. Madhav Dhar is a Managing
Director of Morgan Stanley. He joined the Adviser in 1984 to focus on global
asset allocation and investment strategy and now heads the Adviser's emerging
markets group and serves as the group's principal Portfolio Manager. Mr. Dhar
also coordinates the Adviser's developing country funds effort and has been
involved in the launching of the Adviser's country funds. He is a Director of
the Morgan Stanley Emerging Markets Fund, Inc. (a closed-end investment
company). He holds a B.S. (honors) from St. Stephens College, Delhi University
(India), and an M.B.A. from Carnegie-Mellon University. Mr. Dhar has had primary
responsibility for managing the Portfolio's assets since inception.
EMERGING MARKETS DEBT PORTFOLIO -- PAUL GHAFFARI. Paul Ghaffari is a
Principal of Morgan Stanley. He joined the Adviser in June 1993 as a Vice
President and Portfolio Manager for the Morgan Stanley Emerging Markets Debt
Fund (a closed-end investment company). Prior to joining the Adviser, Mr.
Ghaffari was a Vice President in the Fixed Income Division of the Emerging
Markets Sales and Trading Department at Morgan Stanley. From 1983 to 1992, he
worked in LDC Sales and Trading Department and the Mortgage-Backed Securities
Department at J.P. Morgan & Co. Inc. and worked in the Treasury Department at
the Morgan Guaranty Trust Co. He holds a B.A. in International Relations from
Pamona College and an M.S. in Foreign Service from Georgetown University. Mr.
Ghaffari has had primary responsibility for managing the Portfolio's assets
since inception.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
the Board of Directors of the Fund and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal and state laws. The Administration Agreement also
provides that the Administrator, through its agents,
24
<PAGE>
will provide the Fund dividend disbursing and transfer agent services. For its
services under the Administration Agreement, the Fund pays the Adviser a monthly
fee which on an annual basis equals 0.15% of the average daily net assets of
each Portfolio.
In a merger completed on September 1, 1995, The Chase Manhattan Bank, N.A.
("Chase") succeeded to all of the rights and obligations under the U.S. Trust
Administration Agreement between the Adviser and United States Trust Company of
New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide
certain administrative services to the Fund. Pursuant to a delegation clause in
the U.S. Trust Administration Agreement, U.S. Trust delegated its administration
responsibilities to Chase Global Funds Services Company ("CGFSC"), formerly
known as Mutual Funds Service Company, which after the merger with Chase is a
subsidiary of Chase and will continue to provide certain administrative services
to the Fund. The Adviser supervises and monitors administrative services
provided by CGFSC. The services provided under the Administration Agreement and
the U.S. Trust Administration Agreement are also subject to the supervision of
the Board of Directors of the Fund. The Board of Directors of the Fund has
approved the provision of services described above pursuant to the
Administration Agreement and the U.S. Trust Administration Agreement as being in
the best interest of the Fund. CGFSC's business address is 73 Tremont Street,
Boston, Massachusetts 02108-3913. For additional information regarding the
Administration Agreement or the U.S. Trust Administration Agreement, see
"Management of the Fund" in the Statement of Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares for each Portfolio pursuant to Rule 12b-1 under the 1940 Act (each a
"Plan"). Under each Plan, the Distributor is entitled to receive from the
Portfolios a distribution fee, which is accrued daily and paid quarterly, of
0.25% of the Class B shares' average daily net assets on an annualized basis.
The Distributor expects to reallocate most of its fee to its investment
representatives. The Distributor may, in its discretion, voluntarily waive from
time to time all or any portion of its distribution fee and each of the
Distributor and the Adviser is free to make additional payments out of its own
assets to promote the sale of Fund shares, including payments that compensate
financial institutions for distribution services or shareholder services.
Each Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
25
<PAGE>
PAYMENTS TO FINANCIAL INSTITUTIONS. The Adviser or its affiliates may
compensate certain financial institutions for the continued investment of their
customers' assets in the Emerging Markets Portfolio pursuant to the advice of
such financial institutions. These payments will be made directly by the Adviser
or its affiliates from their assets, and will not be made from the assets of the
Fund or by the assessment of a sales charge on shares. Such financial
institutions may also perform certain shareholder or recordkeeping services that
would otherwise be performed by MFSC. The Adviser may elect to enter into a
contract to pay the financial institutions for such services.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including organizational costs, legal fees, accountant's fees,
custodial fees, and printing and mailing costs) specified in the Administration
and Distribution Agreements.
PURCHASE OF SHARES
Class A and Class B shares of each Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For an account for either Portfolio opened on or after January 2, 1996 (a
"New Account"), the minimum initial investment and minimum account size are
$500,000 for Class A shares and $100,000 for Class B shares. Managed Accounts
may purchase Class A shares without being subject to any minimum initial
invesment or minimum account size requirements for a Portfolio account. Officers
of the Adviser and its affiliates are subject to the minimums for a Portfolio
account, except they may purchase Class B shares subject to a minimum initial
investment and minimum account size of $5,000 for a Portfolio account.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based solely upon changes in the market that reduce the net asset value of
shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remain Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B Account") convert to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
The Fund reserves the right to modify or terminate the conversion features
of the shares as stated above at any time upon 60-days' notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the
26
<PAGE>
shares in such account are subject to redemption by the Fund and, if redeemed,
the net asset value of such shares will be promptly paid to the shareholder. The
Fund, however, will not redeem shares based solely upon changes in the market
that reduce the net asset value of shares.
For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to New Accounts containing Class B shares held by
officers of the Adviser or its affiliates. However, if the value of such account
held by an officer of the Adviser or its affiliates falls below $5,000 because
of shareholder redemptions(s), the Fund will notify the shareholder, and if the
account value remains $5,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio acccount increases, whether
due to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days' notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form, and mailing it, together with a check ($500,000 minimum
for Class A shares of each Portfolio and $100,000 for Class B shares of each
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio
name]", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The Portfolio(s) to be
purchased should be designated on the Account Registration Form. For purchases
by check, the Fund is ordinarily credited with Federal Funds within one
business day. Thus your purchase of shares by check is ordinarily credited to
your account at the net asset value per share of each of the Portfolios
determined on the next business day after receipt.
27
<PAGE>
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, NY 10081-1000
ABA#021000021
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
Purchase orders for shares of each Portfolio which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed
at the price computed on the date of receipt as long as the Transfer Agent
receives payment by check or in Federal Funds prior to the regular close of
the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested.
Your bank may charge a service fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000, except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund Inc. -- [portfolio name]") at the above address or by wiring monies to the
Custodian Bank as outlined above. It is very important that your account name
and portfolio be specified in the letter or wire to ensure proper crediting to
28
<PAGE>
your account. In order to ensure that your wire orders are invested promptly,
you are requested to notify one of the Fund's representatives (toll free:
1-800-548-7786) prior to the wire date. Additional investments will be applied
to purchase additional shares in the same class held by a shareholder in a
Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of the Portfolios is
the net asset value next determined after the order is received. See "Valuation
of Shares." An order received prior to the regular close of the New York Stock
Exchange ("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed
at the price computed on the date of receipt; an order received after the
regular close of the NYSE will be executed at the price computed on the next day
the NYSE is open as long as the Transfer Agent receives payment by check or in
Federal Funds prior to the regular close of the NYSE on such day.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolios will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is canceled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
purchases in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of each Portfolio and the Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging Class
A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class
A shares of Portfolio B for Class A shares of Portfolio C and again exchanging
Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day
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<PAGE>
period. Two types of transactions are exempt from these excessive trading
restrictions: (1) trades exclusively between money market portfolios; and (2)
trades done in connection with an asset allocation service, such as TFM
Accounts, managed or advised by MSAM and/or any of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase has been collected, which
may take up to eight business days after purchase. The Fund will redeem Class A
shares or Class B shares of each Portfolio at the next determined net asset
value of shares of the applicable class. On days that both the NYSE and the
Custodian Bank are open for business, the net asset value per share of each of
the Portfolios is determined at the regular close of trading of the NYSE
(currently 4:00 p.m. Eastern Time). Shares of the Portfolios may be redeemed by
mail or telephone. No charge is made for redemption. Any redemption proceeds may
be more or less than the purchase price of your shares depending on, among other
factors, the market value of the investment securities held by the Portfolio.
BY MAIL
Each Portfolio will redeem its Class A or Class B shares at the net asset
value determined on the date the request is received, if the request is received
in "good order" before the regular close of the NYSE. Your request should be
addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston,
Massachusetts 02208-2798, except that deliveries by overnight courier should be
addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global Funds
Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by mail or
overnight courier and will be implemented at the net asset value next determined
after it is received. Redemption requests sent to the Fund through express mail
must be sent to Morgan Stanley Institutional Fund, Inc., c/o Mutual Funds
Service Company, 73 Tremont Street, Boston, Massachusetts 02108. The Fund and
the
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<PAGE>
Fund's transfer agent (the "Transfer Agent") will employ reasonable procedures
to confirm that the instructions communicated by telephone are genuine. These
procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to provide
additional telecopied written instructions regarding transaction requests.
Neither the Fund nor the Transfer Agent will be responsible for any loss,
liability, cost or expense for following instructions received by telephone that
either of them reasonably believes to be genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in either Portfolio for shares of any
other available portfolio of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
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<PAGE>
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege is only available with respect to portfolios that are
registered for sale in a shareholder's state of residence. The exchange
privilege may be modified or terminated by the Fund at any time upon 60-days'
notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current portfolio,
the names of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of your current portfolio, the name(s) of the portfolio(s)
and class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the class of
each of the portfolios involved in the exchange of shares at the close of
business. Requests received after 4:00 p.m. (Eastern Time) are processed the
next business day based on the net asset value determined at the close of
business on such day. For additional information regarding responsibility for
the authenticity of telephoned instructions, see "Redemption of Shares -- By
Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of each Portfolio's shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolios is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. 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 not readily available are valued
at a price within a range not exceeding the current asked price nor less than
the current bid price. The current bid and asked prices are determined based on
the bid and asked prices quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such
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securities. The prices provided by a pricing service are determined without
regard to bid or last sale prices, but take into account institutional size
trading in similar groups of securities and any developments related to the
specific securities. Securities not priced in this manner are valued at the most
recently quoted bid price, or when securities exchange valuations are used, at
the latest quoted sale price on the day of valuation. If there is no such
reported sale, the latest quoted bid price will be used. Securities purchased
with remaining maturities of 60 days or less are valued at amortized cost, if it
approximates market value. In the event that amortized cost does not approximate
market value, market prices as determined above will be used.
The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determined prices in accordance with
the above-stated procedures, are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid price and
asked price of such currencies against the U.S. dollar last quoted by any major
bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distributions expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise the total return for each class of
the Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an
investment in a class of the Portfolio would have earned over a specified period
of time (such as one, five or ten years), assuming that all distributions and
dividends by the Portfolio were reinvested in the same class on the reinvestment
dates during the period. Total return does not take into account any federal or
state income taxes that may be payable on dividends and distributions or upon
redemption. The Fund may also include comparative performance information in
advertising or marketing the Portfolio's shares, including data from Lipper
Analytical Services, Inc., other industry publications, business periodicals,
rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will automatically be reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash.
Each Portfolio expects to distribute substantially all of its net investment
income in the form of annual dividends. Net realized gains of each Portfolio, if
any, after reduction for any tax loss carryforwards will also be distributed
annually. Confirmations of the purchase of shares of each Portfolio through the
automatic reinvestment of income dividends and capital gains distributions will
be provided, pursuant to Rule 10b-10(b) under
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The Securities Exchange Act of 1934, as amended, on the next monthly client
statement following such purchase of shares. Consequently, confirmations of such
purchases will not be provided at the time of completion of such purchases as
might otherwise be required by Rule 10b-10.
Undistributed net investment income is included in each Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(I.E., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of each Portfolio will differ at times.
Expenses of each Portfolio allocated to a particular class of shares thereof
will be borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), so that the Portfolio will be relieved of federal income tax on
that part of its net investment income and net capital gain that is distributed
to shareholders.
Each Portfolio distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to shareholders.
Dividends from a Portfolio's net investment income are taxable to shareholders
as ordinary income, whether received in cash or in additional shares. Such
dividends paid by a Portfolio generally will qualify for the 70%
dividends-received deduction for corporate shareholders. Each Portfolio will
report annually to its shareholders the amount of dividend income qualifying for
such treatment.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. Each
Portfolio sends reports annually to shareholders of the federal income tax
status of all distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses), including any available capital loss carryforwards, prior to the end of
each calendar year to avoid liability for federal excise tax.
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Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale or redemption of shares may result in taxable gain or loss to the
redeeming shareholder, depending upon whether the fair market value of the
redemption proceeds exceeds or is less than the Shareholder's adjusted basis in
the redeemed shares. If capital gain distributions have been made with respect
to shares that are sold at a loss after being held for six months or less, then
the loss is treated as a long-term capital loss to the extent of the capital
gain distributions.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
Investment income received by a Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that a Portfolio is liable for foreign income taxes so withheld, each
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although each
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that each Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolios and directs the Adviser to use its best efforts to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolios. The Fund has authorized the Adviser to pay
higher commissions in recognition of brokerage services which, in the opinion of
the Adviser, are necessary for the achievement of better execution, provided the
Adviser believes this to be in the best interest of the Fund.
Since shares of the Portfolios are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Fund's portfolios or who act as agents in the purchase of
shares of the Fund's portfolios for their clients.
In purchasing and selling securities for the Portfolios, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and
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<PAGE>
research services which they provide to the Fund. Some securities considered for
investment by the Portfolios may also be appropriate for other clients served by
the Adviser. If purchase or sale of securities consistent with the investment
policies of the Portfolio and one or more of these other clients served by the
Adviser is considered at or about the same time, transactions in such securities
will be allocated among the Portfolios and such other clients in a manner deemed
fair and reasonable by the Adviser. Although there is no specified formula for
allocating such transactions, the various allocation methods used by the
Adviser, and the results of such allocations, are subject to periodic review by
the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of the Portfolio brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Fund, the commissions, fees or other remuneration received by Morgan Stanley
or such affiliates must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of those Directors who are not
"interested persons," as defined in the Investment Company Act of 1940 (the
"1940 Act") have adopted procedures which are reasonably designed to provide
that any commissions, fees or other remuneration paid to Morgan Stanley or such
affiliates are consistent with the foregoing standard.
Portfolio securities will not be purchased from or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act, of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.
Although neither Portfolio will invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. The Emerging Markets Portfolio anticipates that,
under normal circumstances, its annual portfolio turnover rate will not exceed
50%. The Emerging Markets Debt Portfolio anticipates that, under normal
circumstances, its annual portfolio turnover rate will not exceed 100%. High
portfolio turnover involves correspondingly greater transaction costs which will
be borne directly by the respective Portfolio. In addition, high portfolio
turnover may result in more capital gains which would be taxable to the
shareholders of the respective Portfolio. The tables set forth in "Financial
Highlights" present the Portfolio's historical turnover rates.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by the shareholders, the Board of Directors has the power
to designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with respect to such classes. The shares of
common stock of each portfolio are currently classified into two classes, the
Class A shares and the Class B shares, except for the International Small Cap,
Money Market and Municipal Money Market Portfolios, which only offer Class A
shares.
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The shares of the Portfolios, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Persons or organizations owning 25% or more
of the outstanding shares of a Portfolio may be presumed to "control" (as that
term is defined in the 1940 Act) that Portfolio. Under Maryland law, the Fund is
not required to hold an annual meeting of its shareholders unless required to do
so under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser, or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
As of September 1, 1995, domestic securities and cash are held by Chase,
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
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<TABLE>
<CAPTION>
<S><C>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
EMERGING MARKETS AND EMERGING MARKETS DEBT PORTFOLIOS
P.O. Box 2798, Boston, MA 02208-2798
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ACCOUNT REGISTRATION FORM
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ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, please contact your Morgan Stanley representative or call us
toll free 1-(800)-548-7786. Please print all items except signature, and mail to
the Fund at the address above.
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A) REGISTRATION
1. INDIVIDUAL 1.
------------------------------------------------------------------------------------------------
2. JOINT TENANTS First Name Initial Last Name
(RIGHTS OF SURVIVORSHIP 2.
PRESUMED UNLESS ------------------------------------------------------------------------------------------------
TENANCY IN COMMON First Name Initial Last Name
IS INDICATED)
------------------------------------------------------------------------------------------------
First Name Initial Last Name
3. CORPORATIONS, 3.
TRUSTS AND OTHERS ------------------------------------------------------------------------------------------------
Please call the Fund
for additional documents ------------------------------------------------------------------------------------------------
that may be required to
set up account and to ------------------------------------------------------------------------------------------------
authorize transactions Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/
ASSOCIATION TRANSFER TO
MINOR (ONLY ONE
CUSTODIAN AND
MINOR PERMITTED)
/ / TRUST / / OTHER (Specify)
------------------------ -------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box
-------------------------------------------------------------------------------
Please fill in City State Zip
completely, including -------------------------------------- ---- --------------------------------------
telephone number(s). Home Telephone No. - - Business Telephone No. - -
------------ ------------
/ / United States Citizen / / Resident Alien / / Non-Resident Alien: Indicate Country of Residence
------------------
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C) TAXPAYER PART 1. Enter your Taxpayer IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For You (as a payee) are required by law to provide us
NUMBER most individual taxpayers, (as payer) with your correct Taxpayer Identification
If the account is in more than this is your Social Security Number. Accounts that have a missing or incorrect Taxpayer
one name, CIRCLE THE NAME OF Number. Identification Number will be subject to backup withholding
THE PERSON WHOSE TAXPAYER TAXPAYER IDENTIFICATION at a 31% rate on dividends, distributions and other payments.
IDENTIFICATION NUMBER IS NUMBER If you have not provided us with your correct taxpayer
PROVIDED IN SECTION A) ABOVE. -------------------------- identification number, you may be subject to a $50 penalty
If no name is circled, the imposed by the Internal Revenue Service.
number will be considered to OR Backup withholding is not an additional tax; the tax
be that of the last name SOCIAL SECURITY NUMBER liability of persons subject to backup withholding will be
listed. For Custodian account -------------------------- reduced by the amount of tax withheld. If withholding
of a minor (Uniform Gifts/ results in an overpayment of taxes, a refund may be
Transfers to Minors Acts), PART 2. BACKUP WITHHOLDING obtained.
give the Social Security / / Check this box if you are You may be notified that you are subject to backup
Number of the minor. NOT subject to Backup withholding under Section 3406(a)(1)(C) of the Internal
Withholding under the Revenue Code because you have underreported interest or
provisions of Section dividends or you were required to but failed to file a return
3406(a)(1)(C) of the Internal which would have included a reportable interest or
Revenue Code. dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK
THE BOX IN PART 2 AT LEFT.
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D) PORTFOLIO AND CLASS For Purchase of the following Portfolio(s):
SELECTION (Class A shares
minimum $500,000 and Emerging Markets Portfolio / / Class A Shares $ / / Class B Shares $
Class B shares minimum ------------- ------------
$100,000). Please Emerging Markets Debt Portfolio / / Class A Shares $ / / Class B Shares $
indicate Portfolio, ------------- ------------
class and amount. Total Initial Investment $
------------------------------------
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E) METHOD OF INVESTMENT Payment by:
Please indicate manner of / / check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--PORTFOLIO NAME)
payment.
/ / Exchange $ From -
---------------- ------------------------ -------------------------
Name of Portfolio Account No.
/ / Account previously established by:
/ / Phone exchange / / Wire on -
--------------------------- --------------------------
Date Account No. (Check
(Previously assigned Digit)
by the Fund)
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<PAGE>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) will be reinvested in
OPTION additional shares unless either box below is checked.
/ / Income dividends to be paid in cash, capital gains distributions (if any) in
shares.
/ / Income dividends and capital gains distributions (if any) to be paid in
cash.
- -----------------------------------------------------------------------------------------------------------------------------------
G) TELEPHONE / / I/we hereby authorize the Fund and its
REDEMPTION agents to honor any telephone requests to ------------------------- -------------------------
wire redemption proceeds to the Name of COMMERCIAL Bank Bank Account No.
Please select at time of commercial bank indicated at right and/or (Not Savings Bank)
initial application if mail redemption proceeds to the name -------------------------
you wish to redeem shares and address in which my/our fund account Bank ABA No.
by telephone. A SIGNATURE is registered if such requests are believed ---------------------------------------------------
GUARANTEE IS REQUIRED IF to be authentic. Name(s) in which your BANK Account is Established
BANK ACCOUNT IS NOT
REGISTERED IDENTICALLY TO THE FUND AND THE FUND'S TRANSFER AGENT ---------------------------------------------------
YOUR FUND ACCOUNT. WILL EMPLOY REASONABLE PROCEDURES TO Bank's Street Address
TELEPHONE REQUESTS FOR CONFIRM THAT INSTRUCTIONS COMMUNICATED BY ---------------------------------------------------
REDEMPTIONS TELEPHONE ARE GENUINE. THESE PROCEDURES City State Zip
WILL NOT BE INCLUDE REQUIRING THE INVESTOR TO PROVIDE
HONORED UNLESS THE CERTAIN PERSONAL IDENTIFICATION INFORMATION AT
BOX IS THE TIME AN ACCOUNT IS OPENED AND PRIOR TO
CHECKED. EFFECTING EACH TRANSACTION REQUESTED BY
TELEPHONE. IN ADDITION, ALL TELEPHONE
TRANSACTION REQUESTS WILL BE RECORDED AND
INVESTORS MAY BE REQUIRED TO PROVIDE
ADDITIONAL TELECOPIED WRITTEN INSTRUCTIONS OF
TRANSACTION REQUESTS. NEITHER THE FUND NOR
THE TRANSFER AGENT WILL BE RESPONSIBLE FOR
ANY LOSS, LIABILITY, COST OR EXPENSE FOR
FOLLOWING INSTRUCTIONS RECEIVED BY TELEPHONE
THAT IT REASONABLY BELIEVES TO BE GENUINE.
- -----------------------------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION ------------------------------------------------------------------------------------------------
Name
In addition to the ac-
count statement sent to ------------------------------------------------------------------------------------------------
my/our registered ad-
dress, I/we hereby au-
thorize the fund to mail ------------------------------------------------------------------------------------------------
duplicate statements to Address
the name and address
provided at right. ------------------------------------------------------------------------------------------------
City State Zip Code
- -----------------------------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION -------------------- -------------------- --------------------
Representative Name Representative No. Branch No.
- -----------------------------------------------------------------------------------------------------------------------------------
J) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal capacity to purchase and redeem
ALL HOLDERS shares of the Fund and affirm that I/we have received a current Prospectus of the Morgan Stanley
AND TAXPAYER Institutional Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF PERJURY,
CERTIFICATION I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE.
Sign Here -- (X) (X)
----------------------------------------- ----------------------------------------------------
Signature Date Signature Date
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 7
Investment Objectives and Policies................ 11
Additional Investment Information................. 15
Investment Limitations............................ 23
Management of the Fund............................ 23
Purchase of Shares................................ 26
Redemption of Shares.............................. 30
Shareholder Services.............................. 31
Valuation of Shares............................... 32
Performance Information........................... 33
Dividends and Capital Gains Distributions......... 33
Taxes............................................. 34
Portfolio Transactions............................ 35
General Information............................... 36
Account Registration Form
</TABLE>
EMERGING MARKETS PORTFOLIO
EMERGING MARKETS DEBT PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
- ---------------------------------
- ---------------------------------
- ---------------------------------
- ---------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
-----------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
EMERGING GROWTH PORTFOLIO
MICROCAP PORTFOLIO
AGGRESSIVE EQUITY PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
--------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-seven portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and the Class B
shares of the Equity Growth, Emerging Growth, MicroCap and Aggressive Equity
Portfolios (the "Portfolios"). On January 2, 1996, the Portfolios began offering
two classes of shares, the Class A shares and the Class B shares. All shares of
the Portfolio owned prior to January 2, 1996 were redesignated Class A shares on
January 2, 1996. The Class A and Class B shares currently offered by the
Portfolios have different minimum investment requirements and fund expenses.
Shares of the portfolios are offered with no sales charge or exchange or
redemption fee (with the exception of one of the portfolios).
The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of medium and large
capitalization corporations.
The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small-to-medium
sized corporations.
The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
The AGGRESSIVE EQUITY PORTFOLIO is a non-diversified portfolio that seeks
long-term capital appreciation by investing primarily in corporate equity and
equity-linked securities.
INVESTORS SHOULD NOTE THAT EACH OF THE EQUITY GROWTH AND AGGRESSIVE EQUITY
PORTFOLIOS MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES.
INVESTMENTS IN RESTRICTED SECURITIES IN EXCESS OF 5% OF A PORTFOLIO'S TOTAL
ASSETS MAY BE CONSIDERED A SPECULATIVE ACTIVITY, MAY INVOLVE GREATER RISK AND
MAY INCREASE THE PORTFOLIO'S EXPENSES.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional investors and high net
worth individual investors a series of portfolios which benefit from the
investment expertise and commitment to excellence associated with Morgan Stanley
and its affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, China Growth, Emerging Markets,
European Equity, Global Equity, Gold, International Equity, International Small
Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value
Equity, Value Equity and U.S. Real Estate Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and
Municipal Bond Portfolios; and (v) MONEY MARKET -- Money Market and Municipal
Money Market Portfolios. Additional information about the Fund is contained in a
"Statement of Additional Information" dated January 2, 1996, which is
incorporated herein by reference. The Statement of Additional Information and
the prospectuses pertaining to the other portfolios of the Fund are available
upon request and without charge by writing or calling the Fund at the address
and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REP RESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY 2, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Portfolios indicated below will incur:
<TABLE>
<CAPTION>
EQUITY EMERGING AGGRESSIVE
GROWTH GROWTH MICROCAP EQUITY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A.................................................. None None None None
Class B.................................................. None None None None
Maximum Sales Load Imposed on Reinvested Dividends
Class A.................................................. None None None None
Class B.................................................. None None None None
Deferred Sales Load
Class A.................................................. None None None None
Class B.................................................. None None None None
Redemption Fees
Class A.................................................. None None None None
Class B.................................................. None None None None
Exchange Fees
Class A.................................................. None None None None
Class B.................................................. None None None None
<CAPTION>
EQUITY EMERGING AGGRESSIVE
GROWTH GROWTH MICROCAP EQUITY
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C> <C> <C>
Management Fee (Net of Fee Waivers)*
Class A.................................................. 0.50% 0.97% 1.05%+ 0.00%
Class B.................................................. 0.50% 0.97% 1.05%+ 0.00%
12b-1 Fees
Class A.................................................. None None None None
Class B.................................................. 0.25% 0.25% 0.25%+ 0.25%
Other Expenses
Class A.................................................. 0.30% 0.28% 0.45%+ 1.00%
Class B.................................................. 0.30% 0.28% 0.45%+ 1.00%
----------- ----------- ----------- -----------
Total Operating Expenses (Net of Fee Waivers)*
Class A.................................................. 0.80% 1.25% 1.50%+ 1.00%
Class B.................................................. 1.05% 1.50% 1.75%+ 1.25%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- --------------
*The Adviser has agreed to waive its management fees and/or reimburse each
Portfolio, if necessary, if such fees would cause any of the total annual
operating expenses of the Portfolios to exceed a specified percentage of their
respective average daily net assets. Set forth below, for each Portfolio, are
the management fees and total operating expenses absent such fee waivers and/or
expense reimbursements as a percent of average daily net assets of the Class A
shares and Class B shares, respectively, of each Portfolio.
2
<PAGE>
<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT FEES ------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- -------------------------------------------------------- --------------------- ----------- -----------
<S> <C> <C> <C>
Equity Growth........................................... 0.60% 0.90% 1.15%
Emerging Growth......................................... 1.00% 1.28% 1.53%
MicroCap................................................ 1.25% 1.50%+ 1.75%+
Aggressive Equity....................................... 0.80% 2.26% 2.51%
</TABLE>
+Estimated.
These reductions became or will become effective as of the inception of each
Portfolio. As a result of these reductions, the Management Fees stated above are
lower than the contractual fees stated under "Management of the Fund." For
further information on Fund expenses, see "Management of the Fund."
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. The Class A expenses and fees for the Equity Growth and Emerging
Growth Portfolios have been restated to reflect current fees. The Class A
expenses and fees for the Aggressive Equity Portfolio are estimated using actual
figures for the period ended June 30, 1995. The Class A expenses and fees for
the MicroCap Portfolio are based on estimates, assuming that the average daily
net assets of the Class A shares of the MicroCap Portfolio will be $50,000,000.
The Class B expenses and fees for each Portfolio are based on estimates,
assuming that the average daily net assets of the Class B shares of each
Portfolio will be $50,000,000. "Other Expenses" include Board of Directors' fees
and expenses, amortization of organizational costs, filing fees, professional
fees and costs for shareholder reports. Due to the continuous nature of Rule
12b-1 fees, long term Class B shareholders may pay more than the equivalent of
the maximum front-end charges otherwise permitted by the Rules of Fair Practice
of the National Association of Securities Dealers, Inc. ("NASD").
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The example is based on total operating expenses
of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Equity Growth Portfolio
Class A.......................................................... $ 8 $ 26 $ 44 $ 99
Class B.......................................................... 11 33 58 128
Emerging Growth Portfolio
Class A.......................................................... 13 40 69 151
Class B.......................................................... 15 47 82 179
MicroCap Portfolio
Class A.......................................................... 15 47 * *
Class B.......................................................... 18 55 * *
Aggressive Equity Portfolio
Class A.......................................................... 10 32 * *
Class B.......................................................... 13 40 * *
</TABLE>
- --------------
*Because the MicroCap Portfolio has not yet commenced operations and the
Aggressive Equity Portfolio has recently become operational, the Fund has not
projected expenses beyond the 3-year period shown for either Portfolio.
3
<PAGE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Fund intends to comply with all state laws that restrict investment
company expenses. Currently, the most restrictive state law requires that the
aggregate annual expenses of an investment company shall not exceed two and
one-half percent (2 1/2%) of the first $30 million of average net assets, two
percent (2%) of the next $70 million of average net assets, and one and one-half
percent (1 1/2%) of the remaining net assets of such investment company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse the Portfolios, if necessary, if in any fiscal year the sum of the
Portfolios' expenses exceeds the limit set by applicable state law.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A shares of
the Equity Growth, Emerging Growth and Aggressive Equity Portfolios for each of
the periods presented. The new Class B shares were not offered prior to the date
of this Prospectus. The audited financial highlights for the Class A shares for
the fiscal year ended December 31, 1994 and the unaudited financial highlights
for the Class A shares for the six months ended June 30, 1995 are part of the
Fund's financial statements which appear in the Fund's December 31, 1994 Annual
Report to Shareholders and June 30, 1995 Semi-Annual Report to Shareholders,
respectively, and which are included in the Fund's Statement of Additional
Information. The Portfolios' financial highlights for each of the periods
presented, except for the six months ended June 30, 1995, have been audited by
Price Waterhouse LLP, whose unqualified report thereon is also included in the
Statement of Additional Information. Additional performance information for the
Class A shares is included in the Annual Report. The Annual Report, Semi-Annual
Report and the financial statements therein, along with the Statement of
Additional Information, are available at no cost from the Fund at the address
and telephone number noted on the cover page of this Prospectus. Financial
Highlights are not available for the MicroCap Portfolio since it was not
operational as of June 30, 1995. Subsequent to October 31, 1992 (the Fund's
prior fiscal year end), the Fund changed its fiscal year end to December 31. The
financial statements, including financial highlights, for the Aggressive Equity
Portfolio from March 8, 1995 to June 30, 1995 are unaudited. The following
information should be read in conjunction with the financial statements and
notes thereto.
5
<PAGE>
EQUITY GROWTH PORTFOLIO
<TABLE>
<CAPTION>
APRIL 2, TWO MONTHS SIX MONTHS
1991* TO YEAR ENDED ENDED YEAR ENDED YEAR ENDED ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, 1995
1991 1992 1992 1993 1994 (UNAUDITED)
------------ ------------ ------------- ------------- ------------- --------------
<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 0.10
Net Realized and Unrealized Gain
on Investments.................. 0.61 0.82 0.41 0.28 0.21 2.56
------------ ------------ ------------- ------------- ------------- --------------
Total from Investment
Operations.................... 0.66 0.98 0.44 0.50 0.38 2.66
------------ ------------ ------------- ------------- ------------- --------------
DISTRIBUTIONS
Net Investment Income............ -- (0.20) -- (0.23) (0.13) (0.10)
In Excess of Net Investment
Income.......................... -- -- -- (0.01) -- --
Net Realized Gain................ -- -- -- -- (0.37) (0.42)
------------ ------------ ------------- ------------- ------------- --------------
Total Distributions............ -- (0.20) -- (0.24) (0.50) (0.52)
------------ ------------ ------------- ------------- ------------- --------------
NET ASSET VALUE, END OF PERIOD..... $ 10.66 $ 11.44 $ 11.88 $ 12.14 $ 12.02 $ 14.16
------------ ------------ ------------- ------------- ------------- --------------
------------ ------------ ------------- ------------- ------------- --------------
TOTAL RETURN....................... 6.60% 9.26% 3.85% 4.33% 3.26% 23.05%
------------ ------------ ------------- ------------- ------------- --------------
------------ ------------ ------------- ------------- ------------- --------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)..................... $ 18,139 $ 36,558 $ 45,985 $ 73,789 $ 97,259 $ 146,773
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% 1.71%
Portfolio Turnover Rate.......... 3% 38% 1% 172% 146% 77%
<CAPTION>
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
(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% 0.90%**
Net Investment Income to
Average Net Assets............. 1.77%** 1.52% 1.62%** 1.46% 1.35% 1.60%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 0.60% of the
average daily net assets of the Equity Growth Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Equity Growth Portfolio to the extent that the total operating expenses of
the Equity Growth Portfolio exceed 0.80% of the average daily net assets of
the Class A shares and 1.05% of the average daily net assets of the Class B
shares. In the period ended October 31, 1991, the year ended October 31,
1992, the two months ended December 31, 1992, the years ended December 31,
1993 and 1994 and the six months ended June 30, 1995, the Adviser waived
management fees and/or reimbursed expenses totalling $23,000, $51,000,
$22,000, $68,000, $83,000 and $60,664, respectively, for the Equity Growth
Portfolio.
* Commencement of Operations.
** Annualized.
6
<PAGE>
EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
SIX MONTHS
NOVEMBER 1, TWO MONTHS ENDED
1989* TO YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED JUNE 30,
OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995
1990 1991+ 1992 1992 1993 1994 (UNAUDITED)
------------ ------------ ------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 10.00 $ 9.03 $ 16.18 $ 14.97 $ 16.22 $ 16.22 $ 16.12
------------ ------------ ------------ ------------- ------------- ------------- ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income/
(Loss) (1)............ 0.08 -- (0.09) (0.01) (0.11) (0.09) (0.05)
Net Realized and
Unrealized Gain/
(Loss) on
Investments........... (1.00) 7.19 (1.12) 1.26 0.11 (0.01) 2.17
------------ ------------ ------------ ------------- ------------- ------------- ------------
Total from Investment
Operations.......... (0.92) 7.19 (1.21) 1.25 0.00 (0.10) 2.12
------------ ------------ ------------ ------------- ------------- ------------- ------------
DISTRIBUTIONS
Net Investment
Income................ (0.05) (0.04) -- -- -- -- --
------------ ------------ ------------ ------------- ------------- ------------- ------------
NET ASSET VALUE, END OF
PERIOD.................. $ 9.03 $ 16.18 $ 14.97 $ 16.22 $ 16.22 $ 16.12 $ 18.24
------------ ------------ ------------ ------------- ------------- ------------- ------------
------------ ------------ ------------ ------------- ------------- ------------- ------------
TOTAL RETURN............. (9.27)% 79.84% (7.48)% 8.35% 0.00% (0.62)% 13.15%
RATIO AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands).... $ 11,261 $ 54,364 $ 80,156 $ 94,161 $ 103,621 $ 117,669 $143,586
Ratio of Expenses to
Average Net Assets
(1)................... 1.26%** 1.25% 1.25% 1.25%** 1.25% 1.25% 1.25%**
Ratio of Net Investment
Income/(Loss) to
Average Net Assets
(1)................... 0.64%** 0.00% (0.66)% (0.68)%** (0.77)% (0.61)% (0.68)%**
Portfolio Turnover
Rate.................. 19% 2% 17% 1% 25% 24% 17%
<CAPTION>
- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income... $ 0.01 $ 0.02 $ 0.01 $ 0.00 $ 0.01 $ 0.002 $ 0.04
Ratios before expense limitation:
Expenses to Average
Net Assets.............. 1.64% 1.39% 1.29% 1.36%** 1.31% 1.26% 1.28%**
Net Investment Income
(Loss) to Average Net
Assets................. 0.24% (0.14)% (0.71)% (0.79)%** (0.83)% (0.62)% 0.83%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 1.00% of the
average daily net assets of the Emerging Growth Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Emerging Growth Portfolio to the extent that the total operating expenses of
the Emerging Growth Portfolio exceed 1.25% of the average daily net assets
of the Class A shares and 1.50% of the average daily net assets of the Class
B shares. In the period ended October 31, 1990, the years ended October 31,
1991 and 1992, the two months ended December 31, 1992, the years ended
December 31, 1993 and 1994, and the six months ended June 30, 1995 the
Adviser waived management fees and/or reimbursed expenses totalling $28,000,
$41,000, $31,000, $18,000, $51,000, $16,000 and $19,325, respectively, for
the Emerging Growth Portfolio.
* Commencement of Operations.
** Annualized.
+ Per share amounts for the year ended October 31, 1991 are based on average
outstanding shares.
7
<PAGE>
AGGRESSIVE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 8, 1995*
TO JUNE 30, 1995
(UNAUDITED)
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).................. 0.06
Net Realized and Unrealized Gain on
Investments............................... 1.77
-------
Total from Investment Operations......... 1.83
-------
DISTRIBUTIONS
Net Investment Income...................... (0.02)
-------
NET ASSET VALUE, END OF PERIOD............... $ 11.81
-------
-------
TOTAL RETURN................................. 18.33%
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $ 18,255
Ratio of Expenses to Average Net Assets
(1)....................................... 1.00%**
Ratio of Net Investment Income to Average
Net Assets (1)............................ 2.10%**
Portfolio Turnover Rate.................... 80%
<CAPTION>
- ----------------------
<S> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income...................... $ 0.04
Ratios before expense limitation:
Expenses to Average Net Assets.......... 2.26%**
Net Investment Income in
Average Net Assets..................... 0.83%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled
to receive a management fee calculated at an annual rate of 1.00% of the
average daily net assets of the Aggressive Equity Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Aggressive Equity Portfolio to the extent that the total operating expenses
of the Aggressive Equity Portfolio exceed 1.25% of the average daily net
assets of the Class A Shares and 1.50% of the average daily net assets of
the Class B Shares. In the period ended June 30, 1995, the Adviser waived
management fees and/or reimbursed expenses totalling $47,028 for the
Aggressive Equity portfolio.
* Commencement of Operations
** Annualized
8
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-seven portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and except the International
Small Cap, Money Market and Municipal Money Market Portfolios, offers Class B
shares. Each portfolio has its own investment objective and policies designed to
meet its specific goals. The investment objective of each Portfolio described in
this Prospectus is as follows:
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of medium and
large capitalization companies.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The AGGRESSIVE EQUITY PORTFOLIO is a non-diversified portfolio that seeks
capital appreciation by investing primarily in corporate equity and
equity-linked securities.
The other portfolios of the Fund are described in other Prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The objectives of these other portfolios are listed
below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $500 million.
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-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and debt
securities issued or guaranteed by Latin American governments or
governmental entities.
U.S. EQUITY:
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
-The U. S. REAL ESTATE 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 VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
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INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at September 30, 1995 had approximately $55.2 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. Shares in a Portfolio account opened prior to January 2, 1996
(each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996.
For a Portfolio account opened on or after January 2, 1996 (a "New Account"),
the minimum initial investment is $500,000 for Class A shares and $100,000 for
Class B shares. Certain exceptions to the foregoing minimums apply to (1) shares
in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the
Adviser and its affiliates; and (3) certain advisory or asset allocation
accounts, such as Total Funds Management accounts, managed by Morgan Stanley or
its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves
the right in its sole discretion to determine which of such advisory or asset
allocation accounts shall be Managed Accounts. For information regarding Managed
Accounts, please contact your Morgan Stanley account representative or the Fund
at the telephone number provided on the cover of this Prospectus. Shares in a
Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a
"Grandfathered Class B Account") convert to Class B shares on March 1, 1996. See
"Purchase of Shares -- Minimum Investment and Account Sizes; Conversion from
Class A to Class B Shares."
The minimum subsequent investment for each Portfolio account is $1,000
(except for automatic reinvestment of dividends and capital gains distributions
for which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
HOW TO REDEEM
Class A shares or Class B shares of each Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions may cause
involuntary redemption or automatic conversion. Class A or Class B shares held
in New Accounts are subject to involuntary redemption if shareholder
redemption(s) of such shares reduces the value of such account to less than
$100,000 for a continuous 60-day period. Involuntary redemption does not apply
to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B
Accounts, regardless of the value of such accounts. Class A shares in a New
Account will convert to Class B shares if shareholder redemption(s) of such
shares reduces the value of such account to less than $500,000 for a continuous
60-day period. Class B shares in a New Account will convert to Class A shares if
shareholder purchases of additional Class B shares or market activity cause the
value of Class B shares in the New Account to increase to $500,000 or more. See
"Purchase of Shares -- Minimum Account Sizes and Involuntary Redemption of
Shares" and "Redemption of Shares."
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RISK FACTORS
The investment policies of the Portfolios entail certain risks and
considerations of which an investor should be aware. Because the Emerging Growth
and MicroCap Portfolios seek long-term capital appreciation by investing
primarily in small- to medium-sized companies and small companies, respectively,
both of which types of companies are more vulnerable to financial and other
risks than larger, more established companies, investments in these Portfolios
may involve a higher degree of risk and price volatility than the general equity
markets. The Aggressive Equity Portfolio may invest in small-to medium-sized
companies to a lesser extent. The Equity Growth, Emerging Growth, MicroCap and
Aggressive Equity Portfolios may invest in securities of foreign issuers, which
are subject to certain risks not typically associated with domestic securities.
See "Investment Objectives and Policies" and "Additional Investment
Information." In addition, the Portfolios may invest in repurchase agreements,
lend their portfolio securities and may purchase securities on a when-issued
basis. The Equity Growth and Aggressive Equity Portfolios may invest in covered
call options and may also invest in stock options, stock futures contracts and
options on stock futures contracts, and may invest in forward foreign currency
exchange contracts to hedge currency risk associated with investment in non-U.S.
dollar-denominated securities. The Aggressive Equity Portfolio may invest in
convertible debentures and specialty equity-linked securities, such as PERCS,
ELKS or LYONs, of U.S., and to a limited extent, foreign issuers, which may
involve risks in addition to those associated with equity securities. The
Aggressive Equity Portfolio is a non-diversified portfolio under the Investment
Company Act of 1940, as amended (the "1940 Act") and therefore may invest a
greater proportion of its assets in the securities of a smaller number of
issuers and may, as a result, be subject to greater risk with respect to its
portfolio securities. See "Investment Limitations." See "Additional Investment
Information." Each of these investment strategies involves specific risks which
are described under "Investment Objectives and Policies" and "Additional
Investment Information" herein and under "Investment Objectives and Policies" in
the Statement of Additional Information.
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies the Fund employs in its efforts to achieve these objectives. Each
Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolios will attain their
objectives. The investment policies described below are not fundamental policies
and may be changed without shareholder approval.
THE EQUITY GROWTH PORTFOLIO
The Portfolio's investment objective is to provide long-term capital
appreciation by investing primarily in growth-oriented equity securities of
medium and large capitalization U.S. corporations and, to a limited extent, as
described below, foreign corporations. With respect to the Portfolio, equity
securities include common and preferred stocks, convertible securities, and
rights and warrants to purchase common stocks. Under normal circumstances, the
Portfolio will invest at least 65% of the value of its total assets in equity
securities.
The Adviser employs a flexible and eclectic investment process in pursuit of
the Portfolio's investment objectives. In selecting stocks for the Portfolio,
the Adviser concentrates on a universe of rapidly growing, high quality
companies and lower, but accelerating, earnings growth situations. The Adviser's
universe of potential investments generally comprises companies with market
capitalizations of $750 million or more. The Portfolio is not restricted to
investments in specific market sectors. The Adviser uses its research
capabilities, analytical resources and judgment to assess economic, industry and
market trends, as well as individual company developments, to select promising
growth investments for the Portfolio. The Adviser concentrates on companies with
strong, communicative managements and clearly defined strategies for growth. In
addition, the Adviser rigorously assesses company developments, including
changes in strategic direction, management focus and current and likely future
earnings results. Valuation is important to the Adviser but is viewed in the
context of prospects for sustainable earnings growth and the potential for
positive earnings surprises vis-a-vis consensus expectations. The Portfolio is
free to invest in any equity security that, in the Adviser's judgment, provides
above average potential for capital appreciation.
In selecting investments for the Portfolio, the Adviser emphasizes
individual security selection. The Portfolio's investments will generally be
diversified by number of issues but concentrated sector positions may result
from the investment process. The Portfolio has a long-term investment
perspective; however, the Adviser may take advantage of short-term opportunities
that are consistent with the Portfolio's objective by selling recently purchased
securities which have increased in value.
The Portfolio may invest up to 25% of its total assets at the time of
purchase in securities of foreign companies. The Portfolio may invest in
securities of foreign issuers directly or in the form of Depositary Receipts.
Investors should recognize that investing in foreign companies involves certain
special considerations which are not typically associated with investing in U.S.
companies. See "Additional Investment Information" herein and "Investment
Objectives and Policies -- Forward Foreign Currency Exchange Contracts" in the
Statement of Additional Information.
The Portfolio may invest in convertible securities of domestic and, subject
to the above restrictions, foreign issuers on occasions when, due to market
conditions, it is more advantageous to purchase such securities than to
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<PAGE>
purchase common stock. Since the Portfolio invests in both common stocks and
convertible securities, the risks of investing in the general equity markets may
be tempered to a degree by the Portfolio's investments in convertible securities
which are often not as volatile as common stock.
Any remaining assets may be invested in certain securities or obligations,
including derivative securities, as set forth in "Additional Investment
Information" below.
THE EMERGING GROWTH PORTFOLIO
The Portfolio's investment objective is to provide long-term capital
appreciation by investing primarily in growth-oriented equity securities of
small- to medium-sized domestic corporations and, to a limited extent as
described below, foreign corporations. The production of any current income is
incidental to this objective. Such companies generally have annual gross
revenues ranging from $10 million to $750 million. With respect to the
Portfolio, equity securities include common and preferred stocks, convertible
securities, and rights and warrants to purchase common stocks, and any similar
equity interest, such as trust or partnership interests. Such equity securities
may not pay dividends or distributions and may or may not carry voting rights.
The Adviser employs a flexible investment program in pursuit of the
Portfolio's investment objective. The Portfolio is not restricted to investments
in specific market sectors. The Portfolio will invest in small- to medium-sized
companies that are early in their life cycle, but which have the potential, in
the Adviser's judgment, to become major enterprises. The Adviser uses its
judgment and research capabilities to assess economic, industry, market and
company developments to select investments in promising emerging growth
companies that are expected to benefit from new technology or new products or
services. In addition, the Adviser looks for special developments, such as
research discoveries, changes in customer demand, rejuvenated management or
basic changes in the economic environment. These situations are only
illustrative of the types of investments the Portfolio may make. The Portfolio
is free to invest in any common stock which in the Adviser's judgment provides
above-average potential for capital appreciation.
The Portfolio intends to manage its investments actively to accomplish its
investment objective. Since the Portfolio has a long-term investment
perspective, the Adviser does not intend to respond to short-term market
fluctuations or to acquire securities for the purpose of short-term trading;
however, the Adviser may take advantage of short-term opportunities that are
consistent with its objective.
The Portfolio may invest up to 25% of its total assets at the time of
purchase in securities of foreign companies. The Portfolio may invest in
securities of foreign issuers directly or in the form of Depositary Receipts.
See "Additional Investment Information" below. The Portfolio may enter into
forward foreign currency exchange contracts which provide for the purchase or
sale of foreign currencies in connection with the settlement of foreign
securities transactions or to hedge the underlying currency exposure related to
foreign investments. The Portfolio will not enter into these commitments for
speculative purposes. Investors should recognize that investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies. See "Additional Investment
Information" herein and "Investment Objectives and Policies -- Forward Currency
Exchange Contracts" in the Statement of Additional Information.
The Portfolio may also invest in convertible securities of domestic and,
subject to the above restrictions, foreign issuers on occasions when, due to
market conditions, it is more advantageous to purchase such securities than to
purchase common stock. The Portfolio will not invest in debt securities that are
not rated at least
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investment grade by either Standard & Poor's Corporation or Moody's Investors
Service, Inc. Since the Portfolio invests in both common stocks and convertible
securities, the risks of investing in the general equity markets may be tempered
to a degree by the Portfolio's investments in convertible securities, which are
often not as volatile as equity securities.
Any remaining assets may be invested in certain securities or obligations,
including derivative securities, that are set forth in "Additional Investment
Information" below.
THE MICROCAP PORTFOLIO
The Portfolio's investment objective is to provide long-term capital
appreciation by investing primarily in growth-oriented equity securities of
small domestic corporations and, to a limited extent as described below, foreign
corporations. The production of any current income is incidental to this
objective. Such companies generally have, at time of purchase, annual gross
revenues of $150 million or less or market capitalizations of $250 million or
less. With respect to the Portfolio, equity securities include common and
preferred stocks, convertible securities, rights and warrants to purchase common
stocks, and any similar equity interest, such as trust or partnership interests.
Such equity securities may or may not pay dividends or distributions and may or
may not carry voting rights.
The Adviser employs a flexible investment program in pursuit of the
Portfolio's investment objective. The Portfolio is not restricted to investments
in specific market sectors. The Portfolio will invest in equity securities,
including securities purchased in initial public offerings, of small companies
that are early in their life cycle, but which have the potential, in the
Adviser's judgement, to achieve long-term capital appreciation. The Adviser uses
its judgment and research capabilities to assess economic, industry, market and
company developments to select investments in promising companies that are
expected to benefit from new technology or new products or services. In
addition, the Adviser looks for special developments, such as research
discoveries, changes in customer demand, rejuvenated management or basic changes
in the economic environment. These situations are only illustrative of the types
of investments the Portfolio may make. The Portfolio is free to invest in any
equity security which in the Adviser's judgment provides above-average potential
for capital appreciation.
The Portfolio intends to manage its investments actively to accomplish its
investment objective. Since the Portfolio has a long-term investment
perspective, the Adviser does not intend to respond to short-term market
fluctuations or to acquire securities for the purpose of short-term trading;
however, the Adviser may take advantage of short-term opportunities that are
consistent with its objective.
The Portfolio may invest up to 25% of its total assets at the time of
purchase in securities of foreign companies. The Portfolio may invest in such
securities of foreign issuers directly or in the form of Depositary Receipts.
See "Additional Investment Information" below. The Portfolio may enter into
forward foreign currency exchange contracts which provide for the purchase or
sale of foreign currencies in connection with the settlement of foreign
securities transactions or to hedge the underlying currency exposure related to
foreign investments. The Portfolio will not enter into these commitments for
speculative purposes. Investors should recognize that investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies. See "Additional Investment
Information" herein and "Investment Objectives and Policies -- Forward Currency
Exchange Contracts" in the Statement of Additional Information.
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The Portfolio may invest in convertible securities of domestic and, subject
to the above restrictions, foreign issuers on occasions when, due to market
conditions, it is more advantageous to purchase such securities than to purchase
common stock. The Portfolio will not invest in debt securities that are not
rated at least investment grade by either Standard & Poor's Corporation or
Moody's Investors Service, Inc. Since the Portfolio invests in both common
stocks and convertible securities, the risks of investing in the general equity
markets may be tempered to a degree by the Portfolio's investments in
convertible securities, which are often not as volatile as equity securities.
See "Additional Investment Information".
Any remaining assets may be invested in certain securities or obligations,
including derivative securities, as set forth in "Additional Investment
Information" below.
THE AGGRESSIVE EQUITY PORTFOLIO
The Portfolio's investment objective is to provide capital appreciation by
investing primarily in a non-diversified portfolio of corporate equity and
equity-linked securities. With respect to the Portfolio, equity and
equity-linked securities include common and preferred stocks, convertible
securities, rights and warrants to purchase common stocks, options, futures, and
specialty securities, such as ELKS, LYONs, PERCS of U.S., and to a limited
extent, as described below, foreign issuers. The Aggressive Equity Fund is a
non-diversified portfolio and thus can be more heavily weighted in fewer stocks
than the Equity Growth Portfolio, which is a diversified portfolio. See
"Investment Limitations." Under normal circumstances, the Portfolio will invest
at least 65% of the value of its total assets in equity and equity-linked
securities.
The Adviser employs a flexible and eclectic investment process in pursuit of
the Portfolio's investment objective. In selecting securities for the Portfolio,
the Adviser concentrates on a universe of rapidly growing, high quality
companies and lower, but accelerating, earnings growth situations. The Adviser's
universe of potential investments generally comprises companies with market
capitalizations of $500 million or more but smaller market capitalization
securities may be purchased from time to time. The Portfolio is not restricted
to investments in specific market sectors. The Adviser uses its research
capabilities, analytical resources and judgment to assess economic, industry and
market trends, as well as individual company developments, to select promising
investments for the Portfolio. The Adviser concentrates on companies with
strong, communicative managements and clearly defined strategies for growth. In
addition, the Adviser rigorously assesses earnings results. The Adviser seeks
companies which will deliver surprisingly strong earnings growth. Valuation is
of secondary importance to the Adviser and is viewed in the context of prospects
for sustainable earnings growth and the potential for positive earnings
surprises in relation to consensus expectations. The Portfolio is free to invest
in any equity or equity-linked security that, in the Adviser's judgment,
provides above average potential for capital appreciation.
The Portfolio may from time to time and consistent with applicable legal
requirements sell securities short that it owns (i.e., "against the box") or
borrows. See "Additional Investment Information".
In selecting investments for the Portfolio, the Adviser emphasizes
individual security selection. Overweighted sector positions and issuer
positions may result from the investment process. See "Investment Limitations."
The Portfolio has a long-term investment perspective; however, the Adviser may
take advantage of short-term opportunities that are consistent with the
Portfolio's objective by selling recently purchased securities which have
increased in value.
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The Portfolio may invest in equity and equity-linked securities of domestic
and foreign corporations. However, the Portfolio does not expect to invest more
than 25% of its total assets at the time of purchase in securities of foreign
companies. The Portfolio may invest in securities of foreign issuers directly or
in the form of American Depositary Receipts ("ADRs"). Investors should recognize
that investing in foreign companies involves certain special considerations
which are not typically associated with investing in U.S. companies. See
"Additional Investment Information" herein and "Investment Objectives and
Policies -- Forward Foreign Currency Exchange Contracts" in the Statement of
Additional Information.
Any remaining assets may be invested in certain securities or obligations,
including derivative securities, as set forth in "Additional Investment
Information" below.
ADDITIONAL INVESTMENT INFORMATION
CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES
The Portfolios may invest in securities such as convertible securities,
preferred stock, warrants or other securities exchangeable under certain
circumstances for shares of common stock. Warrants are instruments giving
holders the right, but not the obligation, to buy shares of a company at a given
price during a specified period.
The Aggressive Equity Portfolio may invest in equity-linked securities,
including, among others, PERCS, ELKS or LYONs, which are securities that are
convertible into or the value of which is based upon the value of, equity
securities upon certain terms and conditions. The amount received by an investor
at maturity of such securities is not fixed but is based on the price of the
underlying common stock. It is impossible to predict whether the price of the
underlying common stock will rise or fall. Trading prices of the underlying
common stock will be influenced by the issuer's operational results, by complex,
interrelated political, economic, financial, or other factors affecting the
capital markets, the stock exchanges on which the underlying common stock is
traded and the market segment of which the issuer is a part. In addition, it is
not possible to predict how equity-linked securities will trade in the secondary
market, which is fairly developed and liquid. The market for such securities may
be shallow, however, and high volume trades may be possible only with
discounting. In addition to the foregoing risks, the return on such securities
depends on the creditworthiness of the issuer of the securities, which may be
the issuer of the underlying securities or a third party investment banker or
other lender. The creditworthiness of such third party issuer of equity-linked
securities may, and often does, exceed the creditworthiness of the issuer of the
underlying securities. The advantage of using equity-linked securities over
traditional equity and debt securities is that the former are income producing
vehicles that may provide a higher income than the dividend income on the
underlying equity securities while allowing some participation in the capital
appreciation of the underlying equity securities. Another advantage of using
equity-linked securities is that they may be used for hedging to reduce the risk
of investing in the generally more volatile underlying equity securities.
The following are three examples of equity-linked securities. The Portfolio
may invest in the securities described below or other similar equity-linked
securities.
PERCS. Preferred Equity Redemption Cumulative Stock ("PERCS") technically
are preferred stock with some characteristics of common stock. PERCS are
mandatorily convertible into common stock after a
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period of time, usually three years, during which the investors' capital gains
are capped, usually at 30%. Commonly, PERCS may be redeemed by the issuer at any
time or if the issuer's common stock is trading at a specified price level or
better. The redemption price starts at the beginning of the PERCS duration
period at a price that is above the cap by the amount of the extra dividends the
PERCS holder is entitled to receive relative to the common stock over the
duration of the PERCS and declines to the cap price shortly before maturity of
the PERCS. In exchange for having the cap on capital gains and giving the issuer
the option to redeem the PERCS at any time or at the specified common stock
price level, the Portfolio may be compensated with a substantially higher
dividend yield than that on the underlying common stock. Investors, such as the
Portfolio, that seek current income, find PERCS attractive because a PERCS
provides a higher dividend income than that paid with respect to a company's
common stock.
ELKS. Equity-Linked Securities ("ELKS") differ from ordinary debt
securities, in that the principal amount received at maturity is not fixed but
is based on the price of the issuer's common stock. ELKS are debt securities
commonly issued in fully registered form for a term of three years under an
indenture trust. At maturity, the holder of ELKS will be entitled to receive a
principal amount equal to the lesser of a cap amount, commonly in the range of
30% to 55% greater than the current price of the issuer's common stock, or the
average closing price per share of the issuer's common stock, subject to
adjustment as a result of certain dilution events, for the 10 trading days
immediately prior to maturity. Unlike PERCS, ELKS are commonly not subject to
redemption prior to maturity. ELKS usually bear interest during the three-year
term at a substantially higher rate than the dividend yield on the underlying
common stock. In exchange for having the cap on the return that might have been
received as capital gains on the underlying common stock, the Portfolio may be
compensated with the higher yield, contingent on how well the underlying common
stock does. Investors, such as the Portfolio, that seek current income, find
ELKS attractive because ELKS provide a higher dividend income than that paid
with respect to a company's common stock.
LYONS. Liquid Yield Option Notes ("LYONs") differ from ordinary debt
securities, in that the amount received prior to maturity is not fixed but is
based on the price of the issuer's common stock. LYONs are zero-coupon notes
that sell at a large discount from face value. For an investment in LYONs, the
Portfolio will not receive any interest payments until the notes mature,
typically in 15 to 20 years, when the notes are redeemed at face, or par, value.
The yield on LYONs, typically, is lower-than-market rate for debt securities of
the same maturity, due in part to the fact that the LYONs are convertible into
common stock of the issuer at any time at the option of the holder of the LYONs.
Commonly, the LYONs are redeemable by the issuer at any time after an initial
period or if the issuer's common stock is trading at a specified price level or
better, or, at the option of the holder, upon certain fixed dates. The
redemption price typically is the purchase price of the LYONs plus accrued
original issue discount to the date of redemption, which amounts to the
lower-than-market yield. The Portfolio will receive only the lower-than-market
yield unless the underlying common stock increases in value at a substantial
rate. LYONs are attractive to investors, like the Portfolio, when it appears
that they will increase in value due to the rise in value of the underlying
common stock.
DEPOSITARY RECEIPTS. The Portfolios may invest indirectly in securities of
foreign companies through sponsored or unsponsored American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of Depositary
Receipts (which, together with ADRs and GDRs, are hereinafter collectively
referred to as "Depositary Receipts"), to the extent such Depositary Receipts
are or become available. Depositary Receipts are not necessarily denominated in
the same currency as the underlying securities. In addition, the
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<PAGE>
issuers of the securities underlying unsponsored Depositary Receipts are not
obligated to disclose material information in the U.S. and, therefore, there may
be less information available regarding such issuers and there may not be a
correlation between such information and the market value of the Depositary
Receipts. ADRs are Depositary Receipts typically issued by a U.S. financial
institution which evidence ownership interests in a security or pool of
securities issued by a foreign issuer. GDRs and other types of Depositary
Receipts are typically issued by foreign banks or trust companies, although they
also may be issued by U.S. financial institutions, and evidence ownership
interests in a security or pool of securities issued by either a foreign or a
U.S. corporation. Generally, Depositary Receipts in registered form are designed
for use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the U.S. For purposes of a
Portfolio's investment policies, the Portfolio's investments in Depositary
Receipts will be deemed to be investments in the underlying securities.
FOREIGN INVESTMENT. The Portfolios may invest in U.S. dollar-denominated
securities of foreign issuers trading in U.S. markets and the Emerging Growth
and Aggressive Equity Portfolios may invest in non-U.S. dollar-denominated
securities of foreign issuers. Investment in securities of foreign issuers and
in foreign branches of domestic banks involves somewhat different investment
risks than those affecting securities of U.S. domestic issuers. There may be
limited publicly available information with respect to foreign issuers, and
foreign issuers are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the U.S. Many
foreign securities markets have substantially less volume than U.S. national
securities exchanges, and securities of some foreign issuers are less liquid and
more volatile than securities of comparable domestic issuers. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the U.S. Dividends and interest paid by foreign issuers
may be subject to withholding and other foreign taxes, which may decrease the
net return on foreign investments as compared to dividends and interest paid to
the Portfolio by domestic companies. It is not expected that a Portfolio or its
shareholders would be able to claim a credit for U.S. tax purposes with respect
to any such foreign taxes. See "Taxes." Additional risks include future
political and economic developments, the possibility that a foreign jurisdiction
might impose or change withholding taxes on income payable with respect to
foreign securities, possible seizure, nationalization or expropriation of the
foreign issuer or foreign deposits and the possible adoption of foreign
governmental restrictions such as exchange controls.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies and, since the Emerging Growth and Aggressive Equity
Portfolios may also temporarily hold uninvested reserves in bank deposits in
foreign currencies, the value of the Portfolios' assets measured in U.S. dollars
may be affected favorably or unfavorably by changes in currency exchange rates
and in exchange control regulations, and the Portfolios may incur costs in
connection with conversions between various currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Emerging Growth and
Aggressive Equity Portfolios may enter into forward foreign currency exchange
contracts ("forward contracts"), that provide for the purchase or sale of an
amount of a specified foreign currency at a future date. Purposes for which such
contracts may be used include protecting against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells non-U.S. dollar denominated securities, locking in
the U.S. dollar value of dividends declared on securities held by the Portfolio
and generally protecting the U.S.
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<PAGE>
dollar value of securities held by the Portfolio against exchange rate
fluctuation. Such contracts may also be used as a protective measure against the
effects of fluctuating rates of currency exchange and exchange control
regulations. While such forward contracts may limit losses to the Portfolio
against exchange rate fluctuations, they will also limit any gains that may
otherwise have been realized. Such forward contracts are derivative securities,
in which the Portfolio may invest for hedging purposes. See "Investment
Objectives and Policies -- Forward Currency Exchange Contracts" in the Statement
of Additional Information.
LOANS OF PORTFOLIO SECURITIES. The Portfolios may lend their securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. A Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of its total assets.
For more detailed information about securities lending, see "Investment
Objectives and Policies" in the Statement of Additional Information.
MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money
market instruments, although the Portfolios intend to stay invested in
securities satisfying their primary investment objective to the extent
practical. Each Portfolio may make money market investments pending other
investment or settlement for liquidity, or in adverse market conditions. The
money market investments permitted for the Portfolios include obligations of the
United States Government and its agencies and instrumentalities; other debt
securities; commercial paper including bank obligations; certificates of deposit
(including Eurodollar certificates of deposit); and repurchase agreements. For
more detailed information about these money market investments, see "Description
of Securities and Ratings" in the Statement of Additional Information.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Equity Growth and Aggressive Equity Portfolios may invest in
securities that are neither listed on a stock exchange nor traded over the
counter. Such unlisted equity securities may involve a higher degree of business
and financial risk that can result in substantial losses. As a result of the
absence of a public trading market for these securities, they may be less liquid
than publicly traded securities. Although these securities may be resold in
privately negotiated transactions, the prices realized from these sales could be
less than those originally paid by such Portfolios or less than what may be
considered the fair value of such securities. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration. As a
general matter, the Portfolio may not invest more than 15% of its net assets in
illiquid securities, including securities for which there is no readily
available secondary market. Securities that are not registered under the
Securities Act of 1933, as amended, but that can be offered and sold to
qualified institutional buyers under Rule 144A under that Act will not be
included within the foregoing 15% restriction if the securities are determined
to be liquid. The Board of Directors has adopted guidelines and delegated to the
Adviser, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of Rule 144A securities.
Rule 144A securities may become illiquid if qualified institutional buyers are
not interested in acquiring the securities.
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<PAGE>
REPURCHASE AGREEMENTS. The Portfolios may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities, with a market value at least equal to the purchase
price (including accrued interest) as collateral and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The aggregate of certain repurchase
agreements and certain other investments is limited as set forth under
"Investment Limitations."
SHORT SALES
The Aggressive Equity Portfolio may from time to time sell securities short
consistent with applicable legal requirements. A short sale is a transaction in
which the Portfolio would sell securities it either owns or has the right to
acquire at no added cost (i.e., "against the box") or does not own (but has
borrowed) in anticipation of a decline in the market price of the securities.
When the Portfolio makes a short sale of borrowed securities, the proceeds it
receives from the sale will be held on behalf of a broker until the Portfolio
replaces the borrowed securities. To deliver the securities to the buyer, the
Portfolio will need to arrange through a broker to borrow the securities and, in
so doing, the Portfolio will become obligated to replace the securities borrowed
at their market price at the time of the replacement, whatever that price may
be. The Portfolio may have to pay a premium to borrow the securities and must
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 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, if the short sale is not "against the box", the
Portfolio will place in a segregated account with the 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 can equal only the total amount
invested.
SMALL AND MEDIUM-SIZED COMPANIES. Because the Emerging Growth and MicroCap
Portfolios seek long-term capital appreciation by investing primarily in small-
to medium-sized companies and small companies, respectively, both of which types
of companies are more vulnerable to financial and other risks than larger, more
established companies, investments in these Portfolios may involve a higher
degree of risk and price volatility than the general equity markets. The
Aggressive Equity Portfolio may invest in small- to medium-sized companies to a
lesser extent.
STOCK OPTIONS, FUTURES CONTRACTS AND OPTIONS IN FUTURES CONTRACTS. The
Equity Growth and Aggressive Equity Portfolios may write (i.e., sell) covered
call options on portfolio securities. The Equity Growth and Aggressive Equity
Portfolios may write covered put options on portfolio securities. By selling a
covered call
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<PAGE>
option, the Portfolio would become obligated during the term of the option to
deliver the securities underlying the option should the option holder choose to
exercise the option before the option's termination date. In return for the call
it has written, the Portfolio will receive from the purchaser (or option holder)
a premium which is the price of the option, less a commission charged by a
broker. The Portfolio will keep the premium regardless of whether the option is
exercised. By selling a covered put option, the Portfolio incurs an obligation
to buy the security underlying the option from the purchaser of the put at the
option's exercise price at any time during the option period, at the purchaser's
election (certain options written by the Portfolio will be exercisable by the
purchaser only on a specific date). A call option is "covered" if the Portfolio
owns the security underlying the option it has written or has an absolute or
immediate right to acquire the security by holding a call option on such
security, or maintains a sufficient amount of cash, cash equivalents or liquid
securities to purchase the underlying security.
Generally, a put option is "covered" if the Fund maintains cash, U.S.
Government securities or other high grade debt obligations equal to the exercise
price of the option, or if the Fund holds a put option on the same underlying
security with a similar or higher exercise price.
When the Portfolio writes covered call options, it augments its income by
the premiums received and is thereby hedged to the extent of that amount against
a decline in the price of the underlying securities. The premiums received will
offset a portion of the potential loss incurred by the Portfolio if the
securities underlying the options are ultimately sold by the Portfolio at a
loss. However, during the option period, the Portfolio has, in return for the
premium on the option, given up the opportunity for capital appreciation above
the exercise price should the market price of the underlying security increase,
but has retained the risk of loss should the price of the underlying security
decline.
The Equity Growth and the Aggressive Equity Portfolios may write put options
to receive the premiums paid by purchasers (when the Adviser wishes to purchase
the security underlying the option at a price lower than its current market
price, in which case the Portfolio will write the covered put at an exercise
price reflecting the lower purchase price sought) and to close out a long put
option position.
The Equity Growth and the Aggressive Equity Portfolios may also purchase put
options on their portfolio securities or call options. When the Portfolio
purchases a call option it acquires the right to buy a designated security at a
designated price (the "exercise price"), and when the Portfolio purchases a put
option it acquires the right to sell a designated security at the exercise
price, in each case on or before a specified date (the "termination date"),
which is usually not more than nine months from the date the option is issued.
The Portfolio may purchase call options to close out a covered call position or
to protect against an increase in the price of a security it anticipates
purchasing. The Portfolio may purchase put options on securities which it holds
in its portfolio to protect itself against decline in the value of the security.
If the value of the underlying security were to fall below the exercise price of
the put purchased in an amount greater than the premium paid for the option, the
Portfolio would incur no additional loss. The Portfolio may also purchase put
options to close out written put positions in a manner similar to call option
closing purchase transactions. There are no other limits on the Portfolio's
ability to purchase call and put options.
The Equity Growth and the Aggressive Equity Portfolios may enter into
futures contracts and options on futures contracts to remain fully invested and
to reduce transaction costs. The Portfolio may also enter into futures
transactions as a hedge against fluctuations in the price of a security it holds
or intends to acquire, but not
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<PAGE>
for speculation or for achieving leverage. The Portfolio may enter into futures
contracts and options on futures contracts provided that not more than 5% of the
Portfolio's total assets at the time of entering into the contract or option is
required as deposit to secure obligations under such contracts and options, and
provided that not more than 20% of the Portfolio's total assets in the aggregate
is invested in futures contracts and options on futures contracts (and in
options in the case of the Equity Growth and the Aggressive Equity Portfolios).
The Equity Growth and the Aggressive Equity Portfolios may purchase and
write call and put options on futures contracts that are traded on any
international exchange, traded over-the-counter or which are synthetic options
or futures or equity swaps, and may enter into closing transactions with respect
to such options to terminate an existing position. An option on a futures
contract gives the purchaser the right (in return for the premium paid) to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put) at a specified exercise price at
any time during the term of the option. The Portfolio will purchase and write
options on futures contracts for identical purposes to those set forth above for
the purchase of a futures contract (purchase of a call option or sale of a put
option) and the sale of a futures contract (purchase of a put option or sale of
a call option), or to close out a long or short position in future contracts.
Options, futures and options on futures are derivative securities, in which
the Portfolio may invest for hedging purposes, as well as to remain fully
invested and to reduce transaction costs. Investing for the latter two purposes
may be considered speculative. The primary risks associated with the use of
options, futures and options on futures are (i) imperfect correlation between
the change in market value of the stocks held by the Portfolio and the prices of
futures and options relating to the stocks purchased or sold by the Portfolio;
and (ii) possible lack of a liquid secondary market for an option or a futures
contract and the resulting inability to close a futures position which could
have an adverse impact on the Portfolio's ability to hedge. In the opinion of
the Board of Directors, the risk that the Portfolio will be unable to close out
a futures position or options contract will be minimized by only entering into
futures contracts or options transactions for which there appears to be a liquid
secondary market.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, the Portfolios
may reduce their holdings in equity and other securities for temporary defensive
purposes and the Portfolios may invest in certain short-term (less than twelve
months to maturity) and medium-term (not greater than five years to maturity)
debt securities or may hold cash. The short-term and medium-term debt securities
in which the Portfolio may invest consist of (a) obligations of the United
States or foreign country governments, their respective agencies or
instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of United
States or foreign country banks denominated in any currency; (c) floating rate
securities and other instruments denominated in any currency issued by
international development agencies; (d) finance company and corporate commercial
paper and other short-term corporate debt obligations of United States and
foreign country corporations meeting the Portfolio's credit quality standards;
and (e) repurchase agreements with banks and broker-dealers with respect to such
securities. For temporary defensive purposes, the Portfolios intend to invest
only in short-term and medium-term debt securities that the Adviser believes to
be of high quality, i.e., subject to relatively low risk of loss of interest or
principal (there is currently no rating system for debt securities to most
foreign countries).
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<PAGE>
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolios may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment, but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of
high-grade debt securities or cash in an amount at least equal to these
commitments. The payment obligation and the interest rates that will be received
are each fixed at the time a Portfolio enters into the commitment and no
interest accrues to the Portfolio until settlement. Thus, it is possible that
the market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed. It is a
current policy of the Portfolios not to enter into when-issued commitments
exceeding, in the aggregate, 15% of the Portfolio's net assets other than the
obligations created by these commitments.
INVESTMENT LIMITATIONS
Except for the MicroCap and Aggressive Equity Portfolios, each Portfolio is
a diversified investment company and is therefore subject to the following
fundamental limitations: (a) as to 75% of its total assets, a Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government and its agencies and
instrumentalities, and (b) a Portfolio may not own more than 10% of the
outstanding voting securities of any one issuer.
The MicroCap and Aggressive Equity Portfolios are non-diversified portfolios
under the 1940 Act, which means that the Portfolios are not limited by the 1940
Act in the proportion of their assets that may be invested in the obligations of
a single issuer. Thus, the Portfolios may invest a greater proportion of their
assets in the securities of a small number of issuers and as a result will be
subject to greater risk with respect to their portfolio securities. However, the
Portfolios intend to comply with diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as
regulated investment companies. See "Investment Limitations" in the Statement of
Additional Information.
Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, each
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. Each Portfolio
may not: (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 15% of the market value of the Portfolio's
total assets would be invested in such repurchase agreements and other
investments for which market quotations are not readily available or which are
otherwise illiquid; (ii) borrow money, except from banks for extraordinary or
emergency purposes, and then only in amounts up to 10% of the value of the
Portfolio's total assets, taken at cost at the time of borrowing; or purchase
securities while borrowings exceed 5% of its total assets; (iii) mortgage,
pledge or hypothecate any assets except in connection with any such borrowing in
amounts up to 10% of the value of the Portfolio's net assets at the time of
borrowing; (iv) invest in fixed time deposits with a duration of over seven
calendar days; or (v) invest in fixed time deposits with a duration of from two
business days to seven calendar days if more than 10% of the Portfolio's total
assets would be invested in these deposits.
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<PAGE>
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment
Adviser and Administrator of the Fund and each of its portfolios. The Adviser
provides investment advice and portfolio management services pursuant to an
Investment Advisory Agreement and, subject to the supervision of the Fund's
Board of Directors, makes each of the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages each of the Portfolio's investments. The Adviser is entitled to receive
from each Portfolio an annual management fee, payable quarterly, equal to the
percentage of average daily net assets set forth in the table below. However,
the Adviser has agreed to a reduction in the fees payable to it and to reimburse
the Portfolios, if necessary, if such fees would cause the total annual
operating expenses of either Portfolio to exceed the respective percentage of
average daily net assets set forth below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL
OPERATING EXPENSES
AFTER FEE WAIVER
--------------------
PORTFOLIO MANAGEMENT FEE CLASS A CLASS B
- ----------------------------- --------------- --------- ---------
<S> <C> <C> <C>
Equity Growth Portfolio 0.60% 0.80% 1.05%
Emerging Growth Portfolio 1.00% 1.25% 1.50%
MicroCap Portfolio 1.25% 1.50% 1.75%
Aggressive Equity Portfolio 0.80% 1.00% 1.25%
</TABLE>
The fees payable by the Emerging Growth, MicroCap and Aggressive Equity
Portfolios are higher than the management fees paid by most investment
companies, but the Adviser believes the fees are comparable to those of
investment companies with similar investment objectives.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
United States and abroad. At September 30, 1995, the Adviser, together with its
affiliated asset management companies, managed investments totaling
approximately $55.2 billion, including approximately $40.1 billion under active
management and $15.1 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. The following persons have primary responsibility for
managing the Portfolios indicated.
EQUITY GROWTH PORTFOLIO -- KURT FEUERMAN AND MARGARET K. JOHNSON. Kurt
Feuerman joined Morgan Stanley Asset Management in July 1993 as a Managing
Director in the Institutional Equity Group. Previously Mr. Feuerman was a
Managing Director of Morgan Stanley & Co., Incorporated's Research Department,
where he was responsible for emerging growth stocks, gaming and restaurants.
Before joining Morgan Stanley, Mr. Feuerman was a Managing Director of Drexel
Burnham Lambert, where he had been an equity analyst since 1984. Over the years,
he has been highly ranked in the Institutional Investor All American Research
Poll in four separate categories: packaged food, tobacco, emerging growth and
gaming. Mr. Feuerman earned an M.B.A. from Columbia University in 1982, an M.A.
from Syracuse University in 1980, and a B.A. from McGill University in 1977.
Margaret Johnson is a Vice President of the Adviser and a Portfolio Manager in
the Institutional Equity Group. She joined the Adviser in 1984 and worked as an
Analyst in the Marketing and Fiduciary Advisor areas. Ms. Johnson became an
Equity Analyst in 1986 and a Portfolio Manager in 1989. Prior
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<PAGE>
to joining Morgan Stanley, she worked for the New York City PBS affiliate, WNET,
Channel 13. She holds a B.A. degree from Yale College and is a Chartered
Financial Analyst. Mr. Feuerman and Ms. Johnson have had primary responsibility
for managing the Portfolio's assets since July 1993 and April 1991,
respectively.
EMERGING GROWTH PORTFOLIO -- DENNIS G. SHERVA. Dennis Sherva is a Managing
Director of Morgan Stanley & Co., Incorporated and head of emerging growth stock
investments at the Adviser. He has had primary responsibility for managing the
Portfolio's assets since November 1989. Prior to joining the Adviser in 1988,
Mr. Sherva was Morgan Stanley's Director of Worldwide Research activities for
five years and maintained direct responsibility for emerging growth stock
strategy and analysis. As an analyst following emerging growth stocks for the
past decade, he was rated number one in the small growth company category six
times by Institutional Investor magazine's All-America Research Team poll.
Before joining Morgan Stanley in 1977, Mr. Sherva had twelve years of industrial
and investment experience. He serves on the Board of Directors of Morgan Stanley
Venture Capital Inc. and Morgan Stanley R&D Ventures, Inc. Mr. Sherva graduated
from the University of Minnesota and received an M.A. from Wayne State
University. He is also a Chartered Financial Analyst.
AGGRESSIVE EQUITY PORTFOLIO -- KURT FEUERMAN. Information about Mr. Feuerman
is included under the Equity Growth Portfolio above.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the Officers and
the Board of Directors of the Fund and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under Federal and State laws. The Administration Agreement also
provides that the Administrator, through its agents, will provide to the Fund
dividend disbursing and transfer agent services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15% of the average daily net assets of the Portfolio.
In a merger completed on September 1, 1995, The Chase Manhattan Bank, N.A.
("Chase") succeeded to all of the rights and obligations under the U.S. Trust
Administration Agreement between the Adviser and the United States Trust Company
of New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide
certain administrative services to the Fund. Pursuant to a delegation clause in
the U.S. Trust Administration Agreement, U.S. Trust delegated its administration
responsibilities to Chase Global Funds Services Company ("CGFSC"), formerly
known as Mutual Funds Service Company, which after the merger with Chase is a
subsidiary of Chase and will continue to provide certain administrative services
to the Fund. The Adviser supervises and monitors such administrative services
provided by CGFSC. The services provided under the Administration Agreement and
the U.S. Trust Administration Agreement are also subject to the supervision of
the Board of Directors of the Fund. The Board of Directors of the Fund has
approved the provision of services described above pursuant to the
Administration Agreement and the U.S. Trust Administration Agreement as being in
the best interests of the Fund. CGFSC's business address is 73 Tremont Street,
Boston, Massachusetts 02108-3913. For additional information regarding the
Administration Agreement or the U.S. Trust Administration Agreement, see
"Management of the Fund" in the Statement of Additional Information.
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<PAGE>
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered. The Fund has adopted a Plan of
Distribution with respect to the Class B shares pursuant to Rule 12b-1 under the
1940 Act (the "Plan"). Under the Plan, the Distributor is entitled to receive
form the Portfolios a distribution fee, which is accrued daily and paid
quarterly, of 0.25% of the Class B shares' average daily net assets on an
annualized basis. The Distributor expects to reallocate most of its fee to its
investment representatives. The Distributor may, in its discretion, voluntarily
waive form time to time all or any portion of its distribution fee and each of
the Distributor and the Adviser if free to make additional payments out of its
own assets to promote the sale of Fund shares, including payments that
compensate financial institutions for distribution services or sharehholder
services.
The Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees, and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of each Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio account opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares. Managed Accounts may
purchase Class A shares without being subject to such minimum initial investment
or minimum account size requirements for a Portfolio account. Officers of the
Adviser and its affiliates are subject to the minimums for a Portfolio account,
except they may purchase Class B shares subject to a minimum initial investment
and minimum account size of $5,000 for a Portfolio account.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features
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applicable to the Class B shares. The Fund, however, will not convert Class A
shares to Class B shares based solely upon changes in the market that reduce the
net asset value of shares. Under current tax law, conversions between share
classes are not a taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remain Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B Account") convert to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
The Fund reserves the right to modify or terminate the conversion features
of the shares as stated above at any time upon 60-days' notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to New Accounts containing Class B shares held by
officers of the Adviser or its affiliates. However, if the value of such account
held by an officer of the Adviser or its affiliates falls below $5,000 because
of shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains $5,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days' notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
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1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of the Portfolios and $100,000 for Class B shares of the
Portfolios, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio
name]", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The Portfolio(s) to be
purchased should be designated on the Account Registration Form. For purchases
by check, the Fund is ordinarily credited with Federal Funds within one
business day. Thus, your purchase of shares by check is ordinarily credited to
your account at the net asset value per share of each of the relevant
Portfolios determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund
prior to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Chase Manhattan
New York, NY 10081-1000
ABA #021000021
DDA #91-02-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds
C. Complete the Account Registration Form and mail it to the address shown
thereon.
Purchase orders for shares of the Portfolios which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed
at the price computed on the date of receipt as long as the Transfer Agent
receives payment by check or in Federal Funds prior to the regular close of
the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
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3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested.
Your bank may charge a service fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000 except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund, Inc. -- [portfolio name]") at the above address or by wiring monies to the
Custodian Bank as outlined above. It is very important that your account name,
the portfolio name and the class selected be specified in the letter or wire to
assure proper crediting to your account. In order to insure that your wire
orders are invested promptly, you are requested to notify one of the Fund's
representatives (toll free: 1-800-548-7786) prior to the wire date. Additional
investments will be applied to purchase additional shares in the same class held
by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of each Portfolio is
the net asset value next determined after the order is received. See "Valuation
of Shares." An order received prior to the close of the New York Stock Exchange
("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the
price computed on the date of receipt; an order received after the close of the
NYSE will be executed at the price computed on the next day the NYSE is open as
long as the Transfer Agent receives payment by check or in Federal Funds prior
to the regular close of the NYSE on such day.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolios will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
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EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a Portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolio and the Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of a Portfolio from further purchases of shares of the Fund for an
indefinite period. The Fund considers excessive trading to be more than one
purchase and sale involving shares of the same Portfolio within any 120-day
period. For example, exchanging shares of Portfolio A for shares of Portfolio B,
then exchanging shares of Portfolio B for shares of Portfolio C of the Fund and
again exchanging the shares of Portfolio C for shares of Portfolio B within a
120-day period amounts to excessive trading. Two types of transactions are
exempt from these excessive trading restrictions: (1) trades exclusively between
money market portfolios, and (2) trades done in connection with an asset
allocation service managed or advised by MSAM and/or any of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares or Class B shares of a Portfolio at the next determined net asset
value of shares of the applicable class. On days that both the NYSE and the
Custodian Bank are open for business, the net asset value per share of each of
the Portfolios is determined at the close of trading of the NYSE (currently 4:00
p.m. Eastern Time). Shares of the Portfolios may be redeemed by mail or
telephone. No charge is made for redemption. Any redemption may be more or less
than the purchase price of your shares depending on, among other factors, the
market value of the investment securities held by the Portfolios.
BY MAIL
Each Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your request
should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798, except that deliveries by overnight courier
should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global
Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension
and profit sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
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BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by mail or
overnight courier and will be implemented at the net asset value next determined
after it is received. Redemption requests sent to the Fund through express mail
must be mailed to the address of the Dividend Disbursing and Transfer Agent
listed under "General Information". The Fund and the Fund's transfer agent (the
"Transfer Agent") will employ reasonable procedures to confirm that the
instructions communicated by telephone are genuine. These procedures include
requiring the investor to provide certain personal identification information at
the time an account is opened and prior to effecting each transaction requested
by telephone. In addition, all telephone transaction requests will be recorded
and investors may be required to provide additional telecopied written
instructions regarding transaction requests. Neither the Fund nor the Transfer
Agent will be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to be
genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
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SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in the Portfolios for shares of any
other available portfolio of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege is only available with respect to portfolios that are
registered for sale in a shareholder's state of residence. The exchange
privilege may be modified or terminated by the Fund at any time upon 60-days'
notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current portfolio,
the name of the portfolio(s) and the class(es) of shares of the portfolio(s)
into which you intend to exchange shares, and the signatures of all registered
account holders. Send the exchange request to Morgan Stanley Institutional Fund,
P.O. Box 2798, Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current Portfolio, the name(s) of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the
class(es) of the portfolios at the close of business. Requests received after
4:00 p.m. (Eastern Time) are processed the next business day based on the net
asset value determined at the close of business on such day. For additional
information regarding responsibility for the authenticity of telephoned
instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of a Portfolio's shares and may result in involuntary
conversion or redemption of your shares. See "Purchase of Shares" above.
VALUATION OF SHARES
The net asset value per share of a class of shares of each of the Portfolios
is determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such class, less any liabilities attributable
to such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value
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is calculated separately for each class of a Portfolio. Net asset value per
share is determined as of the close of the NYSE on each day that the NYSE is
open for business. Price information on listed securities is taken from the
exchange where the security is primarily traded. Securities listed on a U.S.
securities exchange for which market quotations are available are valued at the
last quoted sale price on the day the valuation is made. 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 not readily available are valued at a price that is considered to best
represent fair value within a range not in excess of the current asked price nor
less than the current bid price. The current bid and asked prices are determined
based on the bid and asked prices quoted on such valuation date by reputable
brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices, but take into account institutional-size trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recently quoted sale price, or
when securities exchange valuations are used, at the latest quoted bid price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above-stated procedures are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid price and
asked price of such currencies against the U.S. dollar as quoted by a major
bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in a
class of a Portfolio would have earned over a specified period of time (such as
one, five or ten years), assuming that all distributions and dividends by the
Portfolio were reinvested in the same class on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes
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that may be payable on dividends and distributions or upon redemption. The Fund
may also include comparative performance information in advertising or marketing
the Portfolio's shares, including data from Lipper Analytical Services, Inc.,
other industry publications, business periodicals, rating services and market
indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash.
The Emerging Growth and the MicroCap Portfolios expect to distribute
substantially all of their net investment income in the form of annual dividends
and the Equity Growth and the Aggressive Equity Portfolios expect to distribute
substantially all of their net investment income in the form of quarterly
dividends. Net realized gains for each Portfolio, if any, after reduction for
any available tax loss carryforwards will also be distributed annually.
Confirmations of the purchase of shares of each Portfolio through the automatic
reinvestment of income dividends and capital gains distributions will be
provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act of 1934,
as amended, on the next monthly client statement following such purchase of
shares. Consequently, confirmations of such purchases will not be provided at
the time of completion of such purchases, as might otherwise be required by Rule
10b-10.
Undistributed net investment income is included in each Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolios will differ at times.
Expenses of the Portfolio allocated to a particular class of shares thereof will
be borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
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Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. It is each
Portfolio's intent to continue to qualify for the special tax treatment afforded
regulated investment companies under the Code, so that the Portfolio will
continue to be relieved of federal income tax on that part of its net investment
income and net capital gain that is distributed to shareholders.
Each Portfolio distributes substantially all of its net investment income
(including, for this purpose, the excess of net short-term capital gain over net
long-term capital loss) to shareholders. Dividends from a Portfolio's net
investment income are taxable to shareholders as ordinary income, whether
received in cash or in additional shares. Such dividends paid by a Portfolio
will generally qualify for the 70% dividends-received deduction for corporate
shareholders to the extent of qualifying dividend income received by the
Portfolio from U.S. corporations. Each Portfolio will report annually to its
shareholders the amount of dividend income qualifying for such treatment.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. Each
Portfolio sends reports annually to its shareholders of the federal income tax
status of all distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses), prior to the end of each calendar year to avoid liability for federal
excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale, redemption, or exchange of shares may result in taxable gain or
loss to the redeeming shareholder, depending upon whether the fair market value
of the redemption proceeds exceeds or is less than the shareholder's adjusted
basis in the redeemed shares. Any such taxable gain or loss generally will be
treated as long-term capital gain or loss if the shares have been held for more
than one year and otherwise generally will be treated as short-term capital gain
or loss. If capital gain distributions have been made with respect to shares
that are sold at a loss after being held for six months or less, however, then
the loss is treated as a long-term capital loss to the extent of the capital
gain distributions.
Investment income received by a Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that a Portfolio is liable for foreign income taxes so withheld, it is
not expected that a Portfolio or its shareholders would be able to claim a
credit for U.S. tax purposes with respect to any such foreign taxes.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
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THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolios and directs the Adviser to use its best efforts to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolios. The Fund has authorized the Adviser to pay
higher commissions in recognition of brokerage services which, in the opinion of
the Adviser, are necessary for the achievement of better execution, provided the
Adviser believes this to be in the best interest of the Fund.
Since shares of the Portfolios are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Fund's portfolios or who act as agents in the purchase of
shares of the Fund's portfolios for their clients.
In purchasing and selling securities for the Portfolios, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolios may also be appropriate
for other clients served by the Adviser. If the purchase or sale of securities
consistent with the investment policies of the Portfolios and one or more of
these other clients served by the Adviser is considered at or about the same
time, transactions in such securities will be allocated among the Portfolios and
such other clients in a manner deemed fair and reasonable by the Adviser.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Adviser, and the results of such
allocations, are subject to periodic review by the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of the Portfolio's brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Fund, the commissions, fees or other remuneration received by Morgan Stanley
or such affiliates must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of those Directors who are not
"interested persons," as defined in the 1940 Act, have adopted procedures which
are reasonably designed to provide that any commissions, fees or other
remuneration paid to Morgan Stanley or such affiliates are consistent with the
foregoing standard.
37
<PAGE>
Portfolio securities will not be purchased from or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.
Although none of the Portfolios will invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. For the Equity Growth, Emerging Growth and MicroCap
Portfolios, it is anticipated that, under normal circumstances, the annual
portfolio turnover rate will not exceed 100%. However, the annual portfolio
turnover rate of the Equity Growth Portfolio for the fiscal year ended December
31, 1994 was 146%. For the Aggressive Equity Portfolio, the annual portfolio
turnover rate is expected to exceed 100%. High portfolio turnover involves
correspondingly greater transaction costs which will be borne directly by the
respective Portfolio. In addition, high portfolio turnover may result in more
capital gains which would be taxable to the shareholders of the respective
Portfolio. The tables set forth in "Financial Highlights" present the
Portfolios' historical turnover rates.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by the shareholders, the Board of Directors has the power
to designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with respect to such classes. The shares of
common stock of each portfolio are currently classified into two classes, the
Class A shares and the Class B shares, except for the International Small Cap,
Money Market and Municipal Money Market Portfolios, which only offer Class A
shares.
The shares of the Portfolios, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Persons or organizations owning 25% or more
of the outstanding shares of a Portfolio may be presumed to "control" (as
defined in the 1940 Act) such Portfolio. As of December 18, 1995, Northern Trust
Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O. Box 92956,
Chicago, Illinois 60675 was presumed to "control" the Equity Growth Portfolio
based solely on their ownership of 25% or more of the outstanding voting shares
of such Portfolio. Under Maryland law, the Fund is not required to hold an
annual meeting of its shareholders unless required to do so under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
38
<PAGE>
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
As of September 1, 1995, domestic securities and cash are held by Chase,
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits the annual financial statements of each Portfolio.
LITIGATION
The Fund is not involved in any litigation.
39
<PAGE>
<TABLE>
<CAPTION>
<S><C>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
EQUITY GROWTH, EMERGING GROWTH, MICROCAP AND AGRESSIVE EQUITY PORTFOLIOS
P.O. Box 2798, Boston, MA 02208-2798
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT REGISTRATION FORM
- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, please contact your Morgan Stanley representative or call us
toll free 1-(800)-548-7786. Please print all items except signature, and mail to
the Fund at the address above.
- -----------------------------------------------------------------------------------------------------------------------------------
A) REGISTRATION
1. INDIVIDUAL 1.
------------------------------------------------------------------------------------------------
2. JOINT TENANTS First Name Initial Last Name
(RIGHTS OF SURVIVORSHIP 2.
PRESUMED UNLESS ------------------------------------------------------------------------------------------------
TENANCY IN COMMON First Name Initial Last Name
IS INDICATED)
------------------------------------------------------------------------------------------------
First Name Initial Last Name
- -----------------------------------------------------------------------------------------------------------------------------------
3. CORPORATIONS, 3.
TRUSTS AND OTHERS ------------------------------------------------------------------------------------------------
Please call the Fund
for additional documents ------------------------------------------------------------------------------------------------
that may be required to
set up account and to ------------------------------------------------------------------------------------------------
authorize transactions Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/
ASSOCIATION TRANSFER TO
MINOR (ONLY ONE
CUSTODIAN AND
MINOR PERMITTED)
/ / TRUST / / OTHER (Specify)
------------------------ -------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box
-------------------------------------------------------------------------------
Please fill in City State Zip
completely, including -------------------------------------- ---- --------------------------------------
telephone number(s). Home Telephone No. - - Business Telephone No. - -
------------ ------------
/ / United States Citizen / / Resident Alien / / Non-Resident Alien: Indicate Country of Residence
------------------
- -----------------------------------------------------------------------------------------------------------------------------------
C) TAXPAYER PART 1. Enter your Taxpayer IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For You (as a payee) are required by law to provide us
NUMBER most individual taxpayers, (as payer) with your correct Taxpayer Identification
If the account is in more than this is your Social Security Number. Accounts that have a missing or incorrect Taxpayer
one name, CIRCLE THE NAME OF Number. Identification Number will be subject to backup withholding
THE PERSON WHOSE TAXPAYER TAXPAYER IDENTIFICATION at a 31% rate on dividends, distributions and other payments.
IDENTIFICATION NUMBER IS NUMBER If you have not provided us with your correct taxpayer
PROVIDED IN SECTION A) ABOVE. -------------------------- identification number, you may be subject to a $50 penalty
If no name is circled, the imposed by the Internal Revenue Service.
number will be considered to OR Backup withholding is not an additional tax; the tax
be that of the last name SOCIAL SECURITY NUMBER liability of persons subject to backup withholding will be
listed. For Custodian account -------------------------- reduced by the amount of tax withheld. If withholding
of a minor (Uniform Gifts/ results in an overpayment of taxes, a refund may be
Transfers to Minors Acts), PART 2. BACKUP WITHHOLDING obtained.
give the Social Security / / Check this box if you are You may be notified that you are subject to backup
Number of the minor. NOT subject to Backup withholding under Section 3406(a)(1)(C) of the Internal
Withholding under the Revenue Code because you have underreported interest or
provisions of Section dividends or you were required to but failed to file a return
3406(a)(1)(C) of the Internal which would have included a reportable interest or
Revenue Code. dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK
THE BOX IN PART 2 AT LEFT.
- -----------------------------------------------------------------------------------------------------------------------------------
D) PORTFOLIO AND CLASS For Purchase of the following Portfolio(s):
SELECTION (Class A Shares
minimum $500,000 for each EQUITY GROWTH PORTFOLIO / / Class A Shares / / Class B Shares
Portfolio and Class B ------------ ------------
shares minimum $100,000 for EMERGING GROWTH PORTFOLIO / / Class A Shares / / Class B Shares
each Portfolio). Please ------------ ------------
indicate Portfolio, class MICROCAP PORTFOLIO / / Class A Shares / / Class B Shares
and amount. ------------ ------------
AGGRESSIVE EQUITY PORTFOLIO / / Class A Shares / / Class B Shares
------------ ------------
Total Initial Investment $
--------------
- -----------------------------------------------------------------------------------------------------------------------------------
<PAGE>
E) METHOD OF INVESTMENT Payment by:
Please indicate manner of / / check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--PORTFOLIO NAME)
payment.
/ / Exchange $ From -
---------------- ------------------------ -------------------------
Name of Portfolio Account Number
/ / Account previously established by:
/ / Phone exchange / / Wire on -
--------------------------- --------------------------
Date Account Number (Check
(Previously assigned Digit)
by the Fund)
- -----------------------------------------------------------------------------------------------------------------------------------
F) DISTRIBUTION Income dividends and capital gains distributions (if any) will be reinvested in
OPTION additional shares unless either box below is checked.
/ / Income dividends to be paid in cash, capital gains distributions (if any) in
shares.
/ / Income dividends and capital gains distributions (if any) to be paid in
cash.
- -----------------------------------------------------------------------------------------------------------------------------------
G) TELEPHONE / / I/we hereby authorize the Fund and its
REDEMPTION agents to honor any telephone requests to ------------------------- -------------------------
Please select at time of wire redemption proceeds to the Name of COMMERCIAL Bank Bank Account No.
initial application if commercial bank indicated at right and/or (Not Savings Bank)
you wish to redeem shares mail redemption proceeds to the name -------------------------
by telephone. A SIGNATURE and address in which my/our fund account Bank ABA No.
GUARANTEE IS REQUIRED IF is registered if such requests are believed ---------------------------------------------------
BANK ACCOUNT IS NOT to be authentic. Name(s) in which your Bank Account is Established
REGISTERED IDENTICALLY TO
YOUR FUND ACCOUNT. THE FUND AND THE FUND'S TRANSFER AGENT ---------------------------------------------------
WILL EMPLOY REASONABLE PROCEDURES TO Bank's Street Address
TELEPHONE REQUESTS FOR CONFIRM THAT INSTRUCTIONS COMMUNICATED BY
REDEMPTIONS WILL NOT TELEPHONE ARE GENUINE. THESE PROCEDURES ---------------------------------------------------
BE HONORED UNLESS THE INCLUDE REQUIRING THE INVESTOR TO PROVIDE City State Zip
BOX IS CHECKED. CERTAIN PERSONAL IDENTIFICATION INFORMATION AT
THE TIME AN ACCOUNT IS OPENED AND PRIOR TO
EFFECTING EACH TRANSACTION REQUESTED BY
TELEPHONE. IN ADDITION, ALL TELEPHONE
TRANSACTION REQUESTS WILL BE RECORDED AND
INVESTORS MAY BE REQUIRED TO PROVIDE
ADDITIONAL TELECOPIED WRITTEN INSTRUCTIONS OF
TRANSACTION REQUESTS. NEITHER THE FUND NOR
THE TRANSFER AGENT WILL BE RESPONSIBLE FOR
ANY LOSS, LIABILITY, COST OR EXPENSE FOR
FOLLOWING INSTRUCTIONS RECEIVED BY TELEPHONE
THAT IT REASONABLY BELIEVES TO BE GENUINE.
- -----------------------------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION ------------------------------------------------------------------------------------------------
Name
In addition to the ac-
count statement sent to ------------------------------------------------------------------------------------------------
my/our registered ad-
dress, I/we hereby au-
thorize the fund to mail ------------------------------------------------------------------------------------------------
duplicate statements to Address
the name and address
provided at right. ------------------------------------------------------------------------------------------------
City State Zip Code
- -----------------------------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION -------------------- -------------------- --------------------
Representative Name Representative No. Branch No.
- -----------------------------------------------------------------------------------------------------------------------------------
J) SIGNATURE OF The undersigned certify that I/we have full authority and legal capacity to purchase and redeem
ALL HOLDERS shares of the Fund and affirm that I/we have received a current Prospectus of the Morgan Stanley
AND TAXPAYER Institutional Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF PERJURY,
CERTIFICATION I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE.
Sign Here -- (X) (X)
----------------------------------------- ----------------------------------------------------
Signature Date Signature Date
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 5
Prospectus Summary................................ 9
Investment Objectives and Policies................ 13
Additional Investment Information................. 17
Investment Limitations............................ 24
Management of the Fund............................ 25
Purchase of Shares................................ 27
Redemption of Shares.............................. 31
Shareholder Services.............................. 33
Valuation of Shares............................... 33
Performance Information........................... 34
Dividends and Capital Gains Distributions......... 35
Taxes............................................. 35
Portfolio Transactions............................ 37
General Information............................... 38
Account Registration Form
</TABLE>
EQUITY GROWTH PORTFOLIO
EMERGING GROWTH PORTFOLIO
MICROCAP PORTFOLIO
AGGRESSIVE EQUITY PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund currently consists of twenty-seven portfolios
representing a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment needs.
This prospectus (the "Prospectus") pertains to the Class A and the Class B
shares of the U.S. Real Estate Portfolio (the "Portfolio"). On January 2, 1996,
the Portfolio began offering two classes of shares: the Class A shares and the
Class B shares. All shares of the Portfolio owned prior to January 2, 1996 were
redesignated Class A shares on January 2, 1996. The Class A and Class B shares
currently offered by the Portfolio have different minimum investment
requirements and fund expenses. Shares of the portfolios are offered with no
sales charge or exchange or redemption fee (with the exception of one of the
portfolios).
INVESTORS SHOULD NOTE THAT THE PORTFOLIO MAY INVEST UP TO 10% OF ITS TOTAL
ASSETS IN RESTRICTED SECURITIES OTHER THAN RULE 144A SECURITIES AND NO MORE THAN
15% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES THAT ARE RULE 144A SECURITIES.
SEE "ADDITIONAL INVESTMENT INFORMATION -- NON-PUBLICLY TRADED SECURITIES,
PRIVATE PLACEMENTS AND RESTRICTED SECURITIES." INVESTMENTS IN RESTRICTED
SECURITIES IN EXCESS OF 5% OF A PORTFOLIO'S TOTAL ASSETS MAY BE CONSIDERED A
SPECULATIVE ACTIVITY, MAY INVOLVE GREATER RISK AND MAY INCREASE THE PORTFOLIO'S
EXPENSES.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional investors and high net
worth individual investors a series of portfolios which benefit from the
investment expertise and commitment to excellence associated with Morgan Stanley
and its affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, China Growth, Emerging Markets,
European Equity, Global Equity, Gold, International Equity, International Small
Cap and Japanese Equity Portfolios; (ii) U.S. EQUITY -- Emerging Growth, Equity
Growth, Aggressive Equity, MicroCap, Small Cap Value Equity, Value Equity and
U.S. Real Estate Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced and Latin
American Portfolios; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income,
Global Fixed Income, High Yield, Mortgage-Backed Securities and Municipal Bond
Portfolios; and (v) MONEY MARKET -- Money Market and Municipal Money Market
Portfolios. Additional information about the Fund is contained in a "Statement
of Additional Information" dated January 2, 1996, which is incorporated herein
by reference. The Statement of Additional Information and the prospectuses
pertaining to the other portfolios of the Fund are available upon request and
without charge by writing or calling the Fund at the address and telephone
number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY 2, 1996.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A................................................................................... None
Class B................................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
Class A................................................................................... None
Class B................................................................................... None
Deferred Sales Load
Class A................................................................................... None
Class B................................................................................... None
Redemption Fees
Class A................................................................................... None
Class B................................................................................... None
Exchange Fees
Class A................................................................................... None
Class B................................................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- --------------------------------------------------------------------------------------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C>
Management Fee (Net of Fee Waiver)*
Class A................................................................................... 0.12%
Class B................................................................................... 0.12%
12b-1 Fees
Class A................................................................................... None
Class B................................................................................... 0.25%
Other Expenses
Class A................................................................................... 0.88%
Class B................................................................................... 0.88%
Total Operating Expenses (Net of Fee Waivers)*
Class A................................................................................... 1.00%
Class B................................................................................... 1.25%
---------
---------
</TABLE>
- --------------
*The Adviser has agreed to waive its management fees and/or to reimburse the
Portfolio, if necessary, if such fees would cause the Portfolio's total annual
operating expenses, as a percentage of average daily net assets, to exceed the
percentages set forth in the table above. Absent the fee waiver, the management
fee would be 0.80%. Absent the fee waiver and/or expense reimbursement, the
Portfolio's total operating expenses would be 1.68% of the average daily net
assets of the Class A shares and 1.93% of the average daily net assets of the
Class B shares. As a result of this reduction, the Management Fee stated above
is lower than the contractual fee stated under "Management of the Fund." The
Adviser reserves the right to terminate any of its fee waivers and/or expense
reimbursements at any time in its sole discretion. For further information on
Fund expenses, see "Management of the Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. The Class A expenses and fees for the Portfolio are estimated using
actual figures for the period ended June 30, 1995. The Class B expenses and fees
for the Portfolio are based on estimates, assuming that the average daily net
assets of the Class B shares of the Portfolio will be $50,000,000. "Other
Expenses" include Board of Directors' fees and expenses, amortization of
organizational costs, filing fees, professional fees and costs for shareholder
reports. Due to the continuous nature of Rule 12b-1 fees, long term Class B
shareholders may pay more than the equivalent of the maximum front-end sales
charges otherwise permitted by the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD").
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolio charges
no redemption fees of any kind. The example is based on total operating expenses
of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
----------- -----------
<S> <C> <C>
U.S. Real Estate Portfolio
Class A............................................................................ $ 10 $ 32
Class B............................................................................ $ 11 $ 33
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The Fund intends to comply with all state laws that restrict investment
company expenses. Currently, the most restrictive state law requires that the
aggregate annual expenses of an investment company shall not exceed two and
one-half percent (2 1/2%) of the first $30 million of average net assets, two
percent (2%) of the next $70 million of average net assets, and one and one-half
percent (1 1/2%) of the remaining net assets of such investment company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse the Portfolio, if necessary, if in any fiscal year the sum of the
Portfolio's expenses exceeds the limit set by applicable state law.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A shares of
the Portfolio for each of the periods presented. The new Class B shares were not
offered prior to the date of this Prospectus. The unaudited financial highlights
for the Class A shares for the six months ended June 30, 1995 are part of the
Fund's financial statements which appear in the Fund's June 30, 1995 Semi-Annual
Report to Shareholders, which is included in the Fund's Statement of Additional
Information. The Semi-Annual Report and the financial statements therein, along
with the Statement of Additional Information, are available at no cost from the
Fund at the address and telephone number noted on the cover page of this
Prospectus. The following information should be read in conjunction with the
financial statements and notes thereto.
U.S. REAL ESTATE PORTFOLIO
<TABLE>
<CAPTION>
FEBRUARY 24, 1995*
TO JUNE 30, 1995
-------------------
(UNAUDITED)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).................. 0.19
Net Realized and Unrealized Gain on
Investments............................... 0.64
Total from Investment Operations........... 0.83
NET ASSET VALUE, END OF PERIOD............... $10.83
TOTAL RETURN................................. 8.30%
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $ 39,920
Ratio of Expenses to Average Net Assets
(1)(2).................................... 1.00%**
Ratio of Net Investment Income to Average
Net Assets (1)(2)......................... 8.27%**
Portfolio Turnover Rate.................... 41%
</TABLE>
- --------------
(1) Effect of voluntary expense limitation during the period:
<TABLE>
<S> <C>
Per share benefit to net investment income................... $0.02
Ratios before expense limitation:
Expenses to Average Net Assets............................... 1.68%**
Net Investment Income to Average Net Assets.................. 7.66%**
</TABLE>
(2) Under the terms of an Investment Advisory Agreement, the Adviser is
entitled to receive a management fee calculated at an annual rate of
0.80% of the average daily net assets of the Portfolio. The Adviser has
agreed to waive a portion of this fee and/or reimburse expenses of the
Portfolio to the extent that the total operating expenses of the
Portfolio exceed 1.00% of the average daily net assets of the Class A
shares and 1.25% of the average daily net assets of the Class B shares.
In the period ended June 30, 1995, the Adviser waived management fees
and/or reimbursed expenses totalling $58,000, for the Portfolio.
* Commencement of Operations.
** Annualized.
4
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-seven portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except the International
Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class
B shares. Each portfolio has its own investment objective and policies designed
to meet specific goals. The investment objective of the U.S. Real Estate
Portfolio is as follows:
-The U.S. REAL ESTATE 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 other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The objectives of these other portfolios are listed
below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in the equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $500 million.
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
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-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and debt
securities issued or guaranteed by Latin American governments or
governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of medium and
large capitalization companies.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including United States issuers.
-The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
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MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which at September 30, 1995, together with its affiliated
asset management companies, had approximately $55.2 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. Shares in a Portfolio account opened prior to January 2, 1996
(each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996.
For a Portfolio account opened on or after January 2, 1996 (a "New Account"),
the minimum initial investment is $500,000 for Class A shares and $100,000 for
Class B shares. Certain exceptions to the foregoing minimums apply to (1) shares
in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the
Adviser and its affiliates; and (3) certain advisory or asset allocation
accounts, such as Total Funds Management accounts, managed by Morgan Stanley or
its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves
the right in its sole discretion to determine which of such advisory or asset
allocation accounts shall be Managed Accounts. For information regarding Managed
Accounts please contact your Morgan Stanley account representative or the Fund
at the telephone number provided on the cover of this Prospectus. Shares in a
Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a
"Grandfathered Class B Account") convert to Class B shares on March 1, 1996. See
"Purchase of Shares -- Minimum Investment and Account Sizes; Conversion from
Class A to Class B Shares."
The minimum subsequent investment for a Portfolio account is $1,000 (except
for automatic reinvestment of dividends and capital gains distributions for
which there is no minimum). Such subsequent investments will be applied to
purchase additional shares in the same class held by a shareholder in a
Portfolio account. See "Purchase of Shares -- Additional Investments."
HOW TO REDEEM
Class A shares or Class B shares of the Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions may cause
involuntary
7
<PAGE>
redemption or automatic conversion. Class A or Class B shares held in New
Accounts are subject to involuntary redemption if shareholder redemption(s) of
such shares reduces the value of such account to less than $100,000 for any
continuous 60-day period. Involuntary redemption does not apply to Managed
Accounts, Grandfathered Class A Accounts and Grandfathered Class B Accounts,
regardless of the value of such accounts. Class A shares in a New Account will
convert to Class B shares if shareholder redemption(s) of such shares reduces
the value of such account to less than $500,000 for any continuous 60-day
period. Class B shares in a New Account will convert to Class A shares if
shareholder purchases of additional Class B shares or market activity cause the
value of the Class B shares in the New Account to increase to $500,000 or more.
See "Purchase of Shares -- Minimum Account Sizes and Involuntary Redemption of
Shares" and "Redemption of Shares."
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. Because the Portfolio
invests primarily in the securities of companies principally engaged in the real
estate industry, its investments may be subject to the risks associated with the
direct ownership of real estate. The Portfolio's share price and investment
return fluctuate, and a shareholder's investment when redeemed may be worth more
or less than his original cost. Because the Portfolio may invest a substantial
portion of its assets in real estate investment trusts ("REITs"), the Portfolio
may also be subject to certain risks associated with the direct investments of
REITs. Because the Portfolio is a non-diversified portfolio, the Portfolio may
invest a greater proportion of its assets in the securities of a smaller number
of issuers and, as a result, will be subject to a greater risk with respect to
its portfolio securities. See "Investment Objective and Policies -- Risk
Factors."
8
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio is described below, together with
the policies the Fund employs in its efforts to achieve this objective. The
Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolio will attain its objectives.
The investment policies described below are not fundamental policies and may be
changed without shareholder approval.
The investment objective of the Portfolio is 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 ("REITs"). Equity securities include common stocks,
shares or units of beneficial interest of REITs, limited partnership interests
in master limited partnerships, rights or warrants to purchase common stocks,
securities convertible into common stocks, and preferred stock.
Under normal circumstances, at least 65% of the Portfolio's total assets
will be invested in income producing equity securities of companies principally
engaged in the U.S. real estate industry. For purposes of the Portfolio's
investment policies, a company is "principally engaged" in the real estate
industry if (i) it derives at least 50% of its revenues or profits from the
ownership, construction, management, financing or sale of residential,
commercial or industrial real estate or (ii) it has at least 50% of the fair
market value of its assets invested in residential, commercial or industrial
real estate. Companies in the real estate industry may include among others:
REITs, master limited partnerships that invest in interests in real estate, real
estate operating companies, and companies with substantial real estate holdings,
such as hotel companies, residential builders and land-rich companies. The
Portfolio seeks to invest in equity securities of companies that provide a
dividend yield that exceeds the composite dividend yield of securities
comprising the Standard & Poor's Stock Price Index ("S&P 500").
A substantial portion of the Portfolio's total assets will be invested in
securities of REITs. REITs pool investors' funds for investment primarily in
income producing real estate or real estate related loans or interests. A REIT
is not taxed on income distributed to its shareholders or unitholders if it
complies with regulatory requirements relating to its organization, ownership,
assets and income, and with a regulatory requirement that it distribute to its
shareholders or unitholders at least 95% of its taxable income for each taxable
year. Generally, REITs can be classified as Equity REITs, Mortgage REITs or
Hybrid REITs. Equity REITs invest the majority of their assets directly in real
property and derive their income primarily from rents and capital gains from
appreciation realized through property sales. Equity REITs are further
categorized according to the types of real estate securities they own, e.g.,
apartment properties, retail shopping centers, office and industrial properties,
hotels, health-care facilities, manufactured housing and mixed-property types.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive their income primarily from interest payments. Hybrid REITs combine the
characteristics of both Equity and Mortgage REITs. The Portfolio will invest
primarily in Equity REITs. A shareholder in the Portfolio should realize that by
investing in REITs indirectly through the Portfolio, he will bear not only his
proportionate share of the expenses of the Portfolio, but also indirectly, the
management expenses of underlying REITs.
Under normal circumstances, the Portfolio may invest up to 35% of its total
assets in debt securities issued or guaranteed by real estate companies or
secured by real estate assets and rated, at time of purchase, in one of the four
highest rating categories by a nationally recognized statistical rating
organization ("NRSRO") or
9
<PAGE>
determined by the Adviser to be of comparable quality at the time of purchase,
high quality money market instruments, such as notes, certificates of deposit or
bankers' acceptances issued by domestic or foreign insures, or high-grade debt
securities, consisting of corporate debt securities and United States Government
securities. Securities rated in the lowest category of investment grade
securities have speculative characteristics. Investment grade securities are
securities that are rated in one of the four highest rating categories by an
NRSRO.
Any remaining assets not invested as described above may be invested in
certain securities or obligations, including derivative securities, as set forth
in "Additional Investment Information" below. The Portfolio may concentrate in
the U.S. real estate industry, but may not invest more than 25% of its total
assets in securities of companies in any one other industry (for these purposes
the U.S. Government and its agencies and instrumentalities are not considered an
industry).
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. Because the Portfolio
invests primarily in the securities of companies principally engaged in the real
estate industry, its investments may be subject to the risks associated with the
direct ownership of real estate. These risks include: the cyclical nature of
real estate values, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, demographic trends and variations in rental income, changes
in zoning laws, casualty or condemnation losses, environmental risks, regulatory
limitations on rents, changes in neighborhood values, related party risks,
changes in the appeal of properties to tenants, increases in interest rates and
other real estate capital market influences. Generally, increases in interest
rates will increase the costs of obtaining financing, which could directly and
indirectly decrease the value of the Portfolio's investments. The Portfolio's
share price and investment return fluctuate, and a shareholder's investment when
redeemed may be worth more or less than his original cost.
Because the Portfolio may invest a substantial portion of its assets in
REITs, the Portfolio may also be subject to certain risks associated with the
direct investments of REITs. REITs may be affected by changes in the value of
their underlying properties and by defaults by borrowers or tenants. Mortgage
REITs may be affected by the quality of the credit extended. Furthermore, REITs
are dependent on specialized management skills. Some REITs may have limited
diversification and may be subject to risks inherent in investments in a limited
number of properties, in a narrow geographic area, or in a single property type.
REITs depend generally on their ability to generate cash flow to make
distributions to shareholders or unitholders, and may be subject to defaults by
borrowers and to self-liquidations. In addition, the performance of a REIT may
be affected by its failure to qualify for tax-free pass-through of income under
the Internal Revenue Code of 1986, as amended (the "Code"), or its failure to
maintain exemption from registration under the Investment Company Act of 1940,
as amended (the "1940 Act"). Changes in prevailing interest rates may inversely
affect the value of the debt securities in which the Portfolio will invest.
Changes in the value of portfolio securities will not necessarily affect cash
income derived from these securities but will affect a Portfolio's net asset
value.
Because the Portfolio is a non-diversified portfolio, the Portfolio is not
limited by the 1940 Act in the proportion of its assets that may be invested in
the obligations of a single issuer. Thus, the Portfolio may invest a greater
proportion of its assets in the securities of a smaller number of issuers and,
as a result, will be subject to a greater risk with respect to its portfolio
securities. Any economic, political, or regulatory developments affecting
10
<PAGE>
the value of the securities the Portfolio holds could have a greater impact on
the total value of the Portfolio's holdings than would be the case if the
Portfolio's securities were diversified among more issuers. The Portfolio,
however, intends to comply with the diversification requirements imposed by the
Code for qualification as a regulated investment company. See "Taxes" and
"Investment Limitations."
ADDITIONAL INVESTMENT INFORMATION
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend their securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. A Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of its total assets.
For more detailed information about securities lending, see "Investment
Objectives and Policies" in the Statement of Additional Information.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
The Portfolio may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. The money market
investments permitted for the Portfolio include obligations of the United States
Government and its agencies and instrumentalities, other debt securities,
commercial paper including bank obligations, certificates of deposit, and
repurchase agreements. For more detailed information about these money market
investments, see "Description of Securities and Ratings" in the Statement of
Additional Information.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolio may invest in securities that are neither listed on a
stock exchange nor traded over-the-counter, including privately placed
securities. Such unlisted equity securities may involve a higher degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Portfolio or less than what may be
considered the fair value of such securities. Furthermore, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration. The
Portfolio may not invest more than 15% of its net assets in illiquid securities,
including securities for which there is not readily available secondary market
nor more than 10% of its total assets in securities that are restricted from
sale to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act"). Nevertheless, subject to
the foregoing limit on illiquid securities, the Portfolio may invest up to 15%
of its total assets in Restricted Securities that can be offered and sold to
qualified institutional buyers under Rule 144A under that Act ("144A
Securities"). The Board of Directors has adopted guidelines and delegated to the
Adviser, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of 144A Securities. 144A
Securities may become illiquid if qualified institutional buyers are not
interested in acquiring the securities.
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<PAGE>
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities, with a market value at least equal to the purchase
price (including accrued interest) as collateral and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The aggregate of certain repurchase
agreements and certain other investments is limited as set forth under
"Investment Limitations."
STOCK OPTIONS, FUTURES CONTRACTS AND OPTIONS IN FUTURES CONTRACTS. The
Portfolio may write (i.e., sell) covered call options on portfolio securities.
The Portfolio may write covered put options on portfolio securities. By selling
a covered call option, the Portfolio would become obligated during the term of
the option to deliver the securities underlying the option should the option
holder choose to exercise the option before the option's termination date. In
return for the call it has written, the Portfolio will receive from the
purchaser (or option holder) a premium which is the price of the option, less a
commission charged by a broker. The Portfolio will keep the premium regardless
of whether the option is exercised. By selling a covered put option, the
Portfolio incurs an obligation to buy the security underlying the option from
the purchaser of the put at the option's exercise price at any time during the
option period, at the purchaser's election (certain options written by the
Portfolio will be exercisable by the purchaser only on a specific date). A call
option is "covered" if the Portfolio owns the security underlying the option it
has written or has an absolute or immediate right to acquire the security by
holding a call option on such security, or maintains a sufficient amount of
cash, cash equivalents or liquid securities to purchase the underlying security.
Generally, a put option is "covered" if the Fund maintains cash, U.S. Government
securities or other high grade debt obligations equal to the exercise price of
the option, or if the Fund holds a put option on the same underlying security
with a similar or higher exercise price.
When the Portfolio writes covered call options, it augments its income by
the premiums received and is thereby hedged to the extent of that amount against
a decline in the price of the underlying securities. The premiums received will
offset a portion of the potential loss incurred by the Portfolio if the
securities underlying the options are ultimately sold by the Portfolio at a
loss. However, during the option period, the Portfolio has, in return for the
premium on the option, given up the opportunity for capital appreciation above
the exercise price should the market price of the underlying security increase,
but has retained the risk of loss should the price of the underlying security
decline.
The Portfolio will write put options to receive the premiums paid by
purchasers (when the Adviser wishes to purchase the security underlying the
option at a price lower than its current market price, in which case the
Portfolio will write the covered put at an exercise price reflecting the lower
purchase price sought) and to close out a long put option position.
The Portfolio may also purchase put options on its portfolio securities or
call options. When the Portfolio purchases a call option it acquires the right
to buy a designated security at a designated price (the "exercise price"), and
when the Portfolio purchases a put option it acquires the right to sell a
designated security at the
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<PAGE>
exercise price, in each case on or before a specified date (the "termination
date"), which is usually not more than nine months from the date the option is
issued. The Portfolio may purchase call options to close out a covered call
position or to protect against an increase in the price of a security it
anticipates purchasing. The Portfolio may purchase put options on securities
which it holds in its portfolio to protect itself against decline in the value
of the security. If the value of the underlying security were to fall below the
exercise price of the put purchased in an amount greater than the premium paid
for the option, the Portfolio would incur no additional loss. The Portfolio may
also purchase put options to close out written put positions in a manner similar
to call option closing purchase transactions. There are no other limits on the
Portfolio's ability to purchase call and put options.
The Portfolio may enter into futures contracts and options on futures
contracts to remain fully invested and to reduce transaction costs. The
Portfolio may also enter into futures transactions as a hedge against
fluctuations in the price of a security it holds or intends to acquire, but not
for speculation or for achieving leverage. The Portfolio may enter into futures
contracts and options on futures contracts provided that not more than 5% of the
Portfolio's total assets at the time of entering into the contract or option is
required as deposit to secure obligations under such contracts and options, and
provided that not more than 20% of the Portfolio's total assets in the aggregate
is invested in futures contracts and options on futures contracts.
The Portfolio may purchase and write call and put options on futures
contracts that are traded on any international exchange, traded over-the-counter
or which are synthetic options or futures or equity swaps, and may enter into
closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right (in
return for the premium paid) to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the term of the option. The
Portfolio will purchase and write options on futures contracts for identical
purposes to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out a
long or short position in future contracts.
Options, futures and options on futures are derivative securities, in which
the Portfolio may invest for hedging purposes, as well as to remain fully
invested and to reduce transaction costs. Investing for the latter two purposes
may be considered speculative. The primary risks associated with the use of
options, futures and options on futures are (i) imperfect correlation between
the change in market value of the stocks held by the Portfolio and the prices of
futures and options relating to the stocks purchased or sold by the Portfolio;
and (ii) possible lack of a liquid secondary market for an option or a futures
contract and the resulting inability to close a futures position which could
have an adverse impact on the Portfolio's ability to hedge. In the opinion of
the Board of Directors, the risk that the Portfolio will be unable to close out
a futures position or options contract will be minimized by only entering into
futures contracts or options transactions for which there appears to be a liquid
secondary market.
TEMPORARY INVESTMENTS. For temporary defensive purposes, when the Adviser
determines that market conditions warrant, the Portfolio may invest up to 100%
of its assets in money market instruments consisting of securities issued or
guaranteed by the United States Government, its agencies or instrumentalities,
repurchase agreements, certificates of deposit and bankers' acceptances issued
by banks or savings and loan associations having net assets of at least $500
million as of the end of their most recent fiscal year, high-grade commercial
paper rated, at time of purchase, in the top two categories by a national rating
agency or determined to be of
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<PAGE>
comparable quality by the Adviser at the time of purchase and other long- and
short-term debt instruments which are rated A or higher by Standard & Poor's
Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's") at the time
of purchase, and may hold a portion of its assets in cash.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment, but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of
high-grade debt securities or cash in an amount at least equal to these
commitments. The payment obligation and the interest rates that will be received
are each fixed at the time the Portfolio enters into the commitment and no
interest accrues to the Portfolio until settlement. Thus, it is possible that
the market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed. It is a
current policy of the Portfolio not to enter into when-issued commitments
exceeding, in the aggregate, 15% of the market value of the Portfolio's total
assets less liabilities other than the obligations created by these commitments.
INVESTMENT LIMITATIONS
As a non-diversified investment company, the Portfolio is not limited by the
1940 Act in the proportion of its total assets that may be invested in the
obligations of a single issuer. Thus, the Portfolio may invest a greater
proportion of its total assets in the securities of a smaller number of issuers
and, as a result, will be subject to greater risk with respect to its portfolio
securities. However, the Portfolio intends to comply with the diversification
requirements imposed by the Internal Revenue Code of 1986, as amended, for
qualification a regulated investment company. See "Investment Limitations" in
the Statement of Additional Information.
The Portfolio operates under certain investment restrictions that are deemed
fundamental limitations and may be changed only with the approval of the holders
of a majority of the Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, the
Portfolio operates under certain non-fundamental investment limitations, as
described below and in the Statement of Additional Information. The Portfolio
may not: (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 15% of the market value of the Portfolio's
total assets would be invested in such repurchase agreements and other
investments for which market quotations are not readily available or which are
otherwise illiquid; (ii) invest more than 10% of its total assets in Restricted
Securities, except that the Portfolio may invest up to 15% of its total assets
in Restricted Securities that are 144A Securities, subject to the limitation on
illiquid securities described above; (iii) borrow money, except from banks for
extraordinary or emergency purposes, and then only in amounts up to 10% of the
value of the Portfolio's total assets, taken at cost at the time of borrowing;
or purchase securities while borrowings exceed 5% of its total assets; (iv)
mortgage, pledge or hypothecate any assets except in connection with any such
borrowing in amounts up to 10% of the value of the Portfolio's total assets at
the time of borrowing; (v) invest in fixed time deposits with a duration of over
seven calendar days; or (vi) invest in fixed timed deposits with a duration of
from two business days to seven calendar days if more than 10% of the
Portfolio's total assets would be invested in these deposits.
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<PAGE>
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment
Adviser and Administrator of the Fund and each of its portfolios. The Adviser
provides investment advice and portfolio management services pursuant to an
Investment Advisory Agreement and, subject to the supervision of the Fund's
Board of Directors, makes the Portfolio's day-to-day investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Portfolio's investments. The Adviser is entitled to receive from the Portfolio
an annual management fee, payable quarterly, equal to the percentage of average
daily net assets set forth in the table below. However, the Adviser has agreed
to a reduction in the fees payable to it and to reimburse the Portfolio, if
necessary, if such fees would cause the total annual operating expenses of the
Portfolio to exceed the respective percentage of average daily net assets set
forth below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING
EXPENSES
AFTER FEE WAIVER
--------------------------
PORTFOLIO MANAGEMENT FEE CLASS A CLASS B
- ------------------------- ----------------- ------------ ------------
<S> <C> <C> <C>
U.S. Real Estate
Portfolio............... 0.80% 1.00% 1.25%
</TABLE>
The fee payable by the Portfolio is higher than the management fee paid by
most investment companies, but the Adviser believes the fee is comparable to
those of investment companies with similar investment objectives.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
United States and abroad. At September 30, 1995, the Adviser, together with its
affiliated asset management companies, managed investments totaling
approximately $55.2 billion, including approximately $40.1 billion under active
management and $15.1 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGER. Russell Platt has primary responsibility for managing
the Portfolio. Mr. Platt joined the Adviser in 1994 as a Principal. In addition,
Mr. Platt serves as a Director of the General Partner of The Morgan Stanley Real
Estate Fund I ("MSREF I"), where he is involved in capital raising,
acquisitions, oversight of investments and investor relations. MSREF I is a
privately held limited partnership engaged in the acquisition of real estate
assets, portfolios and real estate operating companies with gross assets of
approximately $2.8 billion as of October, 1994. From 1991 to 1993, Mr. Platt was
head of Morgan Stanley Realty's Transaction Development Group. As such, he was
actively involved in Morgan Stanley's worldwide real estate business. These
activities included corporate and lender restructurings, merger and acquisition
advice and public debt and equity financings for Morgan Stanley Realty's real
estate clients. As part of these responsibilities, Mr. Platt directed Morgan
Stanley Realty's activities in Latin America and served as U.S. liaison for
Morgan Stanley Realty's Japanese real estate clients. From 1990 to 1991, Mr.
Platt was based in Morgan Stanley Realty's London office, where he was
responsible for European transaction development. Prior to this, he had
extensive transaction responsibilities involving specific portfolio, retail,
office, hotel and apartment sales and financings. Mr. Platt joined Morgan
Stanley's Investment Banking Division in 1982 and moved to Morgan Stanley Realty
in 1983. He rejoined Morgan Stanley in 1986 after receiving his M.B.A from
Harvard Business School. Mr. Platt graduated from Williams College in 1982 with
a B.A. in Economics.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of
15
<PAGE>
the Officers and the Board of Directors of the Fund and include day-to-day
administration of matters related to the corporate existence of the Fund,
maintenance of its records, preparation of reports, supervision of the Fund's
arrangements with its custodian, and assistance in the preparation of the Fund's
registration statements under Federal and State laws. The Administration
Agreement also provides that the Administrator, through its agents, will provide
to the Fund dividend disbursing and transfer agent services. For its services
under the Administration Agreement, the Fund pays the Adviser a monthly fee
which on an annual basis equals 0.15% of the average daily net assets of the
Portfolio.
In a merger completed on September 1, 1995, The Chase Manhattan Bank, N.A.
("Chase") succeeded to all of the rights and obligations under the U.S. Trust
Administration Agreement between the Adviser and the United States Trust Company
of New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide
certain administrative services to the Fund. Pursuant to a delegation clause in
the U.S. Trust Administration Agreement, U.S. Trust delegated its administrative
responsibilities to Chase Global Funds Services Company ("CGFSC"), formerly
known as Mutual Funds Service Company, which after the merger with Chase is a
subsidiary of Chase and will continue to provide certain administrative services
to the Fund. The Adviser supervises and monitors such administrative services
provided by CGFSC. The services provided under the Administration Agreement and
the U.S. Trust Administration Agreement are also subject to the supervision of
the Board of Directors of the Fund. The Board of Directors of the Fund has
approved the provision of services described above pursuant to the
Administration Agreement and the U.S. Trust Administration Agreement, as being
in the best interests of the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. For additional information regarding
the Administration Agreement or the U.S. Trust Administration Agreement, see
"Management of the Fund" in the Statement of Additional Information.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The Officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Portfolio upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Portfolio.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan,
the Distributor is entitled to receive from the Portfolio a distribution fee,
which is accrued daily and paid quarterly, of 0.25% of the Class B shares'
average daily net assets on an annualized basis. The Distributor expects to
reallocate most of its fee to its investment representatives. The Distributor
may, in its discretion, voluntarily waive from time to time all or any portion
of its distribution fee and each of the Distributor and the Adviser is free to
make additional payments out of its own assets to promote the sale of Fund
shares, including payments that compensate financial institutions for
distribution services or shareholder services.
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<PAGE>
The Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees, and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of the Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For an account for the Portfolio opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares. Managed Accounts may
purchase Class A shares without being subject to any minimum initial investment
or minimum account size requirements for a Portfolio account. Officers of the
Adviser and its affiliates are subject to the minimums for a Portfolio account,
except they may purchase Class B shares subject to a minimum initial investment
and minimum account size of $5,000 for a Portfolio account.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based solely upon changes in the market that reduce the net asset value of
shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remain Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B account") convert to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
The Fund reserves the right to modify or terminate the conversion features
of the shares as stated above at any time upon 60-days' notice to shareholders.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
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<PAGE>
For purposes of redemptions by the Fund, the foregoing minimum account size
requirements do not apply to New Accounts containing Class B shares held by
officers of the Adviser or its affiliates. However, if the value of such account
held by an officer of the Adviser or its affiliates falls below $5,000 because
of shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains below $5,000 for a continuous 60-day period, the shares in
such account are subject to redemption by the Fund and, if redeemed, the net
asset value of such shares will be promptly paid to the shareholder.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days'
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days' notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of the Portfolio and $100,000 for Class B shares of the
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- U.S. Real
Estate Portfolio", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for payment
by other currencies is given by the Fund. The class(es) of shares of the
Portfolio to be purchased should be designated on the Account Registration Form.
For purchases by check, the Fund is ordinarily credited with Federal Funds
within one business day. Thus, your purchase of shares by check is ordinarily
credited to your account at the net asset value per share of the Portfolio
determined on the next business day after receipt.
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<PAGE>
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund
prior to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected, and the account number
assigned to you) as follows:
Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
Purchase orders for shares of the Portfolio which are received prior to the
regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed at
the price computed on the date of receipt as long as the Transfer Agent receives
payment by check or in Federal Funds prior to the regular close of the NYSE on
such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested.
Your bank may charge a service fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000 except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund, Inc. -- U.S. Real Estate Portfolio" at the above address or by wiring
monies to the Custodian Bank as outlined above. It is very important that your
account name, the portfolio name and the class selected be specified in the
letter or wire to assure proper crediting to your account. In order to insure
that your wire orders are invested promptly, you are requested to notify one of
the Fund's representatives (toll free: 1-800-548-7786) prior to the wire date.
Additional investments will be applied to purchase additional shares in the same
class held by a shareholder in a Portfolio account.
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<PAGE>
OTHER PURCHASE INFORMATION
The purchase price of the Class A and Class B shares of the Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the close of the New York Stock Exchange
("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the
price computed on the date of receipt; an order received after the close of the
NYSE will be executed at the price computed on the next day the NYSE is open as
long as the Transfer Agent receives payment by check or in Federal Funds prior
to the regular close of the NYSE on such day.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor. See "Purchase of Shares" in the Statement of Additional
Information.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolio and the Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging Class
A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class
A shares of Portfolio B for Class A shares of Portfolio C and again exchanging
Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (1) trades exclusively between money market portfolios; and (2)
trades done in connection with an asset allocation service, such as TFM
Accounts, managed or advised by MSAM and/or any of its affiliates.
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<PAGE>
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares or Class B shares of the Portfolio at the next determined net
asset value of shares of the applicable class. On days that both the NYSE and
the Custodian Bank are open for business, the net asset value per share of the
Portfolio is determined at the close of trading of the NYSE (currently 4:00 p.m.
Eastern time). Shares of the Portfolio may be redeemed by mail or telephone. No
charge is made for redemption. Any redemption may be more or less than the
purchase price of your shares depending on, among other factors, the market
value of the investment securities held by the Portfolio.
BY MAIL
The Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your request
should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798, except that deliveries by overnight courier
should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global
Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the number
of shares or dollar amount to be redeemed, signed by all registered
owners of the shares in the exact names in which they are registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension
and profit sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by mail or
overnight courier and will be implemented at the net asset value next determined
after it is received. Redemption requests sent to the Fund through express mail
must be mailed to the address of the Dividend Disbursing and Transfer Agent
listed under "General Information". The Fund and the Fund's transfer agent (the
"Transfer Agent") will employ reasonable procedures to confirm that the
instructions communicated by telephone are genuine. These procedures include
requiring the investor to provide certain personal identification information at
the time an account is opened and prior to effecting each transaction requested
by telephone. In addition, all telephone transaction requests will be recorded
and investors may be required to provide additional
21
<PAGE>
telecopied written instructions regarding transaction requests. Neither the Fund
nor the Transfer Agent will be responsible for any loss, liability, cost or
expense for following instructions received by telephone that either of them
reasonably believes to be genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in the Portfolio for shares of any
other available portfolio of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege is only available with respect to portfolios that are
registered for sale in a shareholder's state of residence. The exchange
privilege may be modified or terminated by the Fund at any time upon 60-days'
notice to shareholders.
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<PAGE>
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current portfolio,
the names of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, P.O. Box 2798, Boston,
Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current Portfolio, the names of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern time) are processed at
the close of business that same day based on the net asset value of the class of
the Portfolios involved in the exchange of the shares at the close of business.
Requests received after 4:00 p.m. (Eastern time) are processed the next business
day based on the net asset value determined at the close of business on such
day. For additional information regarding responsibility for the authenticity of
telephoned instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolio's shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the close of the NYSE
on each day that the NYSE is open for business. Price information on listed
securities is taken from the exchange where the security is primarily traded.
Securities listed on a U.S. securities exchange for which market quotations are
available are valued at the last quoted sale price on the day the valuation is
made. 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 not readily available are valued at a price that is
considered to best represent fair value within a range not in excess of the
current asked price nor less than the current bid price. The current bid and
asked prices are determined based on the bid and asked prices quoted on such
valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices, but take into account institutional-size trading in similar groups of
securities and any developments related to the
23
<PAGE>
specific securities. Securities not priced in this manner are valued at the most
recently quoted sale price, or when securities exchange valuations are used, at
the latest quoted bid price on the day of valuation. If there is no such
reported sale, the latest quoted bid price will be used. Securities purchased
with remaining maturities of 60 days or less are valued at amortized cost, if it
approximates market value. In the event that amortized cost does not approximate
market value, market prices as determined above will be used.
The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above-stated procedures are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the bid price of such
currencies against the U.S. dollar last quoted by any major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in a
class of the Portfolio would have earned over a specified period of time (such
as one, five or ten years), assuming that all distributions and dividends by the
Portfolio were reinvested in the same class on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes that may be payable on dividends and distributions or upon redemption. The
Fund may also include comparative performance information in advertising or
marketing the Portfolio's shares, including data from Lipper Analytical
Services, Inc., other industry publications, business periodicals, rating
services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash.
The Portfolio expects to distribute substantially all of its net investment
income in the form of quarterly dividends beginning with a distribution at the
end of the first calendar quarter of 1996. Net realized gains for the Portfolio,
if any, after reduction for any tax loss carryforwards will also be distributed
annually. Confirmations of the purchase of shares of the Portfolio through the
automatic reinvestment of income dividends and capital gains distributions will
be provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act of
1934, as
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<PAGE>
amended, on the next monthly client statement following such purchase of shares.
Consequently, confirmations of such purchases will not be provided at the time
of completion of such purchases, as might otherwise be required by Rule 10b-10.
Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares thereof will
be borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. It is the
Portfolio's intent to continue to qualify for the special tax treatment afforded
regulated investment companies under Subchapter M of the Code, so that the
Portfolio will continue to be relieved of federal income tax on that part of its
net investment income and net capital gain that is distributed to shareholders.
The Portfolio distributes substantially all of its net investment income
(including, for this purpose, the excess of net short-term capital gain over net
long-term capital loss) to shareholders. Dividends from the Portfolio's net
investment income are taxable to shareholders as ordinary income, whether
received in cash or in additional shares. Such dividends paid by a Portfolio
will generally qualify for the 70% dividends-received deduction for corporate
shareholders to the extent of qualifying dividend income received by the
Portfolio from U.S. corporations. The Portfolio will report annually to its
shareholders the amount of dividend income qualifying for such treatment.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. The
Portfolio sends reports annually to its shareholders of the federal income tax
status of all distributions made during the preceding year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses) prior to the end of each calendar year to avoid liability for federal
excise tax.
25
<PAGE>
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale, redemption or exchange of shares may result in taxable gain or
loss to the redeeming shareholder, depending upon whether the fair market value
of the redemption proceeds exceeds or is less than the shareholder's adjusted
basis in the redeemed or sold shares. Any such taxable gain or loss generally
will be treated as long-term capital gain or loss if the shares have been held
for more than one year and otherwise generally will be treated as short-term
capital gain or loss. If capital gain distributions have been made with respect
to shares that are sold at a loss after being held for six months or less,
however, then the loss is treated as a long-term capital loss to the extent of
the capital gain distributions.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that the Portfolio is liable for foreign income taxes so withheld, the
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although the
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that the Portfolio will be able to do so.
Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolio and directs the Adviser to use its best efforts to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolio. The Fund has authorized the Adviser to pay
higher commissions in recognition of brokerage services which, in the opinion of
the Adviser, are necessary for the achievement of better execution, provided the
Adviser believes this to be in the best interest of the Fund.
Since shares of the Portfolio are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Portfolio or who act as agents in the purchase of shares of
the Fund's portfolios for their clients.
In purchasing and selling securities for the Portfolio, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolio, consideration will be given to such
factors as the price of the
26
<PAGE>
security, the rate of the commission, the size and difficulty of the order, the
reliability, integrity, financial condition, general execution and operational
capabilities of competing broker-dealers, and the brokerage and research
services which they provide to the Fund. Some securities considered for
investment by the Portfolio may also be appropriate for other clients served by
the Adviser. If the purchase or sale of securities consistent with the
investment policies of the Portfolio and one or more of these other clients
served by the Adviser is considered at or about the same time, transactions in
such securities will be allocated among the Portfolio and such other clients in
a manner deemed fair and reasonable by the Adviser. Although there is no
specified formula for allocating such transactions, the various allocation
methods used by the Adviser, and the results of such allocations, are subject to
periodic review by the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of the Portfolio's brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Fund, the commissions, fees or other remuneration received by Morgan Stanley
or such affiliates must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of those Directors who are not
"interested persons," as defined in the 1940 Act, have adopted procedures which
are reasonably designed to provide that any commissions, fees or other
remuneration paid to Morgan Stanley or such affiliates are consistent with the
foregoing standard.
Portfolio securities will not be purchased from or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. It is anticipated that under normal circumstances,
the annual portfolio turnover rate will not exceed 100%. High portfolio turnover
involves correspondingly greater transaction costs which will be borne directly
by the respective Portfolio. In addition, high portfolio turnover may result in
more capital gains which would be taxable to the shareholders of the Portfolio.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 34 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. Subject to the notice period to shareholders with
respect to shares held by the shareholders, the Board of Directors has the power
to designate one or more classes of shares of common stock and to classify and
reclassify any unissued shares with respect to such classes. The shares of
common stock of each portfolio are currently classified into two classes, the
Class A shares and the Class B shares, except for the International Small Cap,
Money Market and Municipal Money Market Portfolios, which only offer Class A
shares.
27
<PAGE>
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no pre-emptive rights. The shares of the Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of the Portfolio may be presumed to "control" (as defined in
the 1940 Act) the Portfolio. Under Maryland law, the Fund is not required to
hold an annual meeting of its shareholders unless required to do so under the
1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser, or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
As of September 1, 1995, domestic securities and cash are held by Chase,
which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an
affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor,
acts as the Fund's custodian for foreign assets held outside the United States
and employs subcustodians approved by the Board of Directors of the Fund in
accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits the annual financial statements of each portfolio.
LITIGATION
The Fund is not involved in any litigation.
28
<PAGE>
<TABLE>
<CAPTION>
<S><C>
MORGAN STANLEY INSTITUTIONAL FUND, INC. -- U.S. REAL ESTATE PORTFOLIO
P.O. Box 2798, Boston, MA 02208-2798
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT REGISTRATION FORM
- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, please contact your Morgan Stanley representative or call us
toll free 1-(800)-548-7786. Please print all items except signature, and mail to
the Fund at the address above.
- -----------------------------------------------------------------------------------------------------------------------------------
A) REGISTRATION
1. INDIVIDUAL 1.
------------------------------------------------------------------------------------------------
2. JOINT TENANTS First Name Initial Last Name
(RIGHTS OF SURVIVORSHIP 2.
PRESUMED UNLESS ------------------------------------------------------------------------------------------------
TENANCY IN COMMON First Name Initial Last Name
IS INDICATED)
------------------------------------------------------------------------------------------------
First Name Initial Last Name
3. CORPORATIONS, 3.
TRUSTS AND OTHERS ------------------------------------------------------------------------------------------------
Please call the Fund
for additional documents ------------------------------------------------------------------------------------------------
that may be required to
set up account and to ------------------------------------------------------------------------------------------------
authorize transactions Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/
ASSOCIATION TRANSFER TO
MINOR (ONLY ONE
CUSTODIAN AND
MINOR PERMITTED)
/ / TRUST / / OTHER (Specify)
------------------------ -------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS Street or P.O. Box
-------------------------------------------------------------------------------
Please fill in City State Zip
completely, including -------------------------------------- ---- --------------------------------------
telephone number(s). Home Telephone No. - - Business Telephone No. - -
------------ ------------
/ / United States Citizen / / Resident Alien / / Non-Resident Alien: Indicate Country of Residence
------------------
- -----------------------------------------------------------------------------------------------------------------------------------
C) TAXPAYER PART 1. Enter your Taxpayer IMPORTANT TAX INFORMATION
IDENTIFICATION Identification Number. For You (as a payee) are required by law to provide us
NUMBER most individual taxpayers, (as payer) with your correct Taxpayer Identification
If the account is in more than this is your Social Security Number. Accounts that have a missing or incorrect Taxpayer
one name, CIRCLE THE NAME OF Number. Identification Number will be subject to backup withholding
THE PERSON WHOSE TAXPAYER TAXPAYER IDENTIFICATION at a 31% rate on dividends, distributions and other payments.
IDENTIFICATION NUMBER IS NUMBER If you have not provided us with your correct taxpayer
PROVIDED IN SECTION A) ABOVE. -------------------------- identification number, you may be subject to a $50 penalty
If no name is circled, the imposed by the Internal Revenue Service.
number will be considered to OR Backup withholding is not an additional tax; the tax
be that of the last name SOCIAL SECURITY NUMBER liability of persons subject to backup withholding will be
listed. For Custodian account -------------------------- reduced by the amount of tax withheld. If withholding
of a minor (Uniform Gift/ results in an overpayment of taxes, a refund may be
Transfer to Minors Act), PART 2. BACKUP WITHHOLDING obtained.
give the Social Security / / Check this box if you are You may be notified that you are subject to backup
Number of the minor. NOT subject to Backup withholding under Section 3406(a)(1)(C) of the Internal
Withholding under the Revenue Code because you have underreported interest or
provisions of Section dividends or you were required to but failed to file a return
3406(a)(1)(C) of the Internal which would have included a reportable interest or
Revenue Code. dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK
THE BOX IN PART 2 AT LEFT.
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D) PORTFOLIO AND CLASS For Purchase of the following Portfolio:
SELECTION (Class A shares
minimum $500,000 and U.S. Real Estate Portfolio / / Class A Shares $ / / Class B Shares $
Class B shares minimum ------------- ------------
$100,000). Please Total Initial Investment $
indicate class and ------------------------------------
amount.
- -----------------------------------------------------------------------------------------------------------------------------------
E) METHOD OF INVESTMENT Payment by:
Please indicate manner of / / check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--U.S. REAL ESTATE
payment. PORTFOLIO)
/ / Exchange $ From -
---------------- ------------------------ -------------------------
Name of Portfolio Account No.
/ / Account previously established by:
/ / Phone exchange / / Wire on -
--------------------------- --------------------------
Date Account No. (Check
(Previously assigned Digit)
by the Fund)
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<PAGE>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) will be reinvested in
OPTION additional shares unless either box below is checked.
/ / Income dividends to be paid in cash, capital gains distributions (if any) in
shares.
/ / Income dividends and capital gains distributions (if any) to be paid in
cash.
- -----------------------------------------------------------------------------------------------------------------------------------
G) TELEPHONE / / I/we hereby authorize the Fund and its
REDEMPTION agents to honor any telephone requests to ------------------------- -------------------------
OPTION wire redemption proceeds to the Name of COMMERCIAL Bank Bank Account No.
Please select at time of commercial bank indicated at right and/or (Not Savings Bank)
initial application if mail redemption proceeds to the name -------------------------
you wish to redeem shares and address in which my/our fund account Bank ABA No.
by telephone. A SIGNATURE is registered if such requests are believed ---------------------------------------------------
GUARANTEE IS REQUIRED IF to be authentic. Name(s) in which your Bank Account is Established
BANK ACCOUNT IS NOT
REGISTERED IDENTICALLY TO THE FUND AND THE FUND'S TRANSFER AGENT ---------------------------------------------------
YOUR FUND ACCOUNT. WILL EMPLOY REASONABLE PROCEDURES TO Bank's Street Address
TELEPHONE REQUESTS FOR CONFIRM THAT INSTRUCTIONS COMMUNICATED BY ---------------------------------------------------
REDEMPTIONS OR TELEPHONE ARE GENUINE. THESE PROCEDURES City State Zip
EXCHANGES WILL NOT BE INCLUDE REQUIRING THE INVESTOR TO PROVIDE
HONORED UNLESS THE CERTAIN PERSONAL IDENTIFICATION INFORMATION AT
BOX IS THE TIME AN ACCOUNT IS OPENED AND PRIOR TO
CHECKED. EFFECTING EACH TRANSACTION REQUESTED BY
TELEPHONE. IN ADDITION, ALL TELEPHONE
TRANSACTION REQUESTS WILL BE RECORDED AND
INVESTORS MAY BE REQUIRED TO PROVIDE
ADDITIONAL TELECOPIED WRITTEN INSTRUCTIONS OF
TRANSACTION REQUESTS. NEITHER THE FUND NOR
THE TRANSFER AGENT WILL BE RESPONSIBLE FOR
ANY LOSS, LIABILITY, COST OR EXPENSE FOR
FOLLOWING INSTRUCTIONS RECEIVED BY TELEPHONE
THAT IT REASONABLY BELIEVES TO BE GENUINE.
- -----------------------------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION ------------------------------------------------------------------------------------------------
Name
In addition to the ac-
count statement sent to ------------------------------------------------------------------------------------------------
my/our registered ad-
dress, I/we hereby au-
thorize the fund to mail ------------------------------------------------------------------------------------------------
duplicate statements to Address
the name and address
provided at right. ------------------------------------------------------------------------------------------------
City State Zip Code
- -----------------------------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION -------------------- -------------------- --------------------
Representative Name Representative No. Branch No.
- -----------------------------------------------------------------------------------------------------------------------------------
J) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal capacity to purchase and
ALL HOLDERS redeem shares of the Fund and affirm that I/we have received a current Prospectus of the Morgan
AND TAXPAYER Stanley Institutional Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF
CERTIFICATION PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND
COMPLETE.
Sign Here -- (X) (X)
----------------------------------------- ----------------------------------------------------
Signature Date Signature Date
(X) (X)
----------------------------------------- ----------------------------------------------------
Signature Date Signature Date
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 5
Investment Objective and Policies................. 9
Additional Investment Information................. 11
Investment Limitations............................ 14
Management of the Fund............................ 15
Purchase of Shares................................ 17
Redemption of Shares.............................. 21
Shareholder Services.............................. 22
Valuation of Shares............................... 23
Performance Information........................... 24
Dividends and Capital Gains Distributions......... 24
Taxes............................................. 25
Portfolio Transactions............................ 26
General Information............................... 27
Account Registration Form
</TABLE>
U.S. REAL ESTATE PORTFOLIO
PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load,
open-end management investment company with diversified and non-diversified
series ("Portfolios"). The Fund currently consists of twenty-seven
Portfolios offering a broad range of investment choices. The Fund is
designed to provide clients with attractive alternatives for meeting their
investment needs. Each Portfolio, except the Money Market, Municipal Money
Market, International Small Cap and China Growth Portfolios, began offering
two classes of shares, the Class A shares and the Class B shares on January
2, 1996 (each, a "Multiclass Portfolio"). All shares of a Portfolio owned
prior to January 2, 1996 were redesignated Class A shares on January 2, 1996.
The Class A shares and the Class B shares currently offered by each
Multiclass Portfolio have different minimum investment requirements and fund
expenses. Shares of each Portfolio are offered with no sales charge or
exchange or redemption fee (with the exception of the International Small Cap
Portfolio). This Statement of Additional Information addresses information
of the Fund applicable to each of the twenty-seven Portfolios.
This Statement is not a prospectus but should be read in conjunction with
the several Prospectuses of the Fund's Portfolios. To obtain any of the
Prospectuses, please call the Morgan Stanley Institutional Fund, Inc. Services
Group at 1-800-548-7786.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Special Tax Considerations Relating to Municipal Bond and Municipal Money Market Portfolios . . . . . . . . . . . . . 14
Special Tax Considerations Relating to Foreign Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Taxes and Foreign Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Investment Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Determining Maturities of Certain Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Net Asset Value for Money Market Portfolios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Description of Securities and Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 2, 1996 RELATING TO:
Prospectus for the U.S. Real Estate Portfolio, dated January 2, 1996
Prospectus for the Fixed Income Portfolio, Global Fixed Income Portfolio,
Municipal Bond Portfolio, Mortgage-Backed Securities Portfolio, High Yield
Portfolio, Money Market Portfolio and Municipal Money Market Portfolio,
dated January 2, 1996
Prospectus for the Equity Growth Portfolio, Emerging Growth Portfolio,
MicroCap Portfolio and Aggressive Equity Portfolio, dated January 2, 1996
Prospectus for the Small Cap Value Equity Portfolio, Value Equity Portfolio
and Balanced Portfolio, dated January 2, 1996
Prospectus for the Global Equity Portfolio, International Equity Portfolio,
International Small Cap Portfolio, Asian Equity Portfolio, European Equity
Portfolio, Japanese Equity Portfolio and Latin American Portfolio, dated
January 2, 1996
Prospectus for the Emerging Markets Portfolio and Emerging Markets Debt
Portfolio, dated January 2, 1996
Prospectus for the Active Country Allocation Portfolio, dated January 2,
1996
Prospectus for the Gold Portfolio, dated January 2, 1996
Prospectus for the China Growth Portfolio, dated April 13, 1994.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the investment objectives and policies
set forth in the Fund's Prospectuses:
CURRENCY SWAPS
The China Growth Portfolio may enter into currency swaps for hedging
purposes and non-hedging purposes. Inasmuch as swaps are entered into for
good faith hedging purposes and are offset by a segregated account as
described below, the Portfolio believes that swaps do not constitute senior
securities as defined in the 1940 Act and, accordingly, will not treat them
as being subject to the Portfolio's borrowing restrictions. An amount of
cash or liquid high grade debt securities (i.e., securities rated in one of
the top three ratings categories by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P"), or, if unrated, deemed
by the Adviser to be of comparable credit quality) having an aggregate net
asset value at least equal to the gross payments which the Portfolio is
obligated to make under the currency swap will be maintained in a segregated
account by the Fund's Custodian. The Portfolio will not enter into any
currency swap unless the credit quality of the unsecured senior debt or the
claims-paying ability of the other party thereto is considered to be
investment grade by the Adviser. If there is a default by the other party to
such a transaction, the Portfolio will have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively
liquid in comparison with the markets for other similar instruments which are
traded in the interbank market.
EMERGING COUNTRY EQUITY AND DEBT SECURITIES
GENERAL. Each of the Emerging Markets and Emerging Markets Debt Portfolio's
definition of emerging country equity or debt securities includes securities of
companies that may have characteristics and business relationships common to
companies in a country or countries other than an emerging country. As a result,
the value of the securities of such companies may reflect economic and market
forces applicable to other countries, as well as to an emerging country. Morgan
Stanley Asset Management Inc. (the "Adviser") believes, however, that investment
in such companies will be appropriate because the Portfolio will invest only in
those companies which, in its view, have sufficiently strong exposure to
economic and market forces in an emerging country such that their value will
tend to reflect developments in such emerging country to a greater extent than
developments in another country or countries. For example, the Portfolio may
invest in companies organized and located in countries other than an emerging
country, including companies having their entire production facilities outside
of an emerging country, when securities of such companies meet one or more
elements of the Portfolio's definition of an emerging country equity or debt
security and so long as the Adviser believes at the time of investment that the
value of the company's securities will reflect principally conditions in such
emerging country.
The Emerging Markets Debt Portfolio is subject to no restrictions on the
maturities of the emerging country debt securities it holds; those maturities
may range from overnight to 30 years. The value of debt securities held by the
Portfolio generally will vary inversely to changes in prevailing interest rates.
The Portfolio's investments in fixed-rated debt securities with longer terms to
maturity are subject to greater volatility than the Portfolio's investments in
shorter-term obligations. Debt obligations acquired at a discount are subject
to greater fluctuations of market value in response to changing interest rates
than debt obligations of comparable maturities which are not subject to such
discount.
Investments in emerging country government debt securities involve special
risks. Certain emerging countries have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rate fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging country's debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of such debt. As a result of the foregoing, a government obligor
may default on its obligations. If such an event occurs, the Portfolio may have
limited legal recourse against the issuer and/or guarantor. Remedies must, in
some cases, be pursued in the courts of the defaulting party itself, and the
ability of the holder of foreign government debt securities to obtain recourse
may be subject to the political climate in the relevant country. In addition,
no assurance can be given that the holders of commercial bank debt will not
contest payments to the holders of other foreign government debt obligations in
the event of default under their commercial bank loan agreements.
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BRADY BONDS. The Emerging Markets Debt Portfolio may invest in certain debt
obligations customarily referred to as "Brady Bonds," which are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently, and, accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and issued in
various currencies (although most are U.S. dollar-denominated) and they are
actively traded in the over-the-counter secondary market. The Portfolio may
purchase Brady Bonds either in the primary or secondary markets. The price and
yield of Brady Bonds purchased in the secondary market will reflect the market
conditions at the time of purchase, regardless of the stated face amount and the
stated interest rate. With respect to Brady Bonds with no or limited
collateralization, the Portfolio will rely for payment of interest and principal
primarily on the willingness and ability of the issuing government to make
payment in accordance with the terms of the bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized
in full as to principal due at maturity by U.S. Treasury zero coupon
obligations which have the same maturity as the Brady Bonds. Interest
payments on these Brady Bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Certain Brady Bonds are entitled to "value recovery
payments" in certain circumstances, which in effect constitute supplemental
interest payments but generally are not collateralized. Brady Bonds are
often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity; (ii) the
collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the
event of a default with respect to collateralized Brady Bonds as a result of
which the payment obligations of the issuer are accelerated, the U.S.
Treasury zero coupon obligations held as collateral for the payment of
principal will not be distributed to investors, nor will such obligations be
sold and the proceeds distributed. The collateral will be held to the
scheduled maturity of the defaulted Brady Bonds by the collateral agent, at
which time the face amount of the collateral will equal the principal
payments which would have then been due on the Brady Bonds in the normal
course. In addition, in light of the residual risk of the Brady Bonds and,
among other factors, the history of defaults with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds should be viewed as speculative.
Brady Plan debt restructuring totalling approximately $73 billion have been
implemented to date in Argentina, Bulgaria, Costa Rica, Ecuador, Mexico,
Nigeria, the Philippines, Uruguay and Venezuela, with the largest proportion of
Brady Bonds having been issued to date by Mexico and Venezuela. Brazil and
Poland have announced plans to issue Brady Bonds aggregating approximately $52
billion, based on current estimates. There can be no assurance that the
circumstances regarding the issuance of Brady Bonds by these countries will not
change.
STRUCTURED SECURITIES. The Emerging Markets Debt Portfolio may also invest a
portion of its assets in interests in entities organized and operated solely for
the purpose of restructuring the investment characteristics of sovereign debt
obligations. This type of restructuring involves the deposit with or purchase
by an entity, such as a corporation or trust, of specified instruments (such as
commercial bank loans or Brady Bonds) and the issuance by that entity of one or
more classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured Securities to
create securities with different investment characteristics such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to Structured Securities is dependent on the
extent of the cash flow on the underlying instruments. Because Structured
Securities of the type in which the Portfolio anticipates it will invest
typically involve no credit enhancement, their credit risk generally will be
equivalent to that of the underlying instruments. The Portfolio is permitted to
invest in a class of Structured Securities that is either subordinated or
unsubordinated to the right of payment of another class. Subordinated
Structured Securities typically have higher yields and present greater risks
than unsubordinated Structured Securities. Certain issuers of Structured
Securities may be deemed to be "investment companies" as defined in the 1940
Act. As a result, the Portfolio's investment in these Structured Securities
may be limited by restrictions contained in the 1940 Act. Structured Securities
are typically sold in private placement transactions, and there currently is no
active trading market for Structured Securities.
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LOAN PARTICIPATIONS AND ASSIGNMENTS. The Emerging Markets Debt Portfolio may
also 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"). The Portfolio's investments in Loans are
expected in most instances to be in the form of participations in Loans
("Participations") and assignments of all or a portion of Loans ("Assignments")
from third parties. The Portfolio's investment in Participations typically will
result in the Portfolio having a contractual relationship only with the Lender
and not with the borrower. The Portfolio will have 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. In connection with purchasing Participations, the
Portfolio generally will have no right to enforce compliance by the borrower
with the terms of the loan agreement relating to the Loan, nor any rights of
set-off against the borrower, and the Portfolio may not directly benefit from
any collateral supporting the Loan in which it has purchased the Participation.
As a result, the Portfolio may be subject to the credit risk of both the
borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, the Portfolio may be treated
as a general creditor of the Lender and may not benefit from any set-off between
the Lender and the borrower. Certain Participations may be structured in a
manner designed to avoid purchasers of Participations being subject to the
credit risk of the Lender with respect to the Participation, but even under such
a structure, in the event of the Lender's insolvency, the Lender's servicing of
the Participation may be delayed and the assignability of the Participation
impaired. The Portfolio will acquire Participations only if the Lender
interpositioned between the Portfolio and the borrower is determined by the
Adviser to be creditworthy.
When the Portfolio purchases Assignments from Lenders it will acquire
direct rights against the borrower on the Loan. Because Assignments are
arranged through private negotiations between potential assignees and
potential assignors, however, 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. The assignability of
certain sovereign debt obligations is restricted by the governing
documentation as to the nature of the assignee such that the only way in
which the Portfolio may acquire an interest in a loan is through a
Participation and not an Assignment. The Portfolio may have difficulty
disposing of Assignments and Participations because to do so it will have to
assign such securities to a third party. Because there is no liquid market
for such securities, the Portfolio anticipates that such securities could be
sold only to a limited number of institutional investors. The lack of a
liquid secondary market may have an adverse impact on the value of such
securities and the Portfolio's ability to dispose of particular Assignments
or Participations when necessary to meet the Portfolio's liquidity needs or
in response to a specific economic event such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the
Portfolio to assign a value to these securities for purposes of valuing the
Portfolio's securities and calculating its net asset value.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The U.S. dollar value of the assets of the Global Equity, International
Equity, International Small Cap, Asian Equity, European Equity, Japanese
Equity, Latin American, Global Fixed Income, Active Country Allocation, China
Growth, Emerging Markets, Emerging Markets Debt and Gold Portfolios and, to
the extent they invest in securities denominated in foreign currencies, the
assets of the Emerging Growth, MicroCap, Aggressive Equity, Small Cap Value
Equity, Value Equity, Balanced, Fixed Income and High Yield Portfolios may be
affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and the Portfolios may incur costs in
connection with conversions between various currencies. The Portfolios will
conduct their foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through entering into forward contracts to purchase or sell
foreign currencies. A forward currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract agreed upon by
the parties, at a price set at the time of the contract. These contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for such trades. The Gold Portfolio may also enter into precious
metals forward contracts. See "Precious Metals Forward and Futures Contracts
and Options" below.
The Portfolios may enter into forward foreign currency exchange contracts
in several circumstances. When a Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when a
Portfolio anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the Portfolio may desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such dividend
or interest payment, as the case may be. By entering into a forward contract
for a fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the Portfolio will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the dividend or interest payment is declared, and the date on which such
payments are made or received.
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Additionally, when any of these Portfolios anticipates that the currency of
a particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract for a fixed amount of dollars, to
sell the amount of foreign currency approximating the value of some or all of
such Portfolio's securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of these securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. None of the Portfolios intend to enter
into such forward contracts to protect the value of portfolio securities on a
continuous basis.
Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the long-term investment decisions made with
regard to overall diversification strategies. However, the management of the
Fund believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of the performance
of each Portfolio will thereby be served. Except under circumstances where a
segregated account is not required under the 1940 Act or the rules adopted
thereunder, the Fund's Custodian will place cash, U.S. government securities, or
high-grade debt securities into a segregated account of a Portfolio in an amount
equal to the value of such Portfolio's total assets committed to the
consummation of forward currency exchange contracts. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will be equal to the amount of such Portfolio's commitments with
respect to such contracts.
The Portfolios generally will not enter into a forward contract with a term
of greater than one year. At the maturity of a forward contract, a Portfolio
may either sell the portfolio security and make delivery of the foreign
currency, or it may retain the security and terminate its contractual obligation
to deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly,
it may be necessary for a Portfolio to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that such Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If a Portfolio retains the portfolio security and engages in an offsetting
transaction, such Portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward prices decline during the period between a Portfolio entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, such Portfolio
will realize a gain to the extent that the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, such Portfolio would suffer a loss to the extent that
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Portfolios are not required to enter into such transactions with regard
to their foreign currency-denominated securities. It also should be realized
that this method of protecting the value of portfolio securities against a
decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange
which one can achieve at some future point in time. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time, they tend to limit any potential gain which
might result should the value of such currency increase.
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FUTURES CONTRACTS
The Equity Growth, Aggressive Equity, Value Equity, Balanced, Small Cap
Value Equity, Active Country Allocation, Gold, Latin American, U.S. Real
Estate, Emerging Markets, Emerging Markets Debt and China Growth Portfolios
may enter into futures contracts and options on futures contracts for the
purpose of remaining fully invested and reducing transactions costs. The
Fixed Income, Municipal Bond, Mortgage-Backed Securities, High Yield, Money
Market, Municipal Money Market, Active County Allocation, Equity Growth,
Aggressive Equity Gold, Latin American, U.S. Real Estate, Emerging Markets,
Emerging Markets Debt and China Growth Portfolios may also enter into futures
contracts for hedging purposes. No Portfolio will enter into futures
contracts or options thereon for speculative purposes. The Gold Portfolio
may also enter into futures contracts and options thereon on precious metals.
See "Precious Metals Forward and Futures Contracts and Options" below. The
China Growth and Latin American Portfolios may also enter into futures and
options thereon on stock and other securities indices and currencies.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified
future time and at a specified price. Futures contracts, which are
standardized as to maturity date and underlying financial instrument, are
traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"), a U.S. government agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold" or "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
Futures contracts on securities indices or other indices do not require the
physical delivery of securities, but merely provide for profits and losses
resulting from changes in the market value of a contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures position is simply closed out. Changes in the
market value of a particular futures contract reflect changes in the level of
the index on which the futures contract is based.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold for prices that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of an
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The
Portfolios expect to earn interest income on their margin deposits. With
respect to each long position in a futures contract or option thereon, the
underlying commodity value of such contract will always be covered by cash and
cash equivalents set aside plus accrued profits held at the futures commission
merchant.
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The Portfolios may purchase and write call and put options on futures
contracts which are traded on a U.S. Exchange (and in the case of the China
Growth and Latin American Portfolios, on any recognized securities or futures
exchange to the extent permitted by the CFTC) and enter into closing
transactions with respect to such options to terminate an existing position. An
option on a futures contract gives the purchaser the right (in return for the
premium paid) to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the accumulated balance in the writer's futures margin
account, which represents the amount by which the market price of the futures
contract at the time of exercise exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract.
The Portfolios will purchase and write options on futures contracts for
identical purposes to those set forth above for the purchase of a futures
contract (purchase of a call option or sale of a put option) and the sale of a
futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in futures contracts.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the underlying securities with futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from market
fluctuations. The Portfolios intend to use futures contracts only for hedging
purposes.
Regulations of the CFTC applicable to the Portfolios require that all
futures transactions constitute bona fide hedging transactions except that a
Portfolio may engage in futures transactions that do not constitute bona fide
hedging to the extent that not more than 5% of the liquidation value of a
Portfolio's total assets are required as margin deposits or premiums for such
transactions. The Portfolios will only sell futures contracts to protect
securities owned against declines in price or purchase contracts to protect
against an increase in the price of securities intended for purchase. As
evidence of this hedging interest, the Portfolios expect that approximately 75%
of their futures contracts will be "completed"; that is, equivalent amounts of
related securities will have been purchased or are being purchased by the
Portfolios upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolios' exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While the Portfolios will incur commission expenses in both opening and closing
out futures positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. None of the Portfolios will enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of its total assets. In addition, none of the Portfolios will
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under futures contracts and options on futures contracts
(and in the case of the Active County Allocation, Equity Growth, Gold, Latin
American and China Growth Portfolios, under options, futures contracts and
options on futures contracts) would exceed 20% of its respective total assets.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contracts at any specific time. Thus, it may
not be possible to close a futures position. In the event of adverse price
movements, the Portfolios would continue to be required to make daily cash
payments to maintain their required margin. In such situations, if a Portfolio
has insufficient cash, it may have to sell portfolio securities to meet its
daily margin requirement at a time when it may be disadvantageous to do so. In
addition, a Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the Portfolio's ability
to effectively hedge.
The Portfolios will minimize the risk that they will be unable to close out
a futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if, at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
Portfolios engage in futures strategies only for hedging purposes, the Adviser
does not believe that the Portfolios are subject to the risks of loss frequently
associated with futures transactions. A Portfolio would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying security or currency and sold it after the decline.
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Utilization of futures transactions by the Portfolios does involve the
risk of imperfect or no correlation where the securities underlying futures
contracts have different maturities than the portfolio securities or
currencies being hedged. It is also possible that a Portfolio could both
lose money on futures contracts and also experience a decline in value of its
portfolio securities. There is also the risk of loss by a Portfolio of
margin deposits in the event of bankruptcy of a broker with whom the
Portfolio has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX
The investment objective of the Active Country Allocation Portfolio is to
provide long-term capital appreciation by investing in accordance with country
weightings determined by the Adviser in equity securities of non-U.S. issuers.
The Adviser determines country allocations for the Portfolio on an ongoing
basis within policy ranges dictated by each country's market capitalization and
liquidity. The Portfolio will invest in industrialized countries throughout the
world that comprise the Morgan Stanley Capital International EAFE (Europe,
Australia and the Far East) Index. The EAFE Index is one of seven International
Indices, twenty National Indices and thirty-eight International Industry Indices
making up the Morgan Stanley Capital International Indices.
The Morgan Stanley Capital International EAFE Index is based on the
share prices of 1066 companies listed on the stock exchanges of Europe,
Australia, New Zealand and the Far East. "Europe" includes Austria, Belgium,
Denmark, Finland, France, Germany, Italy, The Netherlands, Norway, Spain,
Sweden, Switzerland and the United Kingdom. "Far East" includes Japan, Hong
Kong and Singapore/Malaysia.
OPTIONS TRANSACTIONS
GENERAL INFORMATION. As stated in the applicable Prospectus, the Active County
Allocation, Emerging Markets, Emerging Markets Debt, Equity Growth, Aggressive
Equity, Gold, Small Cap Value Equity, Value Equity, Balanced, Latin American,
U.S. Real Estate and China Growth Portfolios may purchase and sell options on
equity securities and the China Growth and Latin American Portfolios also may
purchase and sell options on securities indices. Additional information with
respect to option transactions is set forth below. Call and put options on
equity securities are listed on various U.S. and foreign securities exchanges
("listed options") and are written in over-the-counter transaction ("OTC
Options").
Listed options are issued or guaranteed by the exchange on which they trade
or by a clearing corporation, such as Options Clearing Corporation ("OCC") in
the United States. Ownership of a listed call option gives the fund the right
to buy from the clearing corporation or exchange, the underlying security
covered by the option at the state exercise price (the price per unit of the
underlying security or currency) by filing an exercise notice prior to the
expiration date of the option. The writer (seller) of the option would then
have the obligation to sell to the clearing corporation or exchange, the
underlying security or currency at that exercise price prior to the expiration
date of the option, regardless of its the current market price. Ownership of
listed put option would give the Portfolio the right to sell the underlying
security or currency to the clearing corporation or exchange at the state
exercise price. Upon notice of exercise of the put option, the writer of the
option would have the obligation to purchase the underlying security from the
clearing corporation or exchange at the exercise price.
OTC options are purchased from or sold (written) to dealers of financial
institutions which have entered into direct agreements with the Portfolio. With
OTC options, such variables as expiration date exercise price and premium will
be agreed upon between the Portfolio and the transactions dealer, without the
intermediate of a third party such as a clearing corporation or exchange. If
the transacting dealer fails to make or take delivery of the securities
underlying an option it has written, in accordance with the terms of that
option, the Portfolio would lose the premium paid for the option as well as any
anticipated benefit of the transaction.
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COVERED CALL WRITING. Each of the Portfolios may write (i.e., sell) covered
call options on portfolio securities. By doing so, the Portfolio would become
obligated during the terms of the option to deliver the securities underlying
the option should the option holder choose to exercise the option before the
option's termination date. In return for the call it has written, the Portfolio
will receive from the purchaser (or option holder) a premium which is the price
of the option, less a commission charged by a broker. The Portfolio will keep
the premium regardless of whether the option is exercised. A call option is
"covered" if the Portfolio owns the security underlying the option it has
written or has an absolute or immediate right to acquire the security by holding
a call option on such security, or maintains a sufficient amount of cash, cash
equivalents or liquid securities to purchase the underlying security. When the
Portfolio writes covered call options, it augments its income by the premiums
receive and is thereby hedged to the extent of that amount against a decline in
the price of the underlying securities and the premiums received will offset a
portion of the potential loss incurred by the Portfolio if the securities
underlying the options are ultimately sold by the Portfolio at a loss. However,
during the option period, the Portfolio has, in return for the premium on the
option, given up the opportunity for capital appreciation above the exercise
price should the market price of the underlying security increase, but has
retained the risk of loss should the price of the underlying security decline.
The size of premiums will fluctuate with varying market conditions.
COVERED PUT WRITING. Each of the Portfolios may write covered put options on
portfolio securities. By doing so, the Portfolio incurs an obligation to buy
the security underlying the option from the purchaser of the put at the option's
exercise price at any time during the option period, at the purchaser's election
(certain listed and OTC options written by the Portfolio will be exercisable by
the purchaser only on a specific date). Generally, a put option is "covered" if
the Portfolio maintains cash, U.S. Government securities or other high grade
debt obligations equal to the exercise price of the option or if the Portfolio
holds a put option on the same underlying security with a similar or higher
exercise price.
Each of the Portfolios will write put options to receive the premiums paid
by purchasers; when the Adviser (and also the Sub-Adviser with respect to the
Gold Portfolio) wishes to purchase the security underlying the option at a price
lower than its current market price, in which case it will write the covered put
at an exercise price reflecting the lower purchase price sought; and to close
out long put option position.
PURCHASE OF PUT AND CALL OPTIONS. Each of the Portfolios may purchase listed
or OTC put or call options on its portfolio securities in amounts exceeding
no more than 5% of its total assets. When the Portfolio purchases a call
option it acquires the right to sell a designated security at a designated
price (the "exercise price"), and when the Portfolio purchases a put option
it acquires the right to purchase a designated security at the exercise
price, in each case on or before a specified date (the "termination date"),
usually not more than nine months from the date the option is issued.
The Portfolio may purchase call options to close out a covered call
position or to protect against an increase in the price of a security it
anticipates purchasing. The Portfolio may purchase put options on securities
which it holds in its portfolio only to protect itself against a decline in the
value of the security. If the value of the underlying security were to fall
below the exercise price of the put purchased in an amount greater than the
premium paid for the option, the Portfolio would incur no additional loss. The
Portfolio may also purchase put options to close out written put positions in a
manner similar to call option closing purchase transactions.
The amount the Portfolio pays to purchase an option is called a "premium",
and the risk assumed by the Portfolio when it purchases an option is the loss of
this premium. Because the price of an option tends to move with that of its
underlying security, if the Portfolio is to make a profit, the price of the
underlying security must change and the change must be sufficient to cover the
premium and commissions paid. A price change in the security underlying the
option does not assure a profit since prices in the options market may not
always reflect such a change.
OPTIONS ON SECURITIES INDICES. The China Growth and Latin American Portfolios
may purchase and write put and call options on securities indices and enter into
a related closing transactions in order to hedge against the risk of market
price fluctuations or to increase income to the Portfolio.
Call and put options on indices are similar to options on securities except
that, rather than the right to purchase or sell particular securities at a
specified price, options on an index give the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the underlying
index is greater than (or less than, in the case of puts) the exercise price of
the option. This amount of cash is equal to the difference between the closing
price of the index and the exercise price of the option, expressed in dollars
multiplied by a specified number. Thus, unlike options on individual
securities, all settlements are in cash, and gain or loss depends on price
movements in the particular market represented by the index generally (or in a
particular industry or segment of the market) rather than the price movements in
individual securities.
All options written on indices must be covered. When the Portfolio writes
an option on an index, it will establish a segregated account containing cash,
U.S. government securities or other high quality liquid debt securities with its
custodian in an amount at least equal to the market value of the option and will
maintain the account while the option is open or will otherwise cover the
transaction.
The Portfolio may choose to terminate an option position by entering into a
closing transaction. The ability of the Portfolio to enter into closing
transactions depends upon the existence of a liquid secondary market for such
transactions.
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OPTIONS ON CURRENCIES. The China Growth and Latin American Portfolios may
purchase and write put and call options on foreign currencies (traded on U.S.
and foreign exchanges or over-the-counter markets) to manage the Portfolio's
exposure to changes in dollar exchange rates. Call options on foreign currency
written by the Portfolio will be "covered," which means that the Portfolio will
own an equal amount of the underlying foreign currency. With respect to put
options on foreign currency written by the Portfolio, the Portfolio will
establish a segregated account with the Fund's Custodian consisting of cash,
U.S. government securities or other high quality liquid debt securities in an
amount equal to the amount the Portfolio would be required to pay upon exercise
of the put.
PORTFOLIO TURNOVER
The portfolio turnover rate for a year is the lesser of the value of the
purchases or sales for the year divided by the average monthly market value of
the Portfolio for the year, excluding U.S. Government securities and securities
with maturities of one year or less. The portfolio turnover rate for a year is
calculated by dividing the lesser of sales or the average monthly value of the
Portfolio's portfolio purchases of portfolio securities during that year by
securities, excluding money market instruments. The rate of portfolio turnover
will not be a limiting factor when the Portfolio deems it appropriate to
purchase or sell securities for the Portfolio. However, the U.S. federal tax
requirement that the Portfolio derive less than 30% of its gross income from the
sale or disposition of securities held less than three months may limit the
Portfolio's ability to dispose of its securities. See "Taxes."
PRECIOUS METALS FORWARD AND FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Gold Portfolio may enter into futures contacts on precious ("precious
metals futures") metals as a hedge against changes in the prices of precious
metals held or intended to be acquired by the Portfolio, but not for speculation
or for achieving leverage. The Portfolio's hedging activities may include
purchases of futures contracts as an offset against the effect of anticipated
increases in the price of a precious metal which the Portfolio intends to
acquire ("anticipatory hedge") or sales of futures contracts as an offset
against the effect of anticipated declines in the price of precious metal which
the Portfolio owns ("hedge against an existing position").
The Portfolio will enter into precious metals forward contracts which are
similar to precious metals futures contracts, in that they provide for the
purchase or sale of precious metals at an agreed price with delivery to take
place at an agreed future time. However, unlike futures contracts, forward
contracts are negotiated contracts which are primarily used in the dealer
market. Unlike the futures contract market, which is regulated by the CFTC and
by the regulations of the commodity exchanges, the forward contract market is
unregulated. The Portfolio will use forward contracts for the same hedging
purposes as those applicable to futures contracts, as described above. When the
Portfolio enters into a forward contract it will establish with the custodian a
segregated account consisting of cash, cash equivalents or bullion equal to the
market value of the forward contract purchased.
Precious metals futures and forward contract prices can be volatile and are
influenced principally by changes in spot market prices, which in turn are
affected by a variety of political and economic factors. In addition,
expectations of changing market conditions may at times influence the prices of
such futures and forward contracts, and changes in the cost of holding physical
precious metals, including storage, insurance and interest expense, will also
affect the relationship between spot and futures or forward prices. While the
correlation between changes in prices of futures and forward contracts and
prices of the precious metals being hedged by such contracts has historically
been very strong, the correlation may at times be imperfect and even a well
conceived hedge may be unsuccessful to some degree because of market behavior or
unexpected precious metals price trends. To the extent that interest rates move
in a direction opposite to that anticipated, the Portfolio may realize a loss on
a futures transaction not offset by an increase in the value of portfolio
securities. Moreover there is a possibility of a lack of a liquid secondary
market for closing out a futures position or futures option. The success of any
hedging technique depends upon the Adviser's and Sub-Adviser's accuracy in
predicting the direction of a market. If these predictions are incorrect, the
Portfolio may realize a loss.
The Portfolio may also purchase (buy) and write (sell) covered call or put
options on precious metals futures contracts. Such options would be purchased
solely for hedging purposes similar to those applicable to the purchase and sale
of futures contracts. Call options might be purchased to hedge against an
increase in the price of precious metals the Portfolio intends to acquire, and
put options may be purchased to hedge against a decline in the price of precious
metals owned by the Portfolio. As is the case with futures contracts, options
on precious metals futures may facilitate the Portfolio's acquisition of
precious metals or permit the Portfolio to defer disposition of precious metals
for tax or other purposes. The Portfolio may not purchase options on precious
metals and precious metals futures contracts if the premiums paid for all such
options, together with margin deposits on precious metals future contracts,
would exceed 5% of the Portfolio's total assets at the time of option is
purchased.
One of the risks which may arise in employing futures contracts to protect
against the price volatility of the Portfolio's assets is that the price of
precious metals subject of futures contracts (and thereby the futures contracts
prices) may correlate imperfectly with the prices of such assets. A correlation
may also be distorted by the fact that the futures market is dominated by short-
term traders seeking to profit from the difference between a contract or
security price objective and their cost of borrowed funds. Such distortions are
generally minor and would diminish as the contract approached maturity.
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SECURITIES LENDING
Each Portfolio may lend its investment securities to qualified
institutional investors who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, a Portfolio attempts to increase its net investment income through
the receipt of interest on the loan. Any gain or loss in the market price of
the securities loaned that might occur during the term of the loan would be for
the account of the Portfolio. Each Portfolio may lend its investment securities
to qualified brokers, dealers, domestic and foreign banks or other financial
institutions, so long as the terms, structure and the aggregate amount of such
loans are not inconsistent with the Investment Company Act of 1940, as amended
(the "1940 Act"), or the Rules and Regulations or interpretations of the
Securities and Exchange Commission (the "Commission") thereunder, which
currently require that (a) the borrower pledge and maintain with the Portfolio
collateral consisting of cash, an irrevocable letter of credit issued by a
domestic U.S. bank, or securities issued or guaranteed by the United States
Government having a value at all times not less than 100% of the value of the
securities loaned, (b) the borrower add to such collateral whenever the price of
the securities loaned rises (i.e., the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the Portfolio at any
time, and (d) the Portfolio receive reasonable interest on the loan (which may
include the Portfolio investing any cash collateral in interest bearing
short-term investments), any distributions on the loaned securities and any
increase in their market value. There may be risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of the
securities fail financially. However, loans will only be made to borrowers
deemed by the Advisor to be of good standing and when, in the judgment of the
Advisor, the consideration which can be earned currently from such securities
loans justifies the attendant risk. All relevant facts and circumstances,
including the creditworthiness of the broker, dealer or institution, will be
considered in making decisions with respect to the lending of securities,
subject to review by the Board of Directors of the Fund.
At the present time, the staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Board of Directors. In addition, voting
rights may pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
SHORT SALES
The Emerging Markets Debt, Latin American and Aggressive Equity Portfolios
may from time to time sell securities short without limitation but consistent
with applicable legal requirements, although initially the Portfolio does not
intend to sell securities short. A short sale is a transaction in which the
Portfolio would sell securities it owns or has the right to acquire at no added
cost (i.e., "against the box") or does not own (but has borrowed) in
anticipation of a decline in the market price of the securities. When the
Portfolio makes a short sale of borrowed securities, the proceeds it receives
from the sale will be held on behalf of a broker until the Portfolio replaces
the borrowed securities. To deliver the securities to the buyer, the Portfolio
will need to arrange through a broker to borrow the securities and, in so doing,
the Portfolio will become obligated to replace the securities borrowed at their
market price at the time of replacement, whatever that price may be. The
Portfolio may have to pay a premium to borrow the securities and must 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 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, if the short sale is not "against the box," the
Portfolio will place in a segregated account with its custodian, or designated
sub-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). Until it replaces the borrowed
securities, the Portfolio will maintain the segregated account daily at a level
so that (1) the amount deposited in the account plus the amount deposited with
the broker (not including the proceeds from the short sale) will equal the
current market value of the securities sold short and (2) the amount deposited
in the account plus the amount deposited with the broker (not including the
proceeds from the short sale) will not be less than the market value of the
securities at the time they were sold short.
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 can equal only the total amount
invested.
SPECIAL RISKS ASSOCIATED WITH FORWARD CONTRACTS, FOREIGN CURRENCY FUTURES
CONTRACTS AND OPTIONS THEREON AND OPTIONS ON FOREIGN CURRENCIES.
Transactions in forward contracts, as well as futures and options on
foreign currencies, are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on the
value of positions held by the Portfolios permitted to engage in such hedging
transactions. In addition, the value of such positions could be adversely
affected by a number of other complex political and economic factors applicable
to the countries issuing the underlying currencies.
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Furthermore, unlike trading in most other types of instruments, there is
no systematic reporting of last sale information with respect to the foreign
currencies underlying forward contracts, futures contracts and options. As a
result, the available information on which a Portfolio's trading systems will
be based may not be as complete as the comparable data on which such
Portfolio makes investment and trading decisions in connection with
securities and other transactions. Moreover, because the foreign currency
market is a global, twenty-four hour market, events could occur on that
market which will not be reflected in the forward, futures or options markets
until the following day, thereby preventing a Portfolio from responding to
such events in a timely manner.
Settlements of over-the-counter forward contracts or of the exercise of
foreign currency options generally must occur within the country issuing the
underlying currency, which in turn requires parties to such contracts to accept
or make delivery of such currencies in conformity with any United States or
foreign restrictions and regulations regarding the maintenance of foreign
banking relationships, fees, taxes or other charges.
Unlike currency futures contracts and exchange-traded options, options on
foreign currencies and forward contracts are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the Commission. In an over-the-counter trading environment, many of
the protections associated with transactions on exchanges will not be available.
For example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, an option writer could lose amounts substantially in excess of its
initial investment due to the margin and collateral requirements associated with
such option positions. Similarly, there is no limit on the amount of potential
losses on forward contracts to which a Portfolio is a party.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of a
Portfolio's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with such Portfolio.
Where no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the
trading of over-the-counter contracts, and a Portfolio may be unable to close
out options purchased or written, or forward contracts entered into, until their
exercise, expiration or maturity. This in turn could limit a Portfolio's
ability to realize profits or to reduce losses on open positions and could
result in greater losses.
Furthermore, over-the-counter transactions are not backed by the guarantee
of an exchange's clearing corporation. A Portfolio will therefore be subject to
the risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue its role as market-maker in a particular currency, thereby
restricting a Portfolio's ability to enter into desired hedging transactions. A
Portfolio will enter into over-the-counter transactions only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
Over-the-counter options on foreign currencies, like exchange-traded
commodity futures contracts and commodity option contracts, are within the
exclusive regulatory jurisdiction of the CFTC. The CFTC currently permits the
trading of such options, but only subject to a number of conditions regarding
the commercial purpose of the purchaser of such options. The China Growth and
Latin American Portfolios are not able to determine at this time whether or to
what extent the CFTC may impose additional restrictions on the trading of over-
the-counter options on foreign currencies at some point in the future, or the
effect that any restrictions may have on the hedging strategies to be
implemented by the Portfolio. Forward contracts and currency swaps are not
presently subject to regulation by the CFTC, although the CFTC may in the future
assert or be granted authority to regulate such instruments. In such event, a
Portfolio's ability to utilize forward contracts and currency swaps in the
manner set forth above and in the Prospectus could be restricted.
Options on foreign currencies traded on a national securities exchange are
within the jurisdiction of the Commission, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency options positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting a Portfolio to liquidate open positions at a profit prior
to exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effect of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on
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the OCC or its clearing member, impose special procedures for exercise and
settlement, such as technical changes in the mechanics of delivery of currency,
the fixing of dollar settlement prices or prohibitions on exercise.
TAXES
The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's prospectus. No attempt is made to present a detailed
explanation of the federal, state or local tax treatment of the Fund or its
shareholders, and the discussion here and in the Fund's prospectus is not
intended as a substitute for careful tax planning.
The following discussion of federal income tax consequences is based on the
Internal Revenue Code of 1986, as amended (the "Code") and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.
Each Portfolio within the Fund is generally treated as a separate
corporation for federal income tax purposes, and thus the provisions of the Code
generally will be applied to each Portfolio separately, rather than to the Fund
as a whole.
Each Portfolio intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, each Portfolio must, among other things, (a) derive at least 90% of
its gross income each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures and forward contracts; (b) derive
less than 30% of its gross income each taxable year from the sale or other
disposition of the following items if held less than three months (A) stock or
securities, (B) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies), and (C) foreign currencies
(or options, futures, or forward contracts on foreign currencies) that are not
directly related to the Portfolio's principal business of investing in stocks or
securities (or options or futures with respect to stock or securities) (the
"short-short test") and (c) diversify its holdings so that, at the end of each
fiscal quarter of the Portfolio's taxable year, (i) at least 50% of the market
value of the Portfolio's total assets is represented by cash and cash items,
United States Government securities, securities of other RICs, and other
securities, with such other securities limited, in respect to any one issuer, to
an amount not greater than 5% of the value of the Portfolio's total assets or
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets is invested in the securities (other than
United States Government securities or securities of other RICs) of any one
issuer or two or more issuers which the Portfolio controls and which are engaged
in the same, similar, or related trades or business. For purposes of the 90% of
gross income requirement described above, foreign currency gains which are not
directly related to a Portfolio's principal business of investing in stock or
securities (or options or futures with respect to stock or securities) may be
excluded from income that qualifies under the 90% requirement.
In addition to the requirements described above, in order to qualify as a
RIC, a Portfolio must distribute at least 90% of its net investment income
(which generally includes dividends, taxable interest, and the excess of net
short-term capital gains over net long-term capital losses less operating
expenses) and at least 90% of its net tax-exempt interest income, if any, to
shareholders. If a Portfolio meets all of the RIC requirements, it will not be
subject to federal income tax on any of its net investment income or capital
gains that it distributes to shareholders.
If a Portfolio fails to qualify as a RIC for any year, all of its income
will be subject to tax at corporate rates, and its distributions (including
capital gains distributions) will be taxable as ordinary income dividends to its
shareholders to the extent of the Portfolio's current and accumulated earnings
and profits, and will be eligible for the corporate dividends received deduction
for corporate shareholders.
Each Portfolio will decide whether to distribute or to retain all or part
of any net capital gains (the excess of net long-term capital gains over net
short-term capital losses) in any year for reinvestment. If any such gains are
retained, the Portfolio will pay federal income tax thereon, and, if the
portfolio makes an election, the shareholders will include such undistributed
gains in their income, will increase their basis in Portfolio shares by 65% of
the amount included in their income and will be able to claim their share of the
tax paid by the Portfolio as a refundable credit against their federal income
tax liability.
A gain or loss realized by a shareholder on the sale or exchange of shares
of a Portfolio held as a capital asset will be capital gain or loss, and such
gain or loss will be long-term if the holding period for the shares exceeds one
year, and otherwise will be short-
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term. Any loss realized on a sale or exchange of shares of a Portfolio will be
disallowed to the extent the shares disposed of are replaced within the 61-day
period beginning 30 days before and ending 30 days after the shares are disposed
of. Any loss realized by a shareholder on the disposition of shares held 6
months or less is treated as a long-term capital loss to the extent of any
distributions of net long-term capital gains received by the shareholder with
respect to such shares or any inclusion of undistributed capital gain with
respect to such shares.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Each Portfolio will generally be subject to a nondeductible 4% federal
excise tax to the extent it fails to distribute by the end of any calendar year
at least 98% of its ordinary income for that year and 98% of its capital gain
net income (the excess of short- and long-term capital gains over short- and
long-term capital losses) for the one-year period ending on October 31 of that
year, plus certain other amounts.
Each Portfolio is required by federal law to withhold 31% of reportable
payments (which may include dividends, capital gains distributions, and
redemptions) paid to shareholders who have not certified on the Account
Registration Form or on a separate form supplied by the Portfolio, that the
Social Security or Taxpayer Identification Number provided is correct and that
the shareholder is exempt from backup withholding or is not currently subject to
backup withholding.
For certain transactions, each Portfolio is required for federal income tax
purposes to recognize as gain or loss its net unrealized gains and losses on
forward currency and futures contracts as of the end of each taxable year, as
well as those actually realized during the year. In most cases, any such gain
or loss recognized with respect to a regulated futures contract is considered to
be 60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Realized gain or loss
attributable to a foreign currency forward contract is treated as 100% ordinary
income. Furthermore, foreign currency futures contracts which are intended to
hedge against a change in the value of securities held by a Portfolio may affect
the holding period of such securities and, consequently, the nature of the gain
or loss on such securities upon disposition.
As discussed above, in order for each Portfolio to continue to qualify for
federal income tax treatment as a RIC, at least 90% of its gross income for a
taxable year must be derived from certain qualifying income, including
dividends, interest, income derived from loans of securities, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
related income, including gains from options, futures and forward contracts,
derived with respect to its business of investing in stock, securities or
currencies. Any net gain realized from the closing out of futures contracts
will therefore generally be qualifying income for purposes of the 90%
requirement. Qualification as a RIC also requires that less than 30% of a
Portfolio's gross income be derived from the sale or other disposition of stock,
securities, options, futures or forward contracts (including certain foreign
currencies not directly related to the Fund's business of investing in stock or
securities) held less than three months. In order to avoid realizing excessive
gains on futures contracts held less than three months, the Portfolio may be
required to defer the closing out of futures contracts beyond the time when it
would otherwise be advantageous to do so.
Short sales engaged in by a Portfolio may reduce the holding property held
by a Portfolio which is substantially identical to the property sold short.
This rule may make it more difficult for the Portfolio to satisfy the short-
short test. This rule may also have the effect of converting capital gains
recognized by the Portfolio from long-term to short-term as well as converting
capital losses recognized by the Portfolio from short-term to long-term.
SPECIAL TAX CONSIDERATIONS RELATING TO
MUNICIPAL BOND AND
MUNICIPAL MONEY MARKET PORTFOLIOS
Each of the Municipal Bond Portfolio and the Municipal Money Market
Portfolio will qualify to pay "exempt interest dividends" to its shareholders
provided that, at the close of each quarter of its taxable year at least 50% of
the value of its total assets consists of obligations the interest on which is
exempt from federal income tax. Current federal tax law limits the types and
volume of bonds qualifying for federal income tax exemption of interest, which
may have an effect on the ability of these Portfolios to purchase sufficient
amounts of tax-exempt securities to satisfy this requirement. Any loss on the
sale or exchange of shares of the Municipal Bond Portfolio or the Municipal
Money Market Portfolio held for six months or less will be disallowed to the
extent of any exempt-interest dividends received by the selling shareholder with
respect to such shares.
As noted in the Prospectus for the Municipal Bond Portfolio and the
Municipal Money Market Portfolio, exempt-interest dividends are excludable from
a shareholder's gross income for regular Federal income tax purposes. Exempt-
interest dividends may
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nevertheless be subject to the alternative minimum tax (the "Alternative Minimum
Tax") imposed by Section 55 of the Code or the environmental tax (the
"Environmental Tax") imposed by Section 59A of the Code. The Alternative
Minimum Tax is imposed at the rate of up to 28% in the case of non-corporate
taxpayers and at the rate of 20% in the case of corporate taxpayers, to the
extent it exceeds the taxpayer's regular tax liability. The Environmental Tax
is imposed at the rate of 0.12% and applies only to corporate taxpayers. The
Alternative Minimum Tax and the Environmental Tax may be affected by the receipt
of exempt-interest dividends in two circumstances. First, exempt-interest
dividends derived from certain "private activity bonds" issued after August 7,
1986, will generally be an item of tax preference and therefore potentially
subject to the Alternative Minimum Tax and the Environmental Tax. The
Portfolios intend, when possible, to avoid investing in private activity bonds.
Second, in the case of exempt-interest dividends received by corporate
shareholders, all exempt-interest dividends, regardless of when the bonds from
which they are derived were issued or whether they are derived from private
activity bonds, will be included in the corporation's "adjusted current
earnings," as defined in Section 56(g) of the Code, in calculating the
corporation's alternative minimum taxable income for purposes of determining the
Alternative Minimum Tax and the Environmental Tax.
The percentage of income that constitutes "exempt-interest dividends" will
be determined for each year for the Municipal Bond Portfolio and the Municipal
Money Market Portfolio and will be applied uniformly to all dividends declared
with respect to the Portfolios during that year. This percentage may differ
from the actual percentage for any particular day.
Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of the Municipal Bond Portfolio or the Municipal Money Market
Portfolio will not be deductible for federal income tax purposes. The deduction
otherwise allowable to property and casualty insurance companies for "losses
incurred" will be reduced by an amount equal to a portion of exempt-interest
dividends received or accrued during any taxable year. Foreign corporations
engaged in a trade or business in the United States will be subject to a "branch
profits tax" on their "dividend equivalent amount" for the taxable year, which
will include exempt-interest dividends. Certain Subchapter S corporations may
also be subject to taxes on their "passive investment income," which could
include exempt-interest dividends. Up to 85% of the Social Security benefits or
railroad retirement benefits received by an individual during any taxable year
will be included in the gross income of such individual if the individual's
"modified adjusted gross income" (which includes exempt-interest dividends) plus
one-half of the Social Security benefits or railroad retirement benefits
received by such individual during that taxable year exceeds the base amount
described in Section 86 of the Code.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial development bonds or
private activity bonds should consult their tax advisors before purchasing
shares of the Municipal Bond Portfolio or the Municipal Money Market Portfolio.
"Substantial user" is defined generally for these purposes as including a "non-
exempt person" who regularly uses in trade or business a part of a facility
financed from the proceeds of such bonds.
Issuers of bonds purchased by the Municipal Bond Portfolio (or the
beneficiary of such bonds) may have made certain representations or covenants in
connection with the issuance of such bonds to satisfy certain requirements of
the Code that must be satisfied subsequent to the issuance of such bonds.
Investors should be aware that exempt-interest dividends derived from such bonds
may become subject to federal income taxation retroactively to the date thereof
if such representations are determined to have been inaccurate or if the issuer
of such bonds (or the beneficiary of such bonds) fails to comply with such
covenants.
SPECIAL TAX CONSIDERATIONS RELATING TO FOREIGN INVESTMENTS
Gains or losses attributable to foreign currency contracts, or to
fluctuations in exchange rates that occur between the time a Portfolio accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Portfolio actually collects
such receivables or pays such liabilities are treated as ordinary income or
ordinary loss to the Portfolio. Similarly, gains or losses on disposition of
debt securities denominated in a foreign currency attributable to fluctuations
in the value of the foreign currency between the date of acquisition of the
security and the date of disposition also are treated as ordinary gain or loss
to the Portfolio. These gains or losses increase or decrease the amount of a
Portfolio's net investment income available to be distributed to its
shareholders as ordinary income.
It is expected that each Portfolio will be subject to foreign withholding
taxes with respect to its dividend and interest income from foreign countries,
and a Portfolio may be subject to foreign income taxes with respect to other
income. So long as more than 50% in value of a Portfolio's total assets at the
close of the taxable year consists of stock or securities of foreign
corporations, the Portfolio may elect to treat certain foreign income taxes
imposed on it for United States federal income tax purposes as paid directly by
its shareholders. A Portfolio will make such an election only if it deems it to
be in the best interest of its shareholders and will
15
<PAGE>
notify shareholders in writing each year if it makes an election and of the
amount of foreign income taxes, if any, to be treated as paid by the
shareholders. If a Portfolio makes the election, shareholders will be required
to include in income their proportionate shares of the amount of foreign income
taxes treated as imposed on the Portfolio and will be entitled to claim either a
credit (subject to the limitations discussed below) or, if they itemize
deductions, a deduction, for their shares of the foreign income taxes in
computing their federal income tax liability.
Shareholders who choose to utilize a credit (rather than a deduction) for
foreign taxes will be subject to a number of complex limitations regarding the
availability and utilization of the credit. Because of these limitations,
shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the foreign income taxes paid by a Portfolio.
Shareholders are urged to consult their tax advisors regarding the application
of these rules to their particular circumstances.
TAXES AND FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, a foreign trust or estate, a foreign corporation, or foreign a
partnership ("Foreign Shareholder") depends on whether the income from the
Portfolio is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Portfolio is not effectively connected with a U.S.
trade or business carried on by a Foreign Shareholder, distributions of net
investment income plus the excess of net short-term capital gains over net
long-term capital losses will be subject to U.S. withholding tax at the rate of
30% (or such lower treaty rate as may be applicable) upon the gross amount of
the dividend. Furthermore, Foreign Shareholders will generally be exempt from
U.S. federal income tax on gains realized on the sale of shares of the
Portfolio, distributions of net long-term capital gains, and amounts retained by
the Fund which are designated as undistributed capital gains.
If the income from the Portfolio is effectively connected with a U.S. trade
or business carried on by a Foreign Shareholder, then distributions from the
Portfolio and any gains realized upon the sale of shares of the Portfolio, will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
and residents or domestic corporations.
The Portfolio may be required to withhold U.S. federal income tax on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless the Foreign Shareholder complies with Internal
Revenue Service certification requirements.
The tax consequences to a Foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described here.
Furthermore, Foreign Shareholders are strongly urged to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in a Portfolio, including the potential application of the provisions
of the Foreign Investment in Real Estate Property Tax Act of 1980, as amended.
PURCHASE OF SHARES
The purchase price of the Class A shares of each Portfolio of the Fund,
except the Money Market and Municipal Money Market Portfolios, and the Class
B shares of each Multiclass Portfolio of the Fund is the net asset value next
determined after the order is received. For each Portfolio of the Fund other
then the Money Market or Municipal Market Portfolios, an order received prior
to the regular close of the New York Stock Exchange (the "NYSE") will be
executed at the price computed on the date of receipt; and an order received
after the regular close of the NYSE will be executed at the price computed on
the next day the NYSE is open as long as the Fund's transfer agent receives
payment by check or in Federal Funds prior to the regular close of the NYSE
on such day. Shares of the Money Market and Municipal Money Market Portfolios
may be purchased at the net asset value per share at the price next
determined after Federal Funds are available to such Portfolios. Shares of
the Fund may be purchased on any day the NYSE is open. The NYSE will be
closed on the following days: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts such as employee benefit plans or under circumstances where
certain economies can be achieved in sales of a Portfolio's shares. The
International Equity Portfolio is currently limiting investments in the
16
<PAGE>
Portfolio to: (i) reinvested dividends and distributions by existing
shareholders of the Portfolio; (ii) additional investments by existing
shareholders of the Portfolio; (iii) investments by employees of Morgan Stanley;
and (iv) investors who were in the process of becoming shareholders of the
Portfolio at the time the Portfolio limited further investments.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the NYSE is closed, or trading on the NYSE is
restricted as determined by the Commission, (ii) during any period when an
emergency exists as defined by the rules of the Commission as a result of which
it is not reasonably practicable for a Portfolio to dispose of securities owned
by it, or fairly to determine the value of its assets, and (iii) for such other
periods as the Commission may permit.
No charge is made by any Portfolio for redemptions except for the 1%
transaction fee assessed upon redemption of the International Small Cap
Portfolio. Any redemption may be more or less than the shareholder's cost
depending on the market value of the securities held by the Portfolio.
To protect your account and the Fund from fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Fund to
verify the identity of the person who has authorized a redemption from your
account. Signature guarantees are required in connection with: (1) all
redemptions, regardless of the amount involved, when the proceeds are to be paid
to someone other than the registered owner(s) and/or registered address; and
(2) share transfer requests.
A guarantor must be a bank, a trust company, a member firm of a domestic
stock exchange, or a foreign branch of any of the foregoing. Notaries public
are not acceptable guarantors.
The signature guarantees must appear either: (1) on the written request
for redemption; (2) on a separate instrument for assignment ("stock power")
which should specify the total number of shares to be redeemed; or (3) on all
stock certificates tendered for redemption and, if shares held by the Fund are
also being redeemed, on the letter or stock power.
SHAREHOLDER SERVICES
The following supplements the Shareholder Services section set forth in the
Fund's Prospectuses:
EXCHANGE FEATURES
Shares of each Portfolio of the Fund may be exchanged for shares of any
other available Portfolio (other than the International Equity Portfolio,
which is closed to new investors). In exchanging for shares of a Portfolio
with more than one class, the class of shares a shareholder receives in
exchange will be determined in the same manner as any other purchase of
shares and will not be based on the class of shares surrendered for the
exchange. Consequently, the same minimum initial investment and minimum
account size for determining the class of shares received in the exchange
will apply.
Any such exchange will be based on the respective net asset values of the
shares involved. There is no sales commission or charge of any kind. Before
making an exchange, a shareholder should consider the investment objectives of
the Portfolio to be purchased.
Exchange requests may be made either by mail or telephone. Exchange
requests by mail should be sent to Morgan Stanley Institutional Fund, Inc.,
P.O. Box 2798, Boston, Massachusetts 02208-2798. Telephone exchanges will be
accepted only if the certificates for the shares to be exchanged are held by
the Fund for the account of the shareholder and the registration of the two
accounts will be identical. Requests for exchanges received prior to 10:00
am. (Eastern Time) for the Municipal Money Market Portfolio, 11:00 a.m.
(Eastern Time) for the Money Market Portfolio, and 4:00 p.m. (Eastern Time)
for the remaining Portfolios will be processed as of the close of business on
the same day. Requests received after these times will be processed on the
next business day. Exchanges may be subject to limitations as to amounts or
frequency, and to other restrictions established by the Board of Directors to
assure that such exchanges do not disadvantage the Fund and its shareholders.
For federal income tax purposes an exchange between Portfolios is a taxable
event for shareholders subject to tax, and, accordingly, a gain or loss may be
realized. The exchange privilege may be modified or terminated by the Fund
at any time upon 60-days' notice to shareholders.
17
<PAGE>
TRANSFER OF SHARES
Shareholders may transfer shares of the Fund's Portfolios to another person
by making a written request to the Fund. The request should clearly identify
the account and number of shares to be transferred, and include the signature of
all registered owners and all stock certificates, if any, which are subject to
the transfer. The signature on the letter of request, the stock certificate or
any stock power must be guaranteed in the same manner as described under
"Redemption of Shares." As in the case of redemptions, the written request must
be received in good order before any transfer can be made. Transferring shares
may affect the eligibility of an account for a given class of the Portfolio's
shares and may result in involuntary conversion or redemption of such shares.
INVESTMENT LIMITATIONS
Each current Portfolio has adopted the following restrictions which are
fundamental policies and may not be changed without the approval of the lesser
of: (1) at least 67% of the voting securities of the Portfolio present at a
meeting if the holders of more than 50% of the outstanding voting securities of
the Portfolio are present or represented by proxy, or (2) more than 50% of the
outstanding voting securities of the Portfolio. Each Portfolio of the Fund will
not:
(1) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent the
Portfolio from purchasing or selling options or futures contracts or from
investing in securities or other instruments backed by physical commodities),
and except that the Gold Portfolio may invest in gold bullion in accordance with
its investment objectives and policies;
(2) purchase or sell real estate, although it may purchase and sell
securities of companies that deal in real estate and may purchase and sell
securities that are secured by interests in real estate;
(3) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or repurchase agreements;
(4) except with respect to the Global Fixed Income, Emerging Markets,
Emerging Markets Debt, China Growth, Latin American, MicroCap, Aggressive
Equity, U.S. Real Estate Portfolios (i) purchase more than 10% of any class
of the outstanding voting securities of any issuer and (ii) purchase
securities of an issuer (except obligations of the U.S. Government and its
agencies and instrumentalities) if as a result, with respect to 75% of its
total assets, more than 5% of the Portfolio's total assets, at market value,
would be invested in the securities of such issuer;
(5) issue senior securities and will not borrow, except from banks and as
a temporary measure for extraordinary or emergency purposes and then, in no
event, in excess of 33 1/3% of its total assets (including the amount borrowed)
less liabilities (other than borrowings), except that each of the Emerging
Markets Debt and Latin American Portfolios may borrow from banks or other
entities in amounts not in excess of 33 1/3% of its total assets (including the
amount borrowed) less liabilities in accordance with its investment objectives
and policies;
(6) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933 Act in
the disposition of restricted securities;
(7) acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value of the Portfolio's total
assets would be invested in securities of companies within such industry;
provided, however, that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or (in the case of the Money Market Portfolio or the
Municipal Money Market Portfolio) instruments issued by U.S. Banks, except that
the Latin American Portfolio may invest more than 25% of its total assets in
companies involved in the telecommunications industry or financial services
industry, and except that the U.S. Real Estate Portfolio may invest more than
25% of its total assets in the U.S. real estate industry, respectively, as
provided in their respective prospectuses; and
(8) write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
In addition, each current Portfolio of the Fund has adopted non-fundamental
investment limitations as stated below and in their respective prospectuses.
Such limitations may be changed without shareholder approval. Each current
Portfolio of the Fund will not:
(1) purchase on margin or sell short, except (i) that the Emerging Markets
Debt, Latin American and Aggressive Equity Portfolios may from time to time sell
securities short without limitation but consistent with applicable legal
requirements as stated in
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<PAGE>
its prospectus, (ii) that each of the Active Country Allocation, Equity Growth,
Gold, China Growth and Aggressive Equity Portfolios may enter into option
transactions to the extent that not more than 5% of the Portfolio's total assets
are required as deposits to secure obligations under options and not more than
20% of its total assets are invested in options, futures contracts and options
on futures contracts at any time, and (iii) as specified above in Fundamental
Restriction No. (1);
(2) purchase or retain securities of an issuer if those Officers and
Directors of the Fund or its investment adviser owning more than 1/2 of 1% of
such securities together own more than 5% of such securities;
(3) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 10% of its total assets at fair market value;
(4) invest for the purpose of exercising control over management of any
company;
(5) invest its assets in securities of any investment company, except by
purchase in the open market involving only customary brokers' commissions or in
connection with mergers, acquisitions of assets or consolidations and except as
may otherwise be permitted by the 1940 Act;
(6) invest more than 5% of its total assets in securities of companies
which have (with predecessors) a record of less than three years' continuous
operation;
(7) purchase warrants if, by reason of such purchase, more than 5% of the
value of the Portfolio's net assets (taken at market value) would be invested in
warrants, valued at the lower of cost or market. Included within this amount,
but not to exceed 2% of the value of the Portfolio's net assets, may be warrants
that are not listed on a recognized stock exchange;
(8) except for the U.S. Real Estate Portfolio, invest in real estate
limited partnership interests, and the U.S. Real Estate Portfolio may not invest
in such interests that are not publicly traded;
(9) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the respective prospectuses) that are publicly distributed, and
(ii) by lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent with the 1940
Act or the Rules and Regulations or interpretations of the Commission
thereunder;
(10) invest in oil, gas or other mineral leases; and
(11) purchase puts, calls, straddles, spreads and any combination thereof
if for any reason thereof the value of its aggregate investment in such classes
of securities will exceed 5% of their respective total assets, except that each
of the Active Country Allocation, Equity Growth, Gold, China Growth and
Aggressive Equity Portfolios may enter into option transactions to the extent
that not more than 5% of the Portfolio's total assets are required as deposits
to secure obligations under options and not more than 20% of its total assets
are invested in options, futures contracts and options on futures contracts at
any time.
The Balanced, Fixed Income and Value Equity Portfolios will only issue
shares for securities or assets other than cash in a bona fide reorganization,
statutory merger, or in other acquisitions of portfolio securities (except for
municipal debt securities issued by state political subdivisions or their
agencies or instrumentalities) which (i) meet their respective investment
objectives; (ii) are acquired for investment and not for resale.
Each of the Global Fixed Income, Emerging Markets, Emerging Markets Debt,
China Growth, Latin American, Aggressive Equity and U.S. Real Estate Portfolios
will diversify its holdings so that, at the close of each quarter of its taxable
year, (i) at least 50% of the market value of the Portfolio's total assets is
represented by cash (including cash items and receivables), U.S. Government
securities, and other securities, with such other securities limited, in respect
of any one issuer, for purposes of this calculation to an amount not greater
than 5% of the value of the Portfolio's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities).
The percentage limitations contained in these restrictions apply at the
time of purchase of securities. Future Portfolios of the Fund may adopt
different limitations.
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<PAGE>
DETERMINING MATURITIES OF CERTAIN INSTRUMENTS
Generally, the maturity of a portfolio instrument shall be deemed to be the
period remaining until the date noted on the face of the instrument as the date
on which the principal amount must be paid, or in the case of an instrument
called for redemption, the date on which the redemption payment must be made.
However, instruments having variable or floating interest rates or demand
features may be deemed to have remaining maturities as follows: (1) a
Government Obligation with a variable rate of interest readjusted no less
frequently than annually may be deemed to have a maturity equal to the period
remaining until the next readjustment of the interest rate; (b) an instrument
with a variable rate of interest, the principal amount of which is scheduled on
the face of the instrument to be paid in one year or less, may be deemed to have
a maturity equal to the period remaining until the next readjustment of the
interest rate; (c) an instrument with a variable rate of interest that is
subject to a demand feature may be deemed to have a maturity equal to the longer
of the period remaining until the next readjustment of the interest rate or the
period remaining until the principal amount can be recovered through demand;
(d) an instrument with a floating rate of interest that is subject to a demand
feature may be deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand; and (e) a repurchase agreement
may be deemed to have a maturity equal to the period remaining until the date on
which the repurchase of the underlying securities is scheduled to occur, or
where no date is specified, but the agreement is subject to demand, the notice
period applicable to a demand for the repurchase of the securities.
MANAGEMENT OF THE FUND
OFFICERS AND DIRECTORS
The Fund's officers, under the supervision of the Board of Directors,
manage the day-to-day operations of the Fund. The Directors set broad policies
for the Fund and choose its officers. Three Directors and all of the officers
of the Fund are directors, officers or employees of the Fund's adviser,
distributor or administrative services provider. Directors and officers of the
Fund are also directors and officers of some or all of the other investment
companies managed, administered, advised or distributed by Morgan Stanley Asset
Management Inc. or its affiliates. The other Directors have no affiliation with
the Fund's adviser, distributor or administrative services provider. A list of
the Directors and officers of the Fund and a brief statement of their present
positions and principal occupations during the past five years is set forth
below:
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<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Name, Address and Age Position with Fund Past Five Years
--------------------- ------------------ ----------------------------
<S> <C> <C>
Barton M. Biggs Chairman and Chairman and Director of Morgan Stanley Asset
1221 Avenue of the Director Management Inc. and Morgan Stanley Asset
Americas Management Limited; Managing Director of Morgan
New York, NY 10020 Stanley & Co., Inc.; Director of Morgan Stanley
(63) Group Inc.; Member of International Advisory
Counsel of the Thailand Fund; Chairman and
Director of The Brazilian Investment Fund,
Inc., The Latin American Discovery Fund, Inc.,
The Malaysia Fund, Inc., Morgan Stanley Africa
Investment Fund, Inc., Morgan Stanley Asia-
Pacific Fund, Inc., Morgan Stanley Emerging
Markets Debt Fund, Inc., Morgan Stanley
Emerging Markets Fund, Inc., Morgan Stanley
Fund Inc., Morgan Stanley Global Opportunity
Bond Fund, Inc., Morgan Stanley High Yield
Fund, Inc., Morgan Stanley India Investment
Fund, Inc., Morgan Stanley Institutional Fund,
Inc., The Pakistan Investment Fund, Inc.,
PCS Cash Fund, Inc., The Thai Fund, Inc. and
The Turkish Investment Fund, Inc.
Warren J. Olsen Director and President Principal of Morgan Stanley & Co., Inc.;
1221 Avenue of the Principal of Morgan Stanley Asset Management
Americas Inc.; President and Director of The Brazilian
New York, NY 10020 Investment Fund, Inc., The Latin American
(39) Discovery Fund, Inc., The Malaysia Fund, Inc.,
Morgan Stanley Africa Investment Fund, Inc.,
Morgan Stanley Asia-Pacific Fund, Inc., Morgan
Stanley Emerging Markets Debt Fund, Inc.,
Morgan Stanley Emerging Markets Fund, Inc.,
Morgan Stanley Fund, Inc., Morgan Stanley
Global Opportunity Bond Fund, Inc., Morgan
Stanley High Yield Fund, Inc., Morgan Stanley
India Investment Fund, Inc., Morgan Stanley
Institutional Fund, Inc., The Pakistan
Investment Fund, Inc., PCS Cash Fund, Inc.,
The Thai Fund, Inc., and The Turkish Investment
Fund, Inc.
John D. Barrett, II Director Chairman and Director of Barrett Associates,
521 Fifth Avenue Inc. (Investment counseling); Director of the
New York, NY 10135 Ashforth Company (real estate); Director of the
(60) Morgan Stanley Fund, Inc., Morgan Stanley
Institutional Fund, Inc. and PCS Cash Fund,
Inc.
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<PAGE>
Principal Occupation During
Name, Address and Age Position with Fund Past Five Years
--------------------- ------------------ ----------------------------
Gerard E. Jones Director Partner in Richards & O'Neil LLP (law firm);
43 Arch Street Director of the Morgan Stanley Fund, Inc.,
Greenwich, CT 06830 Morgan Stanley Institutional Fund, Inc. and PCS
(58) Cash Fund, Inc.
Andrew McNally IV Director Chairman and Chief Executive Officer of Rand
8255 North Central McNally (Publication); Director of Allendale
Park Avenue Insurance Co., Mercury Finance (consumer
Skokie, IL 60076 finance); Zenith Electronics, Hubbell, Inc.
(56) (industrial electronics); Director of the
Morgan Stanley Fund, Inc., Morgan Stanley
Institutional Fund, Inc. and PCS Cash Fund,
Inc.; Director of the Morgan Stanley Fund,
Inc., Morgan Stanley Institutional Fund, Inc.
and PCS Cash Fund, Inc.
Samuel T. Reeves Director Chairman of the Board and CEO, Pinacle L.L.C.
8211 North (investment firm); Director, Pacific Gas and
Fresno Street Electric and PG&E Enterprises (utilities);
Fresno, CA 93720 Director of the Morgan Stanley Fund, Inc.,
(61) Morgan Stanley Institutional Fund, Inc. and PCS
Cash Fund, Inc.
Fergus Reid Director Chairman and Chief Executive Officer of
85 Charles Colman Blvd LumeLite Corporation (injection molding firm);
Pawling, NY 12564 Trustee and Director of Vista Mutual Fund
(63) Group; Director of the Morgan Stanley Fund,
Inc., Morgan Stanley Institutional Fund, Inc.
and PCS Cash Fund, Inc.
Frederick O. Robertshaw Director Of Counsel, Bryan, Cave (law firm); Previously
2800 North Central Avenue associated with Copple, Chamberlin & Boehm,
Phoenix, AZ 85004 P.C. and Rake, Copple, Downey & Black, P.C.
(61) (law firms); Director of the Morgan Stanley
Fund, Inc., Morgan Stanley Institutional Fund,
Inc. and PCS Cash Fund, Inc.
22
<PAGE>
Principal Occupation During
Name, Address and Age Position with Fund Past Five Years
--------------------- ------------------ ----------------------------
Frederick B. Whittemore Director Advisory Director of Morgan Stanley & Co.,
1251 Avenue of the Inc.; Vice-Chairman and Director of The
Americas, 30th Flr. Brazilian Investment Fund, Inc., The Latin
New York, NY 10020 American Discovery Fund, Inc., The Malaysia
(65) Fund, Inc., Morgan Stanley Africa Investment
Fund, Inc., Morgan Stanley Asia-Pacific Fund,
Inc., Morgan Stanley Emerging Markets Debt
Fund, Inc., Morgan Stanley Emerging Markets
Fund, Inc., Morgan Stanley Fund, Inc., Morgan
Stanley Global Opportunity Bond Fund, Inc.,
Morgan Stanley High Yield Fund,Inc., Morgan
Stanley India Investment Fund, Inc., Morgan
Stanley Institutional Fund, Inc., The Pakistan
Investment Fund, Inc., PCS Cash Fund, Inc.,
The Thai Fund, Inc. and The Turkish Investment
Fund, Inc.
James W. Grisham Vice President Principal of Morgan Stanley & Co., Inc.;
1221 Avenue of the Principal of Morgan Stanley Asset Management
Americas Inc.; Vice President of The Brazilian
New York, NY 10020 Investment Fund, Inc., The Latin American
(54) Discovery Fund, Inc., The Malaysia Fund, Inc.,
Morgan Stanley Africa Investment Fund, Inc.,
Morgan Stanley Asia-Pacific Fund, Inc., Morgan
Stanley Emerging Markets Debt Fund, Inc.,
Morgan Stanley Emerging Markets Fund, Inc.,
Morgan Stanley Fund, Inc., Morgan Stanley
Global Opportunity Bond Fund, Inc., Morgan
Stanley High Yield Fund, Inc., Morgan Stanley
India Investment Fund, Inc., Morgan Stanley
Institutional Fund, Inc., The Pakistan
Investment Fund, Inc., PCS Cash Fund, Inc.,
The Thai Fund, Inc. and The Turkish Investment
Fund, Inc.
23
<PAGE>
Principal Occupation During
Name, Address and Age Position with Fund Past Five Years
--------------------- ------------------ ----------------------------
Harold J. Schaaff, Jr. Vice President Principal of Morgan Stanley & Co.; General
1221 Avenue of the Counsel and Secretary of Morgan Stanley Asset
Americas Management Inc.; Vice President of The
New York, NY 10020 Brazilian Investment Fund, Inc., The Latin
(35) American Discovery Fund, Inc., The Malaysia
Fund, Inc., Morgan Stanley Africa Investment
Fund, Inc., Morgan Stanley Asia-Pacific Fund,
Inc., Morgan Stanley Emerging Markets Debt
Fund, Inc., Morgan Stanley Emerging Markets
Fund, Inc., Morgan Stanley Fund, Inc., Morgan
Stanley Global Opportunity Bond Fund, Inc.,
Morgan Stanley High Yield Fund, Inc., Morgan
Stanley India Investment Fund, Inc., Morgan
Stanley Institutional Fund, Inc., The Pakistan
Investment Fund, Inc., PCS Cash Fund, Inc.,
The Thai Fund, Inc. and The Turkish Investment
Fund, Inc.
Joseph P. Stadler Vice President Vice President of Morgan Stanley Asset
1221 Avenue of the Management Inc.; Previously with Price
Americas Waterhouse (accounting); Vice President of The
New York, NY 10020 Brazilian Investment Fund, Inc., The Latin
(41) American Discovery Fund, Inc., The Malaysia
Fund, Inc., Morgan Stanley Africa Investment
Fund, Inc., Morgan Stanley Asia-Pacific Fund,
Inc., Morgan Stanley Emerging Markets Debt
Fund, Inc., Morgan Stanley Emerging Markets
Fund, Inc., Morgan Stanley Fund, Inc., Morgan
Stanley Global Opportunity Bond Fund, Inc.,
Morgan Stanley High Yield Fund, Inc., Morgan
Stanley India Investment Fund, Inc., Morgan
Stanley Institutional Fund, Inc., The Pakistan
Investment Fund, Inc., PCS Cash Fund, Inc.,
The Thai Fund, Inc. and The Turkish Investment
Fund, Inc.
24
<PAGE>
Principal Occupation During
Name, Address and Age Position with Fund Past Five Years
--------------------- ------------------ ----------------------------
Valerie Y. Lewis Secretary Vice President of Morgan Stanley Asset
1221 Avenue of the Management Inc.; Previously with Citicorp
Americas (banking); Secretary of The Brazilian
New York, NY 10020 Investment Fund, Inc., The Latin American
(39) Discovery Fund, Inc., The Malaysia Fund, Inc.,
Morgan Stanley Africa Investment Fund, Inc.,
Morgan Stanley Asia-Pacific Fund, Inc., Morgan
Stanley Emerging Markets Debt Fund, Inc.,
Morgan Stanley Emerging Markets Fund, Inc.,
Morgan Stanley Fund, Inc., Morgan Stanley
Global Opportunity Bond Fund, Inc., Morgan
Stanley High Yield Fund, Inc., Morgan Stanley
India Investment Fund, Inc., Morgan Stanley
Institutional Fund, Inc., The Pakistan
Investment Fund, Inc., PCS Cash Fund, Inc.,
The Thai Fund, Inc. and The Turkish Investment
Fund, Inc.
Karl O. Hartmann Assistant Secretary Senior Vice President, Secretary and General
73 Tremont Street Counsel of Chase Global Funds Services Company;
Boston, MA 02108-3913 Previously with Leland, O' Brien, Rubenstein
(40) Associates, Inc. (investments).
James R. Rooney Treasurer Assistant Vice President, Chase Global Funds
73 Tremont Street Services Company; Manager of Fund
Boston, MA 02108-3913 Administration; Officer of various investment
(37) companies managed by Morgan Stanley Asset
Management Inc.; Previously with Scudder,
Stevens & Clark, Inc. (investments) and Ernst
& Young LLP (accounting); Treasurer of The
Brazilian Investment Fund, Inc., The Latin
American Discovery Fund, Inc., The Malaysia
Fund, Inc., Morgan Stanley Africa Investment
Fund, Inc., Morgan Stanley Asia-Pacific Fund,
Inc., Morgan Stanley Emerging Markets Debt Fund,
Inc., Morgan Stanley Emerging Markets Fund,
Inc., Morgan Stanley Fund, Inc., Morgan Stanley
Global Opportunity Bond Fund, Inc., Morgan
Stanley High Yield Fund, Inc., Morgan Stanley
India Investment Fund, Inc., Morgan Stanley
Institutional Fund, Inc., The Pakistan
Investment Fund, Inc., The Thai Fund, Inc. and
The Turkish Investment Fund, Inc.
25
<PAGE>
Principal Occupation During
Name, Address and Age Position with Fund Past Five Years
--------------------- ------------------ ----------------------------
Joanna Haigney Assistant Treasurer Supervisor of Fund Administration and
73 Tremont Street Compliance, Chase Global Funds Services Company;
Boston, MA 02108-3913 Previously with Coopers & Lybrand LLP;
(29) Assistant Treasurer of The Brazilian Investment
Fund, Inc., The Latin American Discovery Fund,
Inc., The Malaysia Fund, Inc., Morgan Stanley
Africa Investment Fund, Inc., Morgan Stanley
Asia-Pacific Fund, Inc., Morgan Stanley
Emerging Markets Debt Fund, Inc., Morgan
Stanley Emerging Markets Fund, Inc., Morgan
Stanley Fund, Inc., Morgan Stanley Global
Opportunity Bond Fund, Inc., Morgan Stanley
High Yield Fund, Inc., Morgan Stanley India
Investment Fund, Inc., Morgan Stanley
Institutional Fund, Inc., The Pakistan
Investment Fund, Inc., The Thai Fund, Inc. and
The Turkish Investment Fund, Inc.
<FN>
_______
* "Interested Person" within the meaning of the 1940 Act.
</TABLE>
REMUNERATION OF DIRECTORS AND OFFICERS
The Fund pays each Director who is not also an officer or affiliated person
and in addition, Mr. Whittemore, an Interested Person, an annual fee, plus
travel and other expenses incurred in attending Board meetings. For the fiscal
year December 31, 1994, the Fund paid approximately $83,000 in Directors' fees
and expenses. Directors who are also officers or affiliated persons receive no
remuneration for their services as Directors. The Fund's officers and employees
are paid by the Adviser or its agents. As of December 18, 1995, to Fund
management's knowledge, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of each Portfolio of the
Fund. The following table shows aggregate compensation paid to each of the
Fund's Directors by the Fund and the Fund Complex, respectively, in the fiscal
year ended December 31, 1994.
26
<PAGE>
COMPENSATION TABLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
NAME OF AGGREGATE PENSION OR ESTIMATED TOTAL
PERSON, COMPENSATION RETIREMENT ANNUAL COMPENSATION
POSITION FROM BENEFITS ACCRUED BENEFITS FROM REGISTRANT
REGISTRANT AS PART OF FUND UPON AND FUND COMPLEX
EXPENSES RETIREMENT PAID TO DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Frederick B. Whittemore,* $15,750 $ $ $67,800
Director and Chairman of
the Board
John P. Britton,** 16,500 27,550
Director
George R. Bunn, Jr.,** 18,350 29,400
Director
A. Macdonald Caputo,** N/A N/A
Director
Gerard E. Jones,* 15,750 85,584.11
Director
Peter E. deSvastich,** 15,750 40,058
Director
Warren J. Olsen,* N/A N/A
Director and President
<FN>
_______________
* As of June 28, 1995, the following persons were elected Directors of the
Fund: Barton M. Biggs, John D. Barrett II, Gerard E. Jones, Andrew McNally
IV, Warren J. Olsen, Samuel T. Reeves, Fergus Reid, Frederick O. Robertshaw
and Frederick B. Whittemore.
** Resigned effective June 28, 1995.
</TABLE>
INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS
Morgan Stanley Asset Management Inc. ("MSAM" or the "Adviser") is a
wholly-owned subsidiary of Morgan Stanley Group Inc. The principal offices of
Morgan Stanley Group Inc. are located at 1221 Avenue of the Americas, New York,
NY 10020. As compensation for advisory services for the year ended October 31,
1992, the two months ended December 31, 1992, the fiscal years ended December
31, 1993 and December 31, 1994, the Adviser earned fees of approximately
$8,312,000, $1,725,000, $17,539,000 and $34,338,000, respectively, and from
such fees voluntarily waived fees of $962,000, $600,000, $3,037,000 and
$2,640,000, respectively. For the year ended October 31, 1992, the two months
ended December 31, 1992, the fiscal years ended December 31, 1993 and December
31, 1994, the Fund paid brokerage commissions of approximately $3,477,000,
$370,000, $5,827,000 and $7,287,293, respectively. For the year ended
October 31, 1992, the two months ended December 31, 1992, the fiscal years ended
December 31, 1993 and December 31, 1994, the Fund paid in the aggregate $66,600,
$4,000, $797,000 and $796,000, respectively, as brokerage commissions to Morgan
Stanley & Co. Incorporated, an affiliated broker-dealer, which represented 2%,
1%, 13% and 11% of the total amount of brokerage commissions paid in each
respective period. For the year ended October 31, 1992, the two months ended
December 31, 1992 and the fiscal years ended December 31, 1993 and December 31,
1994, the Fund paid administrative fees to MSAM of approximately $2,624,000,
$542,000, $4,662,000 and $4,458,000, respectively.
The Sub-Adviser, Sun Valley Gold Company, with principal offices at 620 Sun
Valley Road, Sun Valley, Idaho, serves as the investment sub-adviser of the Gold
Portfolio, pursuant to a sub-advisory agreement among the Fund, the Adviser and
the Sub-Adviser (the "Sub-Advisory Agreement"). The Adviser and the Sub-Adviser
have entered into an indemnification agreement under
27
<PAGE>
which, generally, the Sub-Adviser has agreed to indemnify the Adviser and the
Fund for claims or losses in connection with any failure by the Sub-Adviser to
comply with its obligations under the Sub-Advisory Agreement or related
agreements or any act or omission that amounts to negligence, misfeasance or bad
faith, and the Adviser has agreed to indemnify the Sub-Adviser for claims or
losses in connection with any failure by the Adviser to comply with its
obligations under the Sub-Advisory Agreement or related agreements. For the
year ended December 31, 1994, the Fund paid $8,000 as brokerage commissions to
Sun Valley.
Pursuant to the MSAM Administration Agreement between the Adviser and the
Fund, the Adviser provides Administrative Services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15 of 1% of the average daily net assets of each
Portfolio.
Under the Agreement between the Adviser and The Chase Manhattan Bank,
N.A. ("Chase," successor in interest to United States Trust Company of New
York), Chase Global Fund Services Company ("CGFSC," formerly Mutual Funds
Service Company and now a Chase subsidiary) provides certain administrative
services to the Fund. CGFSC provides operational and administrative services
to investment companies with approximately $60 billion in assets and having
approximately 223,133 shareholder accounts as of June 30, 1995. CGFSC's
business address is 73 Tremont Street, Boston, Massachusetts 02108-3913.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act which incorporates the Code of Ethics of the Adviser
(together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Adviser and, as described below,
impose additional, more onerous, restrictions on the Fund's investment
personnel.
The Codes require that all employees of the Adviser preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Adviser include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security that at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Adviser.
Furthermore, the Codes provide for trading "blackout periods" that prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The names and addresses of the holders of 5% or more of the outstanding
shares of any class of the Fund as of June 30, 1995 and the percentage of
outstanding shares of such classes owned beneficially or of record by such
shareholders as of such date are, to Fund management's knowledge, as follows:
ACTIVE COUNTRY ALLOCATION PORTFOLIO: The Trustees of Columbia University in the
City of New York, 475 Riverside Drive, Suite 401, New York, NY 10115, owned 16%
of such Portfolio's total outstanding shares.
City of New York Deferred Compensation Plan, 40 Rector Street, 3rd Floor, New
York, NY 10006, owned 13% of such Portfolio's total outstanding shares.
Oglebay Norton Company, 1100 Superior Avenue, Cleveland, OH 44114-2598, owned
12% of such Portfolio's total outstanding shares.
The Finn Foundation, Northern Trust Co., Master Trust Dept., P.O. Box 92984,
Chicago, IL 60675, owned 8% of such Portfolio's total outstanding shares.
Strafe & Co., F/A/O In: Thompson Consumer Electronics, 235 West Schrock Road,
Westerville, OH 43081, owned 7% of such Portfolio's total outstanding shares.
28
<PAGE>
Sahara Enterprises, Inc., 3 First National Plaza, Suite 2000, Chicago, IL 60602-
4260, owned 6% of such Portfolio's total outstanding shares.
ASIAN EQUITY PORTFOLIO: Association De Bienfaisance Et De Retraite Des Policiers
De La Communaute Urbaine De Montreal, 480 Gilford Street, Montreal, Quebec
H2J1N3, owned 9% of such Portfolio's total outstanding shares.
BALANCED PORTFOLIO: The American Roentgen Ray Society, 1891 Preston White
Drive, Reston, VA 22091-5431, owned 21% of such Portfolio's total outstanding
shares.
EMERGING GROWTH PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 22% of such
Portfolio's total outstanding shares.
Allendale Mutual Insurance Co., P.O. Box 7500, Johnston, RI 02919-0750, owned 8%
of such Portfolio's total outstanding shares.
Claude Worthington Benedum Foundation, 1400 Benedum Trees Building, Pittsburgh,
PA 15222, owned 7% of such Portfolio's total outstanding shares.
EMERGING MARKETS DEBT PORTFOLIO: Northwestern University, 633 Clark Street,
Evanston, IL 60208-1122, owned 13% of such Portfolio's total outstanding shares.
Swarthmore College, 500 College Avenue, Swarthmore, PA 19081-1110, owned 7% of
such Portfolio's total outstanding shares.
EMERGING MARKETS PORTFOLIO: Ministers & Missionaries Benefit Board of the
American Baptist Churches, 475 Riverside Drive, New York, NY 10115, owned 11%
of such Portfolio's total outstanding shares.
EQUITY GROWTH PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675, owned 31% of such
Portfolio's total outstanding shares.
FIXED INCOME PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 23% of such
Portfolio's total outstanding shares.
Brooks School, c/o Mr. Frank Marino, North Andover, MA 01845, owned 6% of such
Portfolio's total outstanding shares.
GLOBAL EQUITY PORTFOLIO: Robert College of Istanbul Turkey C/O Morgan Stanley
Asset Management, 25 Cabot Square, London, England E144QA, owned 42% of such
Portfolio's total outstanding shares.
Boston Safe Deposit and Trust Company as Custodian for the MBTA Retirement Fund,
99 Summer Street Suite 1700, Boston, MA 02110, owned 22% of such Portfolio's
total outstanding shares.
JM Kaplan Fund, Inc., 880 Third Avenue 3rd floor, New York, NY 10022, owned 10%
of such Portfolio's total outstanding shares.
Divtex and Company FBO, Pritchard Hubble and Herr C/O Texas Commerce Bank, P.O.
Box 951405, Dallas, TX 75395, owned 8% of such Portfolio's total outstanding
shares.
GLOBAL FIXED INCOME PORTFOLIO: Farm Credit Bank Retirement Plan, Columbia
District American Industries Trust Company Trustee, 5700 NW Central Drive,
4th Floor, Houston, TX 77092, owned 14% of such Portfolio's total outstanding
shares.
Northern Trust Company as Custodian FBO The Lund Foundation, P.O. Box 92956,
Chicago, IL 60675, owned 11% of such Portfolio's total outstanding shares.
The Northern Trust Customer FBO Resort Condominiums International, P.O. Box
92956, Chicago, IL 60675-2956, owned 6% of such Portfolio's total outstanding
shares.
Divtex and Co., FBO Pritchard Hubble and Herr, c/o Texas Commerce Bank, P.O. Box
951405, Dallas, TX 75395-1405, owned 6% of such Portfolio's total outstanding
shares.
HIGH YIELD PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley Profit
Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 26% of such
Portfolio's total outstanding shares.
Valassis Enterprises - Equity, c/o Franklin Enterprises, 520 Lake Cook Road,
Suite 380, Deerfield, IL 60015, owned 19% of such Portfolio's total outstanding
shares.
INTERNATIONAL EQUITY PORTFOLIO: William Penn Foundation, 1630 Locust Street,
Philadelphia, PA 19103, owned 5% of such Portfolio's total outstanding shares.
INTERNATIONAL SMALL CAP PORTFOLIO: The Short Brothers Pension Fund, P.O. Box
241, Airport Road, Belfast, N. Ireland, owned 11% of such Portfolio's total
outstanding shares.
The Casey Family Program, 1300 Dexter Avenue, Suite 400, Seattle, WA 98109-3547,
owned 8% of such Portfolio's total outstanding shares.
Trustees of Boston College Attn: Paul Haran Associates Treasurer, St. Thomas
More Hall 310, Chestnut Hill, MA 02167, owned 7% of such Portfolio's total
outstanding shares.
General Mills, Inc. Master Trust: Pooled International Fund, One General Mills
Blvd., Minneapolis, MN 55426, owned 7% of such Portfolio's total outstanding
shares.
MUNICIPAL BOND PORTFOLIO: Kevin W. Smith, 570 Arvida Parkway, Coral Gables, FL
33156, owned 12% of such Portfolio's total outstanding shares.
Daniel J. McDonald and Maria J. McDonald, 850 Old Dominion Drive, McLean, VA
22102, owned 11% of such Portfolio's total outstanding shares.
29
<PAGE>
SMALL CAP VALUE EQUITY PORTFOLIO: Morgan Stanley & Co. Pension Fund, c/o U.S.
Trust Company of New York, 770 Broadway Street, New York, NY 10003, owned 12% of
such Portfolio's total outstanding shares.
U.S. REAL ESTATE PORTFOLIO: European Patent Organization Pension Reserve Fund,
Erhardtstrasse 27, Munich, Germany 80298, owned 9% of such Portfolio's total
outstanding shares.
VALUE EQUITY PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675, owned 16% of such
Portfolio's total outstanding shares.
NET ASSET VALUE FOR MONEY MARKET PORTFOLIOS
The Money Market Portfolio and the Municipal Money Market Portfolio seek to
maintain a stable net asset value per share of $1.00. These Portfolios use the
amortized cost method of valuing their securities, which does not take into
account unrealized gains or losses. The use of amortized cost and the
maintenance of each Portfolio's per share net asset value at $1.00 is based on
the Portfolio's election to operate under the provisions of Rule 2a-7 under the
1940 Act. As a condition of operating under that Rule, each of the Money Market
Portfolios must maintain a dollar-weighted average portfolio maturity of 90 days
or less, purchase only instruments having remaining maturities of 397 days or
less, and invest only in securities which are of "eligible quality" as
determined in accordance with regulations of the Commission.
The Rule also requires that the Directors, as a particular responsibility
within the overall duty of care owed to shareholders, establish procedures
reasonably designed, taking into account current market conditions and each
Portfolio's investment objectives, to stabilize the net asset value per share as
computed for the purposes of sales and redemptions at $1.00. These procedures
include periodic review, as the Directors deem appropriate and at such intervals
as are reasonable in light of current market conditions, of the relationship
between the amortized cost value per share and a net asset value per share based
upon available indications of market value. In such review, investments for
which market quotations are readily available are valued at the most recent bid
price or quoted yield available for such securities or for securities of
comparable maturity, quality and type as obtained from one or more of the major
market makers for the securities to be valued. Other investments and assets are
valued at fair value, as determined in good faith by the Directors.
In the event of a deviation of over 1/2 of 1% between a Portfolio's net
asset value based upon available market quotations or market equivalents and
$1.00 per share based on amortized cost, the Directors will promptly consider
what action, if any, should be taken. The Directors will also take such action
as they deem appropriate to eliminate or to reduce to the extent reasonably
practicable any material dilution or other unfair results which might arise from
differences between the two. Such action may include redemption in kind,
selling instruments prior to maturity to realize capital gains or losses or to
shorten the average maturity, withholding dividends, paying distributions from
capital or capital gains or utilizing a net asset value per share as determined
by using available market quotations.
There are various methods of valuing the assets and of paying dividends and
distributions from a money market fund. Each of the Money Market and Municipal
Money Market Portfolios values its assets at amortized cost while also
monitoring the available market bid price, or yield equivalents. Since
dividends from net investment income will be declared daily and paid monthly,
the net asset value per share of each Portfolio will ordinarily remain at $1.00,
but each Portfolio's daily dividends will vary in amount. Net realized gains,
if any, will normally be declared and paid monthly.
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to
illustrate the Portfolios' past performance.
Performance quotations by investment companies are subject to rules adopted
by the Commission, which require the use of standardized performance quotations.
In the case of total return, non-standardized performance quotations may be
furnished by the Fund but must be accompanied by certain standardized
performance information computed as required by the Commission. Current
30
<PAGE>
yield and average annual compounded total return quotations used by the Fund are
based on the standardized methods of computing performance mandated by the
Commission. An explanation of those and other methods used by the Fund to
compute or express performance follows.
TOTAL RETURN
From time to time each Portfolio, except the Money Market and Municipal
Money Markets Portfolios, may advertise total return for each class of shares
of the Portfolio. Total return figures are based on historical earnings and
are not intended to indicate future performance. The average annual total
return is determined by finding the average annual compounded rates of return
over 1-, 5-, and 10-year periods (or over the life of the Portfolio) that
would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes that all dividends and
distributions are reinvested when paid. The quotation assumes the amount was
completely redeemed at the end of each 1-, 5-, and 10-year period (or over
the life of the Portfolio) and the deduction of all applicable Fund expenses
on an annual basis.
The average annual compounded rates of return (unless otherwise noted) for
the Fund's Portfolios for the one year and five year periods ended December 31,
1994 and for the period from inception through December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Name of Portfolio Since Date
and Date of Inception One Year Five Year of Inception
--------------------- -------- --------- ------------
<S> <C> <C> <C>
International Equity
August 4, 1989. . . . . . . . 7.76% 9.08% 10.59%
Emerging Growth
November 1, 1989. . . . . . . 28.18 9.24 11.36
Value Equity
January 31, 1990. . . . . . . 18.77 11.32 10.69
Balanced
February 28, 1990 . . . . . . 13.86 9.98 9.75
Equity Growth
April 2, 1991 . . . . . . . . 30.74 N/A 11.76
Global Fixed Income
May 1, 1991 . . . . . . . . . 13.22 N/A 8.56
Fixed Income
May 15, 1991. . . . . . . . . 12.50 N/A 8.60
Asian Equity
July 1, 1991. . . . . . . . . (9.64) N/A 24.98
Active Country Allocation
January 17, 1992. . . . . . . (2.48) N/A 6.04
Global Equity
July 15, 1992 . . . . . . . . 12.95 N/A 19.31
Emerging Markets
September 25, 1992. . . . . . (7.35) N/A 18.25
High Yield
September 28, 1992. . . . . . 12.00 N/A 11.60
International Small Cap
December 15, 1992 . . . . . . (5.23) N/A 19.58
31
<PAGE>
Name of Portfolio Since Date
and Date of Inception One Year Five Year of Inception
--------------------- -------- --------- ------------
Small Cap Value Equity
December 17, 1992 . . . . . . 15.59% N/A 10.56%
European Equity
April 2, 1993 . . . . . . . . 12.15 N/A 22.94
Emerging Markets Debt
February 1, 1994. . . . . . . 17.19 N/A (3.13)
Gold
February 1, 1994. . . . . . . 10.62 N/A (1.18)
Japanese Equity
April 25, 1994. . . . . . . . (21.33) N/A (15.56)
Latin American
January 18, 1995. . . . . . . N/A N/A (12.00)
Municipal Bond
January 18, 1995. . . . . . . N/A N/A 4.22
U.S. Real Estate
February 24, 1995 . . . . . . N/A N/A 8.30
Aggresive Equity
March 8, 1995 . . . . . . . . N/A N/A 18.33
MicroCap
January 2, 1996 . . . . . . . N/A N/A N/A
</TABLE>
These figures were calculated according to the following
n
formula: P(1 + T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of hypothetical $1,000 payment made at the
beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-,
or 10-year periods (or fractional portion thereof).
CALCULATION OF YIELD FOR NON-MONEY MARKET PORTFOLIOS
From time to time certain of the Fund's Portfolios may advertise yield.
Current yield reflects the income per share earned by a Portfolio's investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period.
The respective yields for certain of the Fund's Portfolios for the 30-day
period ended June 30, 1995 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO NAME 30-DAY YIELD
-------------- ------------
<S> <C>
Emerging Markets Debt. . . . . . . 12.06%
Fixed Income . . . . . . . . . . . 6.92%
Global Fixed Income. . . . . . . . 6.79%
32
<PAGE>
High Yield . . . . . . . . . . . . 11.00%
Municipal Bond . . . . . . . . . . 4.33%
</TABLE>
These figures were obtained using the following formula:
6
Yield = 2[( a - b + 1 ) - 1]
-----
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive income distributions
d = the maximum offering price per share on the last day of the
period.
CALCULATION OF YIELD FOR MONEY MARKET PORTFOLIOS
The current yield of the Money Market and Municipal Money Market Portfolios
is calculated daily on a base period return for a hypothetical account having a
beginning balance of one share for a particular period of time (generally 7
days). The return is determined by dividing the net change (exclusive of any
capital changes in such account) by its average net asset value for the period,
and then multiplying it by 365/7 to determine the annualized current yield. The
calculation of net change reflects the value of additional shares purchased with
the dividends by the Portfolio, including dividends on both the original share
and on such additional shares. The yields of the Money Market and Municipal
Money Market Portfolios for the 7-day period ended June 30, 1995 were 5.45%
and 3.71%, respectively. An effective yield, which reflects the effects of
compounding and represents an annualization of the current yield with all
dividends reinvested, may also be calculated for each Portfolio by dividing the
base period return by 7, adding 1 to the quotient, raising the sum to the 365th
power, and subtracting 1 from the result. The effective yields of the Money
Market Portfolios and the Municipal Money Market Portfolio for the 7-day period
ended June 30, 1995 were 5.59% and 3.78%, respectively.
The yield of a Portfolio will fluctuate. The annualization of a week's
dividend is not a representation by the Portfolio as to what an investment in
the Portfolio will actually yield in the future. Actual yields will depend on
such variables as investment quality, average maturity, the type of instruments
the Portfolio invests in, changes in interest rates on instruments, changes in
the expenses of the Fund and other factors. Yields are one basis investors may
use to analyze the Portfolios of the Fund, and other investment vehicles;
however, yields of other investment vehicles may not be comparable because of
the factors set forth in the preceding sentence, differences in the time periods
compared, and differences in the methods used in valuing portfolio instruments,
computing net asset value and calculating yield.
TAXABLE EQUIVALENT YIELD FOR THE MUNICIPAL BOND AND MUNICIPAL MONEY MARKET
PORTFOLIO
It is easy to calculate your own taxable equivalent yield if you know your
tax bracket. The formula is:
Tax Free Yield
---------------------
1 - Your Tax Bracket = Your Taxable Equivalent Yield
For example, if you are in the 28% tax bracket and can earn a tax-free
yield of 7.5%, the taxable equivalent yield would be 10.42%.
The table below indicates the advantages of investments in Municipal Bonds
for certain investors. Tax-exempt rates of interest payable on a Municipal Bond
(shown at the top of each column) are equivalent to the taxable yields set forth
opposite the respective income tax levels, based on income tax rates effective
for the tax year 1995 under the Internal Revenue Code. There can, of course, be
no guarantee that the Municipal Bond Portfolio or Municipal Money Market
Portfolio will achieve a specific yield. Also, it is possible that some portion
of the Portfolio's dividends may be subject to Federal income taxes. A
substantial portion, if not all, of such dividends may be subject to state and
local taxes.
33
<PAGE>
TAXABLE EQUIVALENT YIELD TABLE
<TABLE>
<CAPTION>
SAMPLE LEVEL OF TAXABLE EQUIVALENT RATES
TAXABLE INCOME* BASED ON TAX-EXEMPT YIELD OF:
-------------- -----------------------------
FEDERAL
INCOME
JOINT SINGLE TAX
RETURN RETURN BRACKET 3% 4% 5% 6% 7% 8% 9% 10% 11%
------ ------ ------- -- -- -- -- -- -- -- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-39,000 $0-23,350 15.0% 3.5% 4.7% 5.9% 7.1% 8.2% 9.4% 10.6% 11.8% 12.9%
39,000- 94,250 23,350-56,550 28.0 4.2 5.6 6.9 8.3 9.7 11.1 12.5 13.9 15.3
94,250-143,600 56,550-117,950 31.0 4.3 5.8 7.2 8.7 10.1 11.6 13.0 14.5 15.9
143,600-256,500 117,950-256,500 36.0 4.7 6.3 7.8 9.4 10.9 12.5 14.1 15.6 17.2
over 256,500 over 256,500 39.6 5.0 6.6 8.3 9.9 11.6 13.2 14.9 16.6 18.2
<FN>
* Net amount subject to 1995 Federal Income Tax after deductions and exemptions,
not indexed for 1995 income tax rates.
</TABLE>
The taxable equivalent yields for the Municipal Money Market and Municipal
Bond Portfolios for the seven days ended December 31, 1994, assuming a
Federal income tax rate of 39.6% (maximum rate), were 6.14% and 7.88%,
respectively. The taxable equivalent effective yields for the Municipal
Money Market and Municipal Bond Portfolios for the seven days ended June 30,
1995, assuming the same tax rate, were 6.26% and 8.06%, respectively.
COMPARISONS
To help investors better evaluate how an investment in a Portfolio of
Morgan Stanley Institutional Fund, Inc. might satisfy their investment
objective, advertisements regarding the Fund may discuss various measures of
Fund performance as reported by various financial publications. Advertisements
may also compare performance (as calculated above) to performance as reported by
other investments, indices and averages. The following publications may
be used:
(a) CDA Mutual Fund Report, published by CDA Investment
Technologies, Inc. -- analyzes price, current yield, risk, total
return and average rate of return (average annual compounded
growth rate) over specified time periods for the mutual fund
industry.
(b) Financial publications: Business Week, Changing Times, Financial
World, Forbes, Fortune, Money, Barron's, Consumer's Digest,
Financial Times, Global Investor, Investor's Daily, Lipper
Analytical Services, Inc., Morningstar, Inc., New York Times,
Personal Investor, Wall Street Journal and Weisenberger
Investment Companies Service -- publications that rate fund
performance over specified time periods.
(c) Historical data supplied by the research departments of First
Boston Corporation, the J.P. Morgan companies, Salomon Brothers,
Merrill Lynch, Pierce, Fenner & Smith, Lehman Brothers and
Bloomberg L.P.
(d) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed
Income Fund Performance Analysis -- measures total return and
average current yield for the mutual fund industry. Ranks
individual mutual fund performance over specified time periods,
assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
(e) Mutual Fund Source Book, published by Morningstar, Inc. --
analyzes price, yield, risk and total return for equity funds.
(f) Savings and Loan Historical Interest Rates -- as published in the
U.S. Savings & Loan League Fact Book.
(g) Stocks, Bonds, Bills and Inflation, published by Hobson
Associates -- historical measure of yield, price and total return
for common and small company stock, long-term government bonds,
U.S. Treasury bills and inflation.
The following indices and averages may also be used:
(a) Composite Indices -- 70% Standard & Poor's 500 Stock Index and
30% NASDAQ Industrial Index; 35% Standard & Poor's 500 Stock
Index and 65% Salomon Brothers High Grade Bond Index; and 65%
Standard & Poor's 500 Stock Index and 35% Salomon Brothers High
Grade Bond Index.
(b) Consumer Price Index (or cost of Living Index), published by the
U.S. Bureau of Labor Statistics -- a statistical measure of
change, over time, in the price of goods and services in major
expenditure groups.
(c) Donoghue's Money Fund Average -- an average of all major
money market fund yields, published weekly for 7 and 30-day
yields.
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<PAGE>
(d) Dow Jones Composite Average or its component averages -- an
unmanaged index composed of 30 blue-chip industrial corporation
stocks (Dow Jones Industrial Average), 15 utilities company
stocks and 20 transportation stocks. Comparisons of performance
assume reinvestment of dividends.
(e) EMBI+ -- Expanding on the EMBI, which includes only Bradys, the
EMBI+ includes a broader group of Brady Bonds, loans, Eurobonds
and U.S. Dollar local markets instruments. A more comprehensive
benchmark than EMBI, the EMBI+ covers 49 instruments from 14
countries. At $96 billion, its market cap is nearly 50% higher
than the EMBI's. The EMBI+ is not, however, intended to replace
the EMBI but rather to complement it. The EMBI continues to
represent the most liquid, most easily traded segment of the
market, while the EMBI+ represents the broader market, including
more of the assets that investors typically hold in their
portfolios. Both of these indices are published daily.
(f) First Boston High Yield Index -- generally includes over 180
issues with an average maturity range of seven to ten years with
a minimum capitalization of $100 million. All issues are
individually trader-priced monthly.
(g) First Boston Upper/Middle Tier High Yield Index -- an unmanaged
index of bonds rated B to BBB.
(h) Goldman Sachs 100 Convertible Bond Index -- currently includes 67
bonds and 33 preferred. The original list of names was generated
by screening for convertible issues of 100 million or greater in
market capitalization. The index is priced monthly.
(i) IFC Global Total Return Composite Index -- an unmanaged index
of common stocks and includes 18 developing countries in Latin
America, East and South Asia, Europe, the Middle East and Africa
(net of dividends reinvested).
(j) Indata Balanced-Median Index -- an unmanaged index and includes
an asset allocation of 5% cash, 42% bonds and 53% equity based on
$52.7 billion in assets among 547 portfolios for the six months
ended June 30, 1995. (assumes dividends reinvested).
(k) Indata Equity-Median Stock Index -- an unmanaged index which
includes an average asset allocation of 5% cash and 95% equity
based on $364.7 billion in assets among 1,163 portfolios for the
six months ended June 30, 1995.
(l) J.P. Morgan Emerging Markets Bond Index -- a market-weighted
index composed of all Brady bonds outstanding and includes
Argentina, Brazil, Mexico, Nigeria, the Philippines and
Venezuela.
(m) J.P. Morgan Traded Global Bond Index -- an unmanaged index of
securities and includes Australia, Belgium, Canada, Denmark,
France, Germany, Italy, Japan, The Netherlands, Spain, Sweden,
United Kingdom and the United States.
(n) Lehman Brothers Aggregate Bond Index -- an unmanaged index made
up of the Government/Corporate Index, the Mortgage Backed
Securities Index and the Asset-Backed Securities Index.
(o) Lehman Brothers LONG-TERM Treasury Bond -- composed of all
bonds covered by the Lehman Brothers Treasury Bond Index with
maturities of 10 years or greater.
(p) The Lehman 7 Year Municipal Bond Index -- an unmanaged index
which consists of investment grade bonds with maturities between
6-8 years rated BAA or better. All bonds have been taken from
deals done within the last 5 years, with assets of $50 million or
larger.
(q) Lipper Capital Appreciation Index -- a composite of mutual funds
managed for maximum capital gains.
(r) Morgan Stanley Capital International Combined Far East Free ex
Japan Index -- a market-capitalization weighted index comprising
stocks in Hong Kong, Indonesia, Korea, Malaysia, Philippines,
Singapore and Thailand. Korea is included in the MSCI Combined
Far East Free ex Japan Index at 20% of its market
capitalization.
(s) Morgan Stanley Capital International EAFE Index -- an arithmetic,
market value-weighted average of the performance of over 900
securities on the stock exchanges of countries in Europe,
Australia and the Far East.
(t) Morgan Stanley Capital International Emerging Markets Global
Latin American Index -- an unmanaged, arithmetic market value
weighted average of the performance of over 196 securities on
the stock exchanges of Argentina, Brazil, Chile, Columbia,
Mexico, Peru and Venezuela (Assumes reinvestment of dividends).
(u) Morgan Stanley Capital International Europe Index -- an
unmanaged index of common stocks and includes 14 countries
throughout Europe.
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<PAGE>
(v) Morgan Stanley Capital International Japan Index -- an
unmanaged index of common stocks.
(w) Morgan Stanley Capital International Latin American Global
Index -- a broad-based market capitalization-weighted composite
index covering at least 60% of markets in Mexico, Argentina,
Brazil, Chile, Colombia, Peru and Venezuela (assumes dividends
reinvested).
(x) Morgan Stanley Capital International World Index -- an
arithmetic, market value-weighted average of the performance of
over 1,470 securities listed on the stock exchanges of countries
in Europe, Australia, the Far East, Canada and the United States.
(y) NASDAQ Composite Index -- an unmanaged index of common stocks.
(z) NASDAQ Industrial Index -- a capitalization-weighted index
composed of more than 3,000 domestic stocks taken from the
following industry sectors: agriculture, mining, construction,
manufacturing, electronic components, services and public
administration enterprises. It is a value-weighted index
calculated on price change only and does not include income.
(aa) National Association of Real Estate Investment Trusts ("NAREIT")
Index -- 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.
(bb) The New York Stock Exchange composite or component indices --
unmanaged indices of all industrial, utilities, transportation
and finance company stocks listed on the New York Stock Exchange.
(cc) Philadelphia Gold and Silver Index -- an unmanaged index
comprised of seven leading companies involved in the mining of
gold and silver.
(dd) Russell 2500 Index -- comprised of the bottom 500 stocks is in
the Russell 1000 Index which represents the universe of stocks
from which most active money managers typically select; and all
the stocks in the Russell 2000 Index. The largest security in
the index has a market capitalization of approximately 1.3
billion.
(ee) Salomon Brothers GNMA Index -- includes pools of mortgages
originated by private lenders and guaranteed by the mortgage
pools of the Government National Association.
(ff) Salomon Brothers High Grade Corporate Bond Index -- consists of
publicly issued, non-convertible corporate bonds rated AA or AAA.
It is value-weighted, total return index, including approximately
800 issues with maturities of 12 years or greater.
(gg) Salomon Brothers Broad Investment Grade Bond -- is a
market-weighted index that contains approximately 4700
individually priced investment grade corporate bonds rated BBB or
better, U.S. Treasury/agency issues and mortgage pass-through
securities.
(hh) Standard & Poor's 500 Stock Index or its component indices --
unmanaged index composed of 400 industrial stocks, 40 financial
stocks, 40 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
(ii) Standard & Poor's Small Cap 600 Index - a capitalization-weighted
index of 600 domestic stocks having market capitalizations which
reside within the 50th and the 83rd percentiles of the market
capitalization of the entire stock market, chosen for certain
liquidity characteristics and for industry representation.
(jj) Wilshire 5000 Equity Index or its component indices -- represents
the return on the market value of all common equity securities
for which daily pricing is available. Comparisons of performance
assume reinvestment of dividends.
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in the Fund's
Portfolios, that the averages are generally unmanaged, and that the items
included in the calculations of such averages may not be identical to the
formula used by the Fund to calculate its futures. In addition, there can be no
assurance that the Fund will continue this performance as compared to such other
averages.
36
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund's Articles of Incorporation, as amended and restated, permit
the Directors to issue 34 billion shares of common stock, par value $.001 per
share, from an unlimited number of classes ("Portfolios") of shares.
Currently the Fund consists of shares of twenty-seven Portfolios (the China
Growth and Mortgage-Backed Securities Portfolios are not currently offering
shares).
The shares of each Portfolio of the Fund are fully paid and
nonassessable, and have no preference as to conversion, exchange, dividends,
retirement or other features. The shares of each Portfolio of the Fund have
no pre-emptive rights. The shares of the Fund have non-cumulative voting
rights, which means that the holders of more than 50% of the shares voting
for the election of Directors can elect 100% of the Directors if they choose
to do so. A shareholder is entitled to one vote for each full share held
(and a fractional vote for each fractional share held), then standing in his
name on the books of the Fund.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund's policy is to distribute substantially all of each Portfolio's
net investment income, if any. The Fund may also distribute any net realized
capital gains in the amount and at the times that will avoid both income
(including taxable gains) taxes on it and the imposition of the federal excise
tax on income and capital gains (see discussion under "Taxes" in this Statement
of Additional Information). However, the Fund may also choose to retain net
realized capital gains and pay taxes on such gains. The amounts of any income
dividends or capital gains distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares of a
Portfolio by an investor may have the effect of reducing the per share net asset
value of that Portfolio by the per share amount of the dividend or distribution.
Furthermore, such dividends or distributions, although in effect a return of
capital, are subject to income taxes for shareholders subject to tax as set
forth herein and in the Prospectus.
As set forth in the Prospectus, unless the shareholder elects otherwise
in writing, all dividends and capital gains distributions for a class of
shares are automatically received in additional shares of such class of that
Portfolio of the Fund at net asset value (as of the business day following
the record date). This automatic reinvestment of dividends and distributions
will remain in effect until the Fund is notified by the shareholder in
writing at least three days prior to the record date that either the Income
Option (income dividends in cash and capital gains distributions in
additional shares at net asset value) or the Cash Option (both income
dividends and capital gains distributions in cash) has been elected.
CUSTODY ARRANGEMENTS
Chase serves as the Fund's domestic custodian. Chase is not affiliated
with Morgan Stanley & Co. Incorporated. Morgan Stanley Trust Company,
Brooklyn, NY, acts as the Fund's custodian for foreign assets held outside
the United States and employs subcustodians who were approved by the
Directors of the Fund in accordance with Rule 17f-5 adopted by the Commission
under the 1940 Act. Morgan Stanley Trust Company is an affiliate of Morgan
Stanley & Co. Incorporated. In the selection of foreign subcustodians, the
Directors consider a number of factors, including, but not limited to, the
reliability and financial stability of the institution, the ability of the
institution to provide efficiently the custodial services required for the
Fund, and the reputation of the institution in the particular country or
region.
DESCRIPTION OF SECURITIES AND RATINGS
I. DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
EXCERPTS FROM MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") DESCRIPTION OF
BOND RATINGS: Aaa - Bonds which are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Aa -
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities. Moody's
applies numerical modifiers 1, 2 and 3 in the Aa and A rating categories. The
modifier 1 indicates that the security ranks at a higher end of the rating
category, modifier 2 indicates a mid-range rating and the modifier 3 indicates
that the issue ranks at the lower end of the rating category. A - Bonds which
are rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future. Baa - Bonds
which are rated Baa are considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. Ba - Bonds which are rated Ba are judged
to have speculative elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be very moderate,
and
37
<PAGE>
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. B - Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance
of interest and principal payments or of maintenance of other terms of the
contact over any long period of time may be small. Caa - Bonds which are rated
Caa are of poor standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest. Ca - Bonds which are
rated Ca represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings. C - Bonds which
are rated C are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
EXCERPTS FROM STANDARD & POOR'S CORPORATION (S&P") DESCRIPTION OF BOND
RATINGS: AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation and indicate an extremely strong capacity to pay
principal and interest. AA - Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only to a
small degree. A - Bonds rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories. BBB - Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher rated
categories. BB, B, CCC, CC - Debt rated BB, B, CCC and CC is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. C - The rating C is reserved for income bonds
on which no interest is being paid. D - Debt rated D is in default, and payment
of interest and/or repayment of principal is in arrears.
DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES: Moody's
ratings for state and municipal notes and other short-term obligations are
designated Moody's Investment Grade ("MIG"). Symbols used are as follows:
MIG-1 -- best quality, enjoying strong protection from established cash flows
of funds for their servicing or from established broad-based access to the
market for refinancing, or both; MIG-2 -- high quality with margins of
protection ample although not so large as in the preceding group; MIG-3 -
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the proceeding grades.
DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING: Prime-1 ("P1") --
Judged to be of the best quality. Their short-term debt obligations carry the
smallest degree of investment risk.
EXCERPT FROM S&P'S RATING OF MUNICIPAL NOTE ISSUES: S-1+ -- very strong
capacity to pay principal and interest; SP-2 -- strong capacity to pay principal
and interest.
DESCRIPTION OF S&P'S HIGHEST COMMERCIAL PAPER RATINGS: A-1+ -- this
designation indicates the degree of safety regarding timely payment is
overwhelming. A-1 -- this designation indicates the degree of safety regarding
timely payment is very strong.
II. DESCRIPTION OF U.S. GOVERNMENT SECURITIES
The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the U.S. Government, and by various
instrumentalities which have been established or sponsored by the U.S.
Government.
U.S. Treasury securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by Federal agencies and U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export-Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain agencies and instrumentalities,
such as the Government National Mortgage Associates, are, in effect, backed by
the full faith and credit of the United States through provisions in their
charters that they may make "indefinite and unlimited" drawings on the Treasury,
if needed to service debt. Debt from certain other agencies and
instrumentalities, including the Federal Home Loan Bank and Federal National
Mortgage Association, are not guaranteed by the United States, but those
institutions are protected by the discretionary authority for the U.S. Treasury
to purchase certain amounts of their securities to assist the institution in
meeting its debt obligations. However, the U.S. Treasury has no lawful
obligation to assume the financial liabilities of these agencies or others.
38
<PAGE>
Finally, other agencies and instrumentalities, such as the Farm Credit System
and the Federal Home Loan Mortgage Corporation, are federally chartered
institutions under Government supervision, but their debt securities are backed
only by the creditworthiness of those institutions, not the U.S. Government.
Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and the Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency organized
under Federal charter with Government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Immediate Credit
Banks, and the Federal National Mortgage Association.
III. DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds generally include debt obligations issued by states and
their political subdivisions, and duly constituted authorities and corporations,
to obtain funds to construct, repair or improve various public facilities such
as airports, bridges, highways, hospitals, housing, schools, streets and water
and sewer works. Municipal Bonds may also be issued to refinance outstanding
obligations as well as to obtain funds for general operating expenses and for
loans to other public institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special tax" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other tax, but not
from general tax revenues. The Municipal Bond Portfolio and the Municipal Money
Market Portfolio may also invest in tax-exempt industrial development bonds,
short-term municipal obligations, project notes, demand notes and tax-exempt
commercial paper in accordance with the Portfolio's investment objectives and
policies.
Industrial revenue bonds (i.e., private activity bonds) in most cases are
revenue bonds and generally do not have the pledge of the credit of the issuer.
The payment of the principal and interest on such industrial revenue bonds is
dependent solely on the ability of the user of the facilities financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. Short-term
municipal obligations issued by states, cities, municipalities or municipal
agencies include Tax Anticipation Notes, Revenue Anticipation Notes, Bond
Anticipation Notes, Construction Loan Notes and Short-Term Discount Notes.
Project Notes are instruments guaranteed by the Department of Housing and Urban
Development but issued by a state or local housing agency. While the issuing
agency has the primary obligation on such Project notes, they are also secured
by the full faith and credit of the United States.
Note obligations with demand or put options may have a stated maturity in
excess of one year, but allow any holder to demand payment of principal plus
accrued interest upon a specified number of days' notice. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to repay in its discretion the
outstanding principal of the notes plus accrued interest upon a specific number
of days' notice to the bondholders. The interest rate on a demand note may be
based upon a known lending rate, such as a bank's prime rate, and be adjusted
when such rate changes, or the interest rate on a demand note may be a market
rate that is adjusted at specified intervals. The demand notes in which the
Municipal Money Market Portfolio will invest are payable on not more than one
year's notice.
The yields of Municipal Bonds depend on, among other things, general money
market conditions, conditions in the Municipal Bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's and S&P represent their opinions of the quality
of the Municipal Bonds. It should be emphasized that such ratings are general
and are not absolute standards of quality. Consequently, Municipal Bonds with
the same maturity, coupon and rating may have different yields, while Municipal
Bonds of the same maturity and coupon, but with different ratings, may have the
same yield. It will be the responsibility of the Adviser to appraise
independently the fundamental quality of the bonds held by the Municipal Bond
Portfolio and the Municipal Money Market Portfolio.
Municipal Bonds are sometimes purchased on a "when issued" basis meaning
the buyer has committed to purchasing certain specified securities at an
agreed-upon price when they are issued. The period between commitment date and
issuance date can be a month or more. It is possible that the securities will
never be issued and the commitment canceled.
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<PAGE>
From time to time proposals have been introduced before Congress to
restrict or eliminate the Federal income tax exemption for interest on Municipal
Bonds. Similar proposals may be introduced in the future. If any such proposal
were enacted, it might restrict or eliminate the ability of either the Municipal
Bond portfolio or the Municipal Money Market Portfolio to achieve its investment
objective. In that event, the Fund's Directors and officers would reevaluate
its investment objective and policies and consider recommending to its
shareholders changes in such objective and policies.
Similarly, from time to time proposals have been introduced before State
and local legislatures to restrict or eliminate the State and local income tax
exemption (to the extent such an exemption applies, which may not apply in all
cases) for interest on Municipal Bonds. Similar proposals may be introduced in
the future. If any such proposal were enacted, it might restrict or eliminate
the ability of either of the Municipal Bond Portfolio or the Municipal Money
Market Portfolio to achieve its investment objective. In that event, the Fund's
Directors and officers would reevaluate the Portfolio's investment objective and
policies and consider recommending to its shareholders changes in such objective
and policies.
IV. DESCRIPTION OF MORTGAGE-BACKED SECURITIES
"Mortgage-Backed Securities" are securities that, directly or indirectly,
represent a participation in, or are secured by and payable from, mortgage loans
on real property. Mortgage-backed securities include collateralized mortgage
obligations ("CMOs"), pass-through securities issued or guaranteed by agencies
or instrumentalities of the U.S. government or by private sector entities.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are debt obligations or multiclass pass-through certificates issued by
agencies or instrumentalities of the U.S. government or by private originators
or investors in mortgage loans. They are backed by Mortgage Pass-Through
Securities (discussed below) or whole loans (all such assets, the "Mortgage
Assets") and are evidenced by a series of bonds or certificates issued in
multiple classes or "tranches." The principal and interest on the underlying
Mortgage Assets may be allocated among the several classes of a series of CMOs
in many ways.
CMOs may be issued by agencies or instrumentalities of the U.S. government,
or by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs that are issued by private
sector entities and are backed by assets lacking a guarantee of an entity having
the credit status of a governmental agency or instrumentality are generally
structured with one or more types of credit enhancement as described below. An
issuer of CMOs may elect to be treated, for federal income tax purposes, as a
Real Estate Mortgage Investment Conduit (a "REMIC"). An issuer of CMOs issued
after 1991 must elect to be treated as a REMIC or it will be taxable as a
corporation under rules regarding taxable mortgage pools.
In a CMO, a series of bonds or certificates are issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," may be issued with a
specific fixed or floating coupon rate and has a stated maturity or final
scheduled distribution date. Principal prepayments on the underlying Mortgage
Assets may cause the CMOs to be retired substantially earlier than their stated
maturities or final scheduled distribution dates. Interest is paid or accrues
on CMOs on a monthly, quarterly or semi-annual basis. The principal of and
interest on the Mortgage Assets may be allocated among the several classes of a
CMO in many ways. The general goal in allocating cash flows on Mortgage Assets
to the various classes of a CMO is to create certain tranches on which the
expected cash flows have a higher degree of predictability than the underlying
Mortgage Assets. As a general matter, the more predictable the cash flow is on
a particular CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on Assets.
As part of the process of creating more predictable cash flows on certain
tranches of a CMO, one or more tranches generally must be created that absorb
most of the changes in the cash flows on the underlying Mortgage Assets. The
yields on these tranches are generally higher than prevailing market yields on
Mortgage-Backed Securities with similar average lives. Because of the
uncertainty of the cash flows on these tranches, the market prices of and yields
on these tranches are more volatile.
Included within the category of CMOs are PAC Bonds. PAC Bonds are a type
of CMO tranche or series designed to provide relatively predictable payments of
principal provided that, among other things, the actual prepayment experience on
the underlying mortgage loans falls within a predefined range. If the actual
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the predefined range or if deviations from other assumptions occur,
principal payments on the PAC Bond may be earlier or later than predicted. The
magnitude of the predefined range varies from one PAC Bond to another; a
narrower range increases the risk that prepayments on the PAC Bond will be
greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risks of prepayment than are other types of
mortgage-backed securities.
40
<PAGE>
MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities in
which the Mortgage-Backed Securities Portfolio may invest include pass-through
securities issued or guaranteed by agencies or instrumentalities of the U.S.
government or by private sector entities. Mortgage pass-through securities
issued or guaranteed by private sector originators of or investors in mortgage
loans and are structured similarly to governmental pass-through securities.
Because private pass-throughs typically lack a guarantee by an entity having the
credit status of a governmental agency or instrumentality, they are generally
structured with one or more types of credit enhancement described below. FNMA
and FHLMC obligations are not backed by the full faith and credit of the U.S.
government as GNMA certificates are, but FNMA and FHLMC securities are supported
by the instrumentalities' right to borrow from the United States Treasury. Each
of GNMA, GNMA and FHLMC guarantees timely distributions of interest to
certificate holders. Each of GNMA and FNMA also guarantees timely distributions
of scheduled principal. FHLMC has in the past guaranteed only the ultimate
collection of principal of the underlying mortgage loan; however, FHLMC now
issued Mortgage-Backed Securities (FHLMC Gold Pcs) which also guarantee timely
payment of monthly principal reductions. REFCORP obligations are backed, as to
principal payments, by zero coupon U.S. Treasury bonds, and as to interest
payment, ultimately by the U.S. Treasury. Obligations issued by such U.S.
governmental agencies and instrumentalities are described more fully below.
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934, as amended (the "Housing Act"),
authorizes Ginnie Mae to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of mortgage
loans insured by the Federal Housing Administration under the Housing Act, or
Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the
Department of Veterans Affairs under the Servicemen's Readjustment Act of 1944,
as amended ("VA Loans"), or by pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the United States
government is pledged to the payment of all amounts that may be required to be
paid under any guaranty. In order to meet its obligations under such guaranty,
Ginnie Mae is authorized to borrow from the United States Treasury with no
limitations as to amount.
Each Ginnie Mae Certificate will represent a pro rata interest in one or
more of the following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multi-family residential
properties under construction; (vi) mortgage loans on completed multi-family
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodical changes in interest rates or in
other payment terms of the mortgage loans; and (ix) mortgage-backed serial
notes. All of these mortgage loans will be FHA Loans or VA Loans and, except as
otherwise specified above, will be fully-amortizing loans secured by first liens
on one- to four-family housing units.
FANNIE MAE CERTIFICATES. Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. The obligations of Fannie Mae are not backed
by the full faith and credit of the United States government.
Each Fannie Mae Certificate will represent a pro rata interest in one or
more pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate and adjustable mortgage loans secured by
multi-family projects.
FREDDIE MAC CERTIFICATES. Freddie Mac is a corporate instrumentality of
the United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations
solely of Freddie Mac and are not backed by the full faith and credit of the
U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac.
The mortgage loans underlying the Freddie Mac Certificates will consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity of
between ten and thirty years, substantially all of which are secured by first
liens on one- to four-family residential properties or multi-family projects.
Each mortgage loan must meet the applicable standards set forth in the FHLMC
Act. A Freddie Mac Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
CREDIT ENHANCEMENT. Mortgage-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties. To
lessen the effect of failure by obligors on underlying assets to make payments,
such securities may contain
41
<PAGE>
elements of credit support. Such credit support falls into two categories: (i)
liquidity protection and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying assets. Liquidity protection generally
refers to the provision of advances, typically by the entity administering the
pool of assets, to ensure that the pass-through of payments due on the
underlying pool occurs in a timely fashion. Protection against losses resulting
from ultimate default enhances the likelihood of ultimate payment of the
obligations on at least a portion of the assets in the pool. Such protection
may be provided through guarantees, insurance policies or letters of credit
obtained by the issuer or sponsor from third parties (referred to herein as
"third party credit support), through various means of structuring the
transaction or through a combination of such approaches. The Mortgage-Backed
Securities Portfolio will not pay any additional fees for such credit support,
although the existence of credit support may increase the price the Portfolio
pays for a security.
The ratings of mortgage-backed securities for which third-party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency and loss
experience on the underlying pool of assets is better than expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with defaults on the underlying assets being borne first
by the holders of the most subordinated class), creation of "reserve funds"
(where cash or investments, sometimes funded from a portion of the payments on
the underlying assets, are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each security is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such a security.
V. FOREIGN INVESTMENTS
The Active Country Allocation, International Equity, International Fixed
Income, Global Equity, Global Fixed Income, Asian Equity, European Equity,
Japanese Equity, International Small Cap, Latin American and China Growth
Portfolios will invest, and the Emerging Growth, Emerging Markets, Emerging
Markets Debt, Value Equity, Equity Growth, MicroCap, Balanced, Small Cap
Value Equity, Fixed Income, High Yield and Gold Portfolios may invest, in
securities of foreign issuers. Investors should recognize that investing in
such foreign securities involves certain special considerations which are not
typically associated with investing in U.S. issuers. For a description of the
effect on the Portfolios of currency exchange rate fluctuation, see
"Investment Objectives and Policies -- Forward Foreign Currency Exchange
Contracts" above. As foreign issuers are not generally subject to uniform
accounting, auditing and financial reporting standards and may have policies
that are not comparable to those of domestic issuers, there may be less
information available about certain foreign companies than about domestic
issuers. Securities of some foreign issuers are generally less liquid and
more volatile than securities of comparable domestic issuers. There is
generally less government supervision and regulation of stock exchanges,
brokers and listed issuers than in the U.S. In addition, with respect to
certain foreign countries, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect U.S. investments in those countries. Foreign
securities not listed on a recognized domestic or foreign exchange are
regarded as not readily marketable and therefore such investments will be
limited to 15% of a Portfolio's net asset value at the time of purchase.
Although the Portfolios will endeavor to achieve the most favorable
execution costs in their portfolio transactions, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges.
Certain foreign governments levy withholding or other taxes on dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. Except in the case of
the International Equity, Global Equity, European Equity, Japanese Equity, Asian
Equity, Global Fixed Income, International Fixed Income, International Small
Cap, Latin American and China Growth Portfolios, it is not expected that a
Portfolio or its shareholders would be able to claim a credit for U.S. tax
purposes with respect to any such foreign taxes. However, these foreign
withholding taxes may not have a significant impact on such Portfolios, because
each Portfolio's investment objective is to seek long-term capital appreciation
and any dividend or interest income should be considered incidental.
42
<PAGE>
FINANCIAL STATEMENTS
The following are (i) the audited Financial Statements for the fiscal year
ended December 31, 1994 and the Report of Price Waterhouse LLP, independent
accountants, dated February 17, 1995 relating to the financial statements and
financial highlights of each of the Portfolios except for the Municipal Bond,
Mortgage-Backed Securities, China Growth, U.S. Real Estate, Latin American,
MicroCap and Aggressive Equity Portfolios, which had not commenced operation
as of December 31, 1994; and (ii) the unaudited financial statements for the
six-month period ended June 30, 1995 relating to the financial statements and
financial highlights of each of the Portfolios except for the Mortgage-Backed
Securities, MicroCap and China Growth Portfolios, which had not commenced
operations as of June 30, 1995.
43
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
- ------------------------------------------------------------------------------
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
COMMON STOCKS (100.6%)
AUSTRALIA (4.8%)
57,000 Amcor Ltd............................................... $ 412
26,012 Ampolex Ltd............................................. 70
44,844 Australian National Industries Ltd...................... 50
92,700 Boral Ltd. (Bon Shares Plan)............................ 245
17,700 Brambles Industries Ltd................................. 169
124,092 Broken Hill Proprietary Co., Ltd........................ 1,884
49,628 Burns, Philip & Co., Ltd................................ 117
22,755 Coca-Cola Amatil Ltd.................................... 145
98,755 Coles Myer Ltd.......................................... 335
45,900 CRA Ltd................................................. 634
72,121 CSR Ltd................................................. 249
252,500 Fosters Brewing Corp.................................... 219
58,404 General Property Trust.................................. 103
100,693 Goodman Fielder Ltd..................................... 89
31,900 ICI Australia Ltd....................................... 268
19,738 Lend Lease Corp., Ltd................................... 244
116,100 MIM Holdings Ltd........................................ 194
101,569 National Australia Bank Ltd............................. 815
23,500 Newcrest Mining Ltd..................................... 105
145,152 News Corp., Ltd......................................... 569
62,650 North Broken Hill Peko Ltd.............................. 165
87,801 Pacific Dunlop Ltd...................................... 234
69,500 Pioneer International Ltd............................... 172
+22,000 Renison Goldfields Consolidated Ltd..................... 84
49,338 Santos Ltd.............................................. 133
56,460 Southcorp Holdings Ltd.................................. 127
+34,300 TNT Ltd................................................. 59
74,700 Western Mining Corp. Holdings Ltd....................... 433
17,057 Westfield Trust......................................... 9
6,098 Westfield Trust (New)................................... 10
142,972 Westpac Banking Corp.................................... 481
---------
8,823
---------
BELGIUM (7.7%)
9,600 AG Financiere et de Reassurance du Groupe............... 813
600 Bekaert S.A............................................. 425
15,100 Delhaize Freres et Cie, 'Le Lion', S.A.................. 613
16,250 Electrabel S.A.......................................... 2,892
4,650 Generale de Banque S.A.................................. 1,184
211 Generale de Banque S.A. (New)........................... 53
6,600 Gevaert Photo-Producten S.A............................. 310
1,836 Glaverbel S.A........................................... 245
7,100 Groupe Bruxelles Lambert S.A............................ 839
4,200 Kredietbank S.A......................................... 881
650 Kredietbank S.A. (Participating Certificates)........... 135
6,940 Petrofina S.A........................................... 2,053
4,175 Reunies Electrobel & Tractebel S.A...................... 1,261
4,200 Royale Belge............................................ 659
2,500 Solvay et Cie S.A....................................... 1,191
+7,800 Union Miniere S.A....................................... 606
---------
14,160
---------
FRANCE (12.1%)
2,343 Accor S.A............................................... 255
13,269 Alcatel Alsthom......................................... $ 1,134
13,942 AXA S.A................................................. 646
18,952 Banque Nationale de Paris............................... 872
1,400 BIC Corp................................................ 176
2,640 Bouygues................................................ 253
6,700 B.S.N. S.A.............................................. 940
2,250 Carrefour Supermarche S.A............................... 932
500 Chargeurs S.A........................................... 109
2,050 Cie Bancaire S.A........................................ 198
7,388 Cie de Saint Gobain..................................... 850
16,100 Cie de Suez S.A......................................... 739
10,302 Cie Financiere de Paribas, Class A...................... 685
9,846 Cie Generale des Eaux................................... 957
22,305 Elf Aquitaine........................................... 1,571
8,700 Elf Sanofi.............................................. 401
2,750 Eridania Beghin-Say S.A................................. 362
6,796 Etablissements Economiques du Casino.................... 192
4,900 Havas S.A............................................... 383
7,929 Lafarge Coppee S.A...................................... 565
6,933 L'Air Liquide........................................... 927
270 Legrand................................................. 328
5,600 L'Oreal................................................. 1,143
7,190 LVMH Moet Hennessy Louis Vuitton........................ 1,136
6,342 Lyonnaise des Eaux Demez................................ 557
+9,700 Michelin CGDE, Class B.................................. 353
5,010 Pernod-Ricard........................................... 293
1,700 Pinault-Printemps S.A................................... 302
1,800 Promodes................................................ 335
+4,300 PSA Peugeot Citroen S.A................................. 590
25,100 Rhone-Poulenc S.A., Class A............................. 583
450 SAGEM................................................... 224
900 Saint Louis S.A......................................... 232
4,750 Schneider S.A........................................... 315
2,450 Simco S.A............................................... 211
400 Societe Eurafrance S.A.................................. 123
8,226 Societe Generale........................................ 865
+12,300 Thomson CSF............................................. 368
18,124 Total S.A., Class B..................................... 1,053
---------
22,158
---------
HONG KONG (2.5%)
22,000 Applied International Holdings.......................... 3
26,513 Bank of East Asia....................................... 106
105,000 Cathay Pacific Airways Ltd.............................. 153
75,000 Cheung Kong Holdings Ltd................................ 305
71,500 China Light & Power Co., Ltd............................ 305
54,000 Chinese Estates Holdings................................ 43
27,000 Dickson Concepts International Ltd...................... 18
42,000 Hang Lung Development Co................................ 60
65,980 Hang Seng Bank Ltd...................................... 473
6,800 Hong Kong Aircraft Engineering Co. Ltd.................. 23
66,480 Hong Kong & China Gas Co. Ltd........................... 107
43,000 Hong Kong & Shanghai Hotel.............................. 50
378,000 Hong Kong Telecommunications Ltd........................ 721
152,775 Hopewell Holdings Ltd................................... 126
123,000 Hutchison Whampoa Ltd................................... 497
35,000 Hysan Development Ltd................................... 69
14,000 Johnson Electric Holdings Ltd........................... 32
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
44
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT).
- ------------------------------------------------------------------------------
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
HONG KONG (CONT.)
20,000 Miramar Hotel & Investment Ltd.......................... 43
51,993 New World Development Co., Ltd.......................... 139
39,400 Shangri-La Asia Ltd..................................... 56
56,000 Shun Tak Holdings Ltd................................... 40
64,000 South China Morning Post................................ 37
38,000 Stelux Holdings Ltd..................................... 11
77,500 Sun Hung Kai Properties Ltd............................. 463
55,000 Swire Pacific Ltd., Class A............................. 342
15,000 Television Broadcasting Ltd............................. 60
74,000 Wharf Holdings Ltd...................................... 250
5,300 Wing Lung Bank Ltd...................................... 38
---------
4,570
---------
INDONESIA (3.2%)
218,000 Bank Dagang Nasional (Foreign)......................... 365
1,248,000 Barito Pacific Timber (Foreign)........................ 1,973
353,000 Gadjah Tunggal (Foreign)............................... 482
401,000 Hanajaya Mandala Sampoerna............................. 1,970
344,000 Jakarta International Hotel & Development.............. 446
37,000 Matahari Putra Prima................................... 69
+34,000 Panbrothers Tex (Foreign).............................. 17
187,000 Sinar Mas Agro......................................... 238
123,000 United Tractors (Foreign).............................. 263
---------
5,823
---------
ITALY (7.7%)
+100,000 Alitalia S.p.A......................................... 62
116,520 Assicurazioni Generali S.p.A........................... 2,742
266,000 Banca Commerciale Italiana............................. 570
+50,000 Banca Nazionaia Deli................................... 89
87,000 Banco Ambrosiano Ven................................... 231
29,000 Benetton Group S.p.A................................... 339
+14,000 Cartiere Burgo......................................... 93
+26,000 Cogefar................................................ 26
338,000 Credito Italiano....................................... 349
99,000 Edison S.p.A........................................... 434
+8,000 Falck Italian.......................................... 18
+368,000 Fiat S.p.A............................................. 1,367
110,000 Fiat S.p.A. Di Risp (NCS).............................. 245
37,500 Fidis Italian.......................................... 82
+40,000 Gilardini.............................................. 96
109,500 Istituto Bancario San Paolo............................ 642
13,500 Italcementi............................................ 47
30,500 Italcementi Di Risp.................................... 214
109,000 Italgas................................................ 300
73,500 Mediobanca S.p.A....................................... 598
+780,000 Montedison S.p.A....................................... 588
+135,000 Montedison S.p.A. Di Risp (NCS)........................ 86
+185,000 Olivetti S.A........................................... 236
188,500 Parmalat Finanziaria S.p.A............................. 198
+240,000 Pirelli S.p.A.......................................... 320
40,400 R.A.S. S.p.A........................................... 411
15,600 R.A.S. S.p.A. Di Risp (NCS)............................ 94
24,000 Rinascente............................................. 135
2,700 Risanamento Di Napoli.................................. 40
+7,000 Saffa.................................................. 21
19,000 SAI.................................................... $ 214
+65,000 Saipan................................................. 119
15,000 Sasib.................................................. 75
35,500 Sirti S.p.A............................................ 230
59,000 SME Meridonale......................................... 145
+95,000 SNIA BPO S.p.A......................................... 108
810,000 Telecom Italia S.p.A................................... 2,109
235,000 Telecom Italia S.p.A. Di Risp (NCS).................... 469
---------
14,142
---------
JAPAN (30.5%)
32,000 Ajinomoto Co........................................... 411
16,000 Aoki Corp.............................................. 70
2,000 Aoyama Trading Co...................................... 46
64,000 Asahi Bank Ltd......................................... 745
16,000 Asahi Breweries Ltd.................................... 177
48,000 Asahi Chemical Industry Co., Ltd....................... 368
48,000 Asahi Glass Co......................................... 593
48,000 Bank of Tokyo.......................................... 742
32,000 Bank of Yokohama....................................... 271
11,000 Banyu Pharmaceutical................................... 113
16,000 Bridgestone Co......................................... 251
51,000 Canon, Inc............................................. 865
30,000 Casio Computer Co...................................... 380
32,000 Chiba Bank............................................. 292
6,000 Chiyoda Corp........................................... 81
16,000 Chugai Pharmaceutical Ltd.............................. 169
34,000 Citizen Watch Co....................................... 263
16,000 Cosmo Oil Co., Ltd..................................... 120
74,000 Dai-Ichi Kangyo Bank................................... 1,397
16,000 Daikin Industries Ltd.................................. 142
32,000 Dai Nippon Printing Co., Ltd........................... 546
+7,000 Daishowa Paper Manufacturing Co., Ltd.................. 49
16,000 Daiwa Housing Industry Co.............................. 227
32,000 Daiwa Securities Co., Ltd.............................. 463
11,000 Ebara.................................................. 186
9,300 Fanuc Co............................................... 438
73,000 Fuji Bank.............................................. 1,613
26,000 Fuji Photo Film Ltd.................................... 603
103,000 Fujitsu Ltd............................................ 1,044
26,000 Furukawa Electric Co................................... 169
32,000 Hankyu Corp............................................ 187
16,000 Hazama Corp............................................ 69
138,000 Hitachi Ltd............................................ 1,370
47,000 Honda Motor Co......................................... 835
55,000 Industrial Bank of Japan............................... 1,629
12,000 Ito Yokado Ltd......................................... 642
+64,000 Japan Airlines Co...................................... 452
40,000 Japan Energy Corp...................................... 158
16,000 Jusco Co., Ltd......................................... 357
32,000 Kajima Corp............................................ 274
11,100 Kansai Electric Power Co............................... 267
32,000 Kao Corp............................................... 363
+82,000 Kawasaki Steel Corp.................................... 343
48,000 Kinki Nippon Railway................................... 397
32,000 Kirin Brewery Co., Ltd................................. 357
+96,000 Kobe Steel Ltd......................................... 300
82,000 Komatsu Ltd............................................ 741
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
45
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT).
- ------------------------------------------------------------------------------
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
JAPAN (CONT.)
48,000 Kubota Corp............................................ $ 344
32,000 Kumagai Gumi Co........................................ 166
7,000 Kyocera Corp........................................... 519
16,000 Kyowa Hakko Kogyo...................................... 158
12,000 Kyushu Matsushita Electric............................. 294
17,000 Makita Corp............................................ 307
48,000 Marubeni Corp.......................................... 265
16,000 Marui Co............................................... 292
72,000 Matsushita Electric Industries Ltd..................... 1,186
45,000 Mitsubishi Corp........................................ 592
58,000 Mitsubishi Electric Co................................. 412
48,000 Mitsubishi Estate Co., Ltd............................. 516
128,000 Mitsubishi Heavy Industries Ltd........................ 977
48,400 Mitsubishi Chemical Corp............................... 266
38,000 Mitsubishi Materials Corp.............................. 202
31,000 Mitsubishi Trust and Banking Co........................ 464
48,000 Mitsui & Co............................................ 410
32,000 Mitsukoshi Ltd......................................... 337
3,000 Mochida Pharmaceutical................................. 61
20,100 Murata Manufacturing Co., Ltd.......................... 777
86,000 NEC Corp............................................... 984
32,000 New Oji Paper Co., Ltd................................. 337
16,000 NGK Insulators......................................... 164
16,000 Nippon Denso Co., Ltd.................................. 337
32,000 Nippon Express Co., Ltd................................ 321
16,000 Nippon Fire & Marine Insurance Co...................... 111
16,000 Nippon Meat Packers, Inc............................... 210
48,000 Nippon Oil Co.......................................... 320
32,000 Nippon Paper Industries Co............................. 235
178,000 Nippon Steel Co........................................ 670
48,000 Nippon Yusen........................................... 315
63,000 Nissan Motor Co........................................ 521
+94,000 NKK Corp............................................... 260
48,000 Nomura Securities Co................................... 998
32,000 Obayashi Corp.......................................... 205
32,000 Odakyu Electric Railway Co............................. 235
30,000 Olympus Optical Co., Ltd............................... 328
96,000 Osaka Gas Co........................................... 386
16,000 Penta-Ocean Construction............................... 88
15,000 Pioneer Electric Corp.................................. 362
80,000 Sakura Bank............................................ 1,076
16,000 Sankyo Co., Ltd........................................ 398
48,000 Sanyo Electric Co., Ltd................................ 276
4,000 Secom Co., Ltd......................................... 249
3,800 Sega Enterprises....................................... 219
18,000 Sekisui Chemical Co.................................... 179
16,000 Sekisui House Co., Ltd................................. 178
9,000 Seven-Eleven Japan..................................... 724
61,000 Sharp Corp............................................. 1,103
16,000 Shin - Etsu Chemical Co................................ 318
23,000 Shinizu Corp........................................... 227
15,000 Shiseido Co............................................ 178
32,000 Shizuoka Bank.......................................... 395
+32,000 Showa Denko............................................ 112
15,000 Sony Corp.............................................. 851
80,000 Sumitomo Bank.......................................... 1,526
+64,000 Sumitomo Chemical Co................................... 366
32,000 Sumitomo Corp.......................................... 328
22,000 Sumitomo Electric Ind.................................. 314
7,000 Sumitomo Forestry Co................................... 112
+112,000 Sumitomo Metal Ind..................................... 363
32,000 Taisei Corp., Ltd...................................... 199
32,000 Takeda Chemical Ind.................................... 389
7,000 TDK Corp............................................... 339
32,000 Teijin Ltd............................................. 169
32,000 Tobu Railway Co........................................ 187
50,000 Tokai Bank............................................. 602
48,000 Tokio Marine & Fire Insurance Co....................... 588
7,000 Tokyo Dome Corp........................................ 128
35,300 Tokyo Electric Power Co................................ 985
5,000 Tokyo Electron Ltd..................................... 156
96,000 Tokyo Gas Co........................................... 416
32,000 Tokyo Corp............................................. 212
22,000 Toppan Printing Co., Ltd............................... 307
48,000 Toray Industries Inc................................... 349
73,000 Toshiba Corp........................................... 530
16,000 Toto Ltd............................................... 262
32,000 Toyobo Co.............................................. 128
9,000 Toyoda Automatic Loom Works............................ 185
74,000 Toyota Motor Corp...................................... 1,560
+32,000 Ube Industries Ltd..................................... 124
32,000 Yamaichi Securities Co................................. 242
16,000 Yamanouchi Pharmaceutical Co........................... 329
+8,000 Yamazaki Baking Co..................................... 161
32,000 Yasuda Trust & Banking Co.............................. 255
---------
55,801
---------
MEXICO (3.7%)
+15,600 Aerovias de Mexico S.A. CPO............................ 2
17,700 Apasco S.A., Class A................................... 90
54,800 Cemex.................................................. 288
14,100 Cemex CPO ADR.......................................... 71
152,000 Cifra S.A. de C.V., Class B............................ 308
100,800 Cifra S.A. de C.V., Class C............................ 192
65,940 Controladoro Commercial Mexicana, Class B.............. 56
13,100 Empresas ICA Sociedad Controladora S.A. de C.V......... 216
58,000 Empresas la Moderna S.A., Class ACP.................... 251
71,650 FEMSA, Class B......................................... 187
11,300 FEMSA, Class L......................................... 27
115,200 Grupo Carso S.A., Class A1............................. 853
5,100 Grupo de Modelo S.A., Class C.......................... 95
32,900 Grupo Financiero Banamex Accival, Class B.............. 93
58,200 Grupo Financiero Banamex Accival, Class C.............. 168
48,800 Grupo Financiero Bancomer, Class B..................... 23
164,700 Grupo Financiero Bancomer, Class C..................... 97
4,900 Grupo Financiero Banorte, Class C...................... 12
24,300 Grupo Financiero Serfin, Class BCP..................... 46
+140,900 Grupo Gigante S.A., Class B............................ 47
21,900 Grupo Industrial Alfa S.A., Class A.................... 207
52,200 Grupo Industrial Maseca, Class B2...................... 57
+21,500 Grupo Sidek S.A., Class B.............................. 47
+44,082 Grupo Situr S.A. de C.V., Class BCP.................... 90
28,363 Grupo Televisa S.A. CPO................................ 457
+18,200 Grupo Tribasa S.A. CPO................................. 160
14,559 Kimberly Clark de Mexico, Series A..................... 170
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
46
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT).
- ------------------------------------------------------------------------------
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
MEXICO (CONT.)
1,002,700 Telefonos de Mexico S.A., Class L...................... $ 2,076
18,500 Tolmex S.A., Class B2.................................. 156
37,800 Vitro S.A.............................................. 176
---------
6,718
---------
NETHERLANDS (3.6%)
12,300 ABN Amro Holdings N.V.................................. 428
3,100 Akzo Nobel N.V......................................... 358
26,200 Elsevier N.V........................................... 273
1,550 Heineken N.V........................................... 234
11,000 Internationale Nederlanden Groep N.V................... 520
+3,300 KLM Royal Dutch Airlines N.V........................... 81
4,900 Koninklijke Ahold N.V.................................. 152
4,100 Koninklijke KNP BT N.V................................. 117
1,200 Koninklijke Nederlandsche Hoogovens N.V................ 55
19,800 Koninklijke PTT Nederland N.V.......................... 668
+950 Nedlloyd Groep N.V..................................... 31
13,300 Philips Electronics N.V................................ 394
21,300 Royal Dutch Petroleum Co............................... 2,320
1,150 Stork N.V.............................................. 30
6,400 Unilever N.V........................................... 752
2,800 Wolters Kluwer N.V..................................... 207
---------
6,620
---------
NEW ZEALAND (2.2%)
793,636 Brierly Investments Ltd................................ 574
494,164 Carter Holt Harvey Ltd................................. 1,012
14,200 Ceramco Corp., Ltd..................................... 31
30,902 Fisher & Paykel Industries Ltd......................... 90
119,400 Fletcher Challenge Ltd................................. 280
29,800 Fletcher Challenge Ltd. (Forestry Shares).............. 36
40,200 Lion Nathan Ltd........................................ 77
552,500 Telecom Corp. of New Zealand Ltd....................... 1,804
8,100 Wilson & Horton Ltd.................................... 46
---------
3,950
---------
PORTUGAL (2.0%)
45,200 Banco Chemical S.A. (Registered)....................... 469
75,000 Banco Commercial Portugues (Registered)................ 981
25,000 Banco Portugues de Investimento (New).................. 374
5,100 Companhia Portuguesa Radio Marconi S.A................. 174
5,500 Companhia Portuguesa Radio Marconi S.A. (Registered)... 188
+4,900 Corticeira Amorim S.A.................................. 82
9,000 Jeronimo Martins....................................... 385
18,300 Lisnave-Estaleiros Navais de Lisboa S.A................ 90
6,200 Mota e Companhia S.A................................... 127
27,000 Sonae Investmentos..................................... 621
6,600 UNICER-Uniao Cervejeira S.A............................ 91
---------
3,582
---------
SPAIN (7.9%)
2,420 Acerinox S.A........................................... $ 253
23,900 Argentaria S.A......................................... 847
40,777 Autopistas Concesionaria............................... 315
46,700 Banco Bilbao Vizcaya S.A............................... 1,159
30,400 Banco Central Hispano Americano S.A.................... 728
30,100 Banco de Santander S.A................................. 1,153
2,100 Carburos Metalicos S.A................................. 76
4,100 Corporacion Financiera Alba............................ 174
14,800 Dragados y Construccion S.A............................ 208
11,100 Ebro Agricolas S.A..................................... 122
51,200 Empresa Nacional de Electricdad S.A.................... 2,085
+20,200 Ercros S.A............................................. 19
3,625 FASA Renault S.A....................................... 121
3,000 Fomento Construction Contractas S.A.................... 294
7,400 Gas Natural SDG S.A.................................... 636
585 Gines Navarro Construction............................. 8
174,300 Iberdrola S.A.......................................... 1,075
850 Inmobilaria Metropolitana Vasco Central S.A............ 27
5,300 Mapfre S.A............................................. 221
272 Mapfre S.A. (New)...................................... 10
2,200 Portland Valderrivas S.A............................... 162
62,100 Repsol S.A............................................. 1,684
7,400 Tabacalera S.A., Class A............................... 197
183,300 Telefonica Nacional de Espana S.A...................... 2,165
60,700 Union Electrica Fenosa S.A............................. 253
+8,100 Uralita S.A............................................ 79
10,223 Vallehermoso S.A....................................... 177
5,750 Viscofan Envolturas Celulosicas S.A.................... 87
1,650 Zardoya Otis S.A....................................... 172
---------
14,507
---------
THAILAND (2.9%)
7,200 Asia Credit Co., Ltd. (Foreign)........................ 60
103,200 Bangkok Bank Ltd. (Foreign)............................ 1,102
2,050 Bangkok Insurance Co., Ltd. (Foreign).................. 36
61,900 Bangkok Land Co., Ltd. (Foreign)....................... 154
40,500 Bank of Ayudhya Ltd. (Foreign)......................... 166
4,800 Banpu Public Co. Ltd. (Foreign)........................ 105
12,300 Charoen Pokphand Feedmill Co., Ltd. (Foreign).......... 83
+6,100 CMIC Finance & Securities Co., Ltd. (Foreign).......... 59
6,100 Dhana Siam Finance & Securities Co., Ltd. (Foreign).... 43
13,100 Finance One Co., Ltd. (Foreign)........................ 204
54,000 Industrial Finance Corp. of Thailand (Foreign)......... 115
15,500 Land & House Co., Ltd. (Foreign)....................... 277
6,400 National Finance & Securities Co., Ltd. (Foreign)...... 35
+7,700 Nava Finance & Securities Co., Ltd. (Foreign).......... 54
25,000 Phatra Thanakit Co., Ltd. (Foreign).................... 193
14,200 Shinawatra Computer Co., Ltd. (Foreign)................ 310
12,000 Siam Cement Co., Ltd. (Foreign)........................ 719
12,000 Siam City Cement Co., Ltd. (Foreign)................... 205
31,500 Siam Commercial Bank (Foreign)......................... 288
31,600 Tanayong Co. Ltd. (Foreign)............................ 72
82,300 Thai Farmers Bank, Ltd. (Foreign)...................... 669
+23,750 TPI Polene Co., Ltd. (Foreign)......................... 212
17,500 Wattachak Co., Ltd. (Foreign).......................... 35
---------
5,196
---------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
47
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT).
- ------------------------------------------------------------------------------
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
UNITED KINGDOM (9.8%)
48,300 Abbey National plc..................................... $ 326
35,000 Argyll Group plc....................................... 147
33,900 Arjo Wiggins Appleton plc.............................. 126
13,700 Associated British Foods plc........................... 121
51,981 Barclays plc........................................... 497
25,300 Bass plc............................................... 204
83,916 BAT Industries plc..................................... 567
16,100 BICC plc............................................... 91
30,232 Blue Circle Industries plc............................. 134
15,300 BOC Group plc.......................................... 169
29,700 Boots Co. plc.......................................... 234
13,600 Bowater plc............................................ 93
20,400 BPB Industries plc..................................... 94
16,006 British Aerospace plc.................................. 107
27,700 British Airways plc.................................... 155
135,500 British Gas plc........................................ 666
161,384 British Petroleum Co. plc.............................. 1,076
82,200 British Steel plc...................................... 198
163,400 British Telecommunications plc......................... 966
100,400 BTR plc................................................ 462
6,881 Burmah Castrol plc..................................... 88
60,200 Cable & Wireless plc................................... 355
28,990 Cadbury Schweppes plc.................................. 196
18,600 Caradon plc............................................ 73
20,400 Coats Viyella plc...................................... 60
12,518 Commercial Union plc................................... 100
11,900 Courtaulds plc......................................... 86
8,500 De La Rue Co. plc...................................... 125
14,400 Eastern Electricity plc................................ 175
29,900 Forte plc.............................................. 112
16,600 General Accident plc................................... 131
90,700 General Electric plc................................... 391
12,700 GKN plc................................................ 117
66,700 Glaxo Holdings plc..................................... 692
65,252 Grand Metropolitan plc................................. 416
28,900 Great Universal Stores plc............................. 245
39,184 Guardian Royal Exchange plc............................ 102
49,200 Guinness plc........................................... 347
145,124 Hanson plc............................................. 525
29,634 Harrisons & Crossfields plc............................ 65
56,666 HSBC Holdings plc...................................... 616
20,400 Imperial Chemical Industries plc....................... 239
40,616 Ladbroke Group plc..................................... 109
17,800 Land Securities plc.................................... 166
+25,358 Lasmo plc.............................................. 58
33,280 Lloyds Bank plc........................................ 288
20,887 Lonrho plc............................................. 50
82,200 Marks and Spencer plc.................................. 512
13,600 MEPC plc............................................... 81
36,400 National Power plc..................................... 279
15,300 North West Water Group plc............................. 130
24,600 Peninsular & Oriental Steam Navigation Co.............. 235
33,900 Pilkington plc......................................... 88
61,089 Prudential Corp. plc................................... 302
12,700 Rank Organization plc.................................. 83
19,025 Redland plc............................................ 137
22,400 Reed International plc................................. 280
44,600 Reuters Holdings plc................................... 327
7,600 RMC Group plc.......................................... 111
25,400 Royal Bank of Scotland Group plc....................... 156
21,400 Royal Insurance Holdings plc........................... 94
34,700 RTZ Corp. plc.......................................... 450
47,762 Sainsbury (J) plc...................................... 308
21,300 Scottish Power plc..................................... 117
44,100 Sears plc.............................................. 76
19,700 Sedgwick Group plc..................................... 46
10,200 Slough Estates plc..................................... 38
36,900 SmithKline Beecham plc, Class A........................ 262
9,100 Southern Electricity plc............................... 115
32,504 Tarmac plc............................................. 61
17,134 Taylor Woodrow plc..................................... 34
45,483 Tesco plc.............................................. 177
16,362 Thames Water plc....................................... 124
14,442 THORN EMI plc.......................................... 234
11,918 TI Group plc........................................... 71
30,500 Trafalgar House plc.................................... 36
18,200 Unilever plc........................................... 330
29,700 Vodafone Group plc..................................... 99
17,400 Zeneca Group plc....................................... 240
---------
17,993
---------
TOTAL COMMON STOCKS (Cost $178,920)............................... 184,043
---------
PREFERRED STOCKS (0.3%)
AUSTRALIA (0.1%)
72,576 News Corp., Ltd........................................ 250
ITALY (0.2%)
+140,000 Fiat S.p.A............................................. 322
---------
NETHERLANDS (0.0%)
453 Koninklijke KNP BT N.V................................. 2
---------
TOTAL PREFERRED STOCKS (Cost $658)................................ 574
---------
NO. OF
RIGHTS
- ---------
RIGHTS (0.3%)
PORTUGAL (0.0%)
+6,600 UNICER-Uniao Cervejeira S.A............................ 91
---------
SPAIN (0.2%)
**+30,100 Banco de Santander..................................... 324
---------
THAILAND (0.1%)
**+18,300 Dhana Siam Finance & Securities Co., Ltd., expiring 3/02/95.... 114
+19,200 National Finance & Securities Co., Ltd., expiring 1/95......... 86
---------
200
---------
TOTAL RIGHTS (Cost $286)............................................. 615
---------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
48
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT).
- ------------------------------------------------------------------------------
NO. OF VALUE
WARRANTS (000)
- ------------------------------------------------------------------------------
WARRANTS (0.0%)
BELGIUM (0.0%)
+347 Petrofina S.A., expiring 6/03/97........................ $ 7
---------
HONG KONG (0.0%)
+4,400 Applied International Holdings, expiring 12/30/99....... --
---------
ITALY (0.0%)
+24,000 Credito Italiano, expiring 12/31/97..................... --
---------
TOTAL WARRANTS (Cost $0)........................................... 7
---------
NO. OF
UNITS
- ---------
UNITS (0.2%)
UNITED KINGDOM (0.1%)
35,700 SmithKline Beecham plc................................... 236
---------
AUSTRALIA (0.1%)
66,443 Westfield Trust.......................................... 116
---------
TOTAL UNITS (Cost $343)............................................. 352
---------
TOTAL FOREIGN SECURITIES (101.4%) (Cost $180,207)................... 185,591
---------
FACE
AMOUNT
(000)
- ------------
SHORT-TERM INVESTMENT (1.3%)
REPURCHASE AGREEMENT (1.3%)
$ 2,351 U.S. Trust, 5.50%, dated 12/30/94, due
1/03/95, to be repurchased at $2,352, collateralized
by $2,440 United States Treasury Notes, 3.875%, due
3/31/95, valued at $2,430 (Cost $2,351).................... 2,351
---------
FOREIGN CURRENCY (1.2%)
A$ 203 Australian Dollar................................... 157
BF 12,207 Belgian Franc....................................... 384
L 191 British Pound....................................... 300
DM 3 Deutsche Mark....................................... 2
FF 12 French Franc........................................ 2
HK$ 1,007 Hong Kong Dollar.................................... 130
IN 3,936 Indonesian Rupiah................................... 2
Y 48,747 Japanese Yen........................................ 490
MP 7 Mexican Peso........................................ 1
NG 403 Netherlands Guilder................................. 232
NZ$ 402 New Zealand Dollar.................................. 257
PE 134 Portuguese Escudo................................... 1
SP 37,165 Spanish Peseta...................................... 282
TB 622 Thai Baht........................................... 25
---------
TOTAL FOREIGN CURRENCY (Cost $2,258).............................. 2,265
---------
TOTAL INVESTMENTS (103.9%) (Cost $184,816)........................ 190,207
---------
OTHER ASSETS (0.4%)
Receivable for Portfolio Shares Sold.................... $ 318
Dividends Receivable.................................... 249
Foreign Withholding Tax Reclaim Receivable.............. 204
Interest Receivable..................................... 1
Other................................................... 19 791
-----
LIABILITIES (-4.3%$)
Payable for Investments Purchased...........................(6,653)
Net Unrealized Loss on Forward Foreign Currency Contracts... (597)
Payable for Portfolio Shares Redeemed....................... (318)
Investment Advisory Fees Payable............................ (243)
Bank Overdraft.............................................. (97)
Custodian Fees Payable...................................... (32)
Administrative Fees Payable................................. (29)
Directors' Fees & Expenses.................................. (1)
Other Liabilities........................................... (51) $(8,021)
------ ---------
NET ASSETS (100%)............................................. $ 182,977
-----------
-----------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 15,711,763 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................ $11.65
-----------
-----------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open at December 31,
1994, the portfolio is obligated to deliver or is to receive foreign
currency in exchange for US dollars as indicated below:
IN NET
CURRENCY TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------- --------- ----------- --------------- --------- ------------
$ 16 $ 16 1/03/95 IL 26,814 $ 16 $ --
$ 6 6 1/04/95 IL 9,510 6 --
$ 6,476 6,476 1/31/95 IL 10,707,379 6,593 117
$ 12,000 12,000 4/28/95 Y 1,183,560 12,070 70
FF 107,060 20,014 4/28/95 $ 20,000 20,000 (14)
Y 6,518,185 66,476 4/28/95 $ 65,000 65,000 (1,476)
SP 1,894,800 14,294 4/28/95 $ 15,000 15,000 706
--------- --------- ------
$ 119,282 $ 118,685 $ (597)
--------- --------- ------
--------- --------- ------
- ------------------------------------------------------------------------------
+ -- Non-income producing securities
** -- Security is valued at fair value -- See Note A-1
NCS -- Non Convertible Shares
FF -- French Franc
IL -- Italian Lira
Y -- Japanese Yen
SP -- Spanish Peseta
- ----------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -----------------------------------------------------------------------------
Capital Equipment..................................... $ 17,260 9.4%
Consumer Goods........................................ 33,843 18.5
Energy................................................ 26,505 14.5
Finance............................................... 48,295 26.4
Gold Mines............................................ 105 0.1
Materials............................................. 23,609 12.9
Multi-Industry........................................ 6,832 3.7
Services.............................................. 29,142 15.9
--------- -----
$ 185,591 101.4%
--------- -----
--------- -----
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
49
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
- ------------------------------------------------------------------------------
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
COMMON STOCKS (94.1%)
AUSTRALIA (0.0%)
+75,000 Odin Mining & Investment Co., Ltd.... $ 22
---------
CHINA (2.0%)
890,400 China Merchants Shekou Port Services,
Class B............................ 489
4,351,000 Maanshan Iron & Steel Co., Class H... 917
200,000 Shanghai Diesel Engine Co., Ltd.,
Class B............................ 160
265,000 Shanghai Erfanji Co., Ltd., Class
B.................................. 53
313,235 Shanghai Jin Jiang Tower Ltd., Class
B.................................. 163
1,601,600 Shanghai Jinqiao, Class B............ 1,121
590,900 Shanghai Phoenix Bicycle Ltd., Class
B.................................. 304
500,000 Shanghai Refrigerator Compressor,
Class B............................ 173
638,000 Shanghai Tyre & Rubber Co., Class
B.................................. 242
120,000 Shanghai Yaohua Pilkington Glass,
Class B............................ 118
180,400 Shenzhen Chiwan Wharf Holdings, Class
B.................................. 70
4,965,000 Yizheng Chemical Fibre Co., Class
H.................................. 1,845
---------
5,655
---------
HONG KONG (23.2%)
1,837,000 Cheung Kong Holdings Ltd............. 7,479
580,000 China Light & Power Co., Ltd......... 2,474
1,758,500 Citic Pacific Ltd.................... 4,239
4,200,000 C.P. Pokphand Co., Ltd............... 982
9,312,000 Guangdong Investments Ltd............ 4,603
610,000 Harbin Power Equipment Co............ 205
860,500 Hong Kong Electric Holdings Ltd...... 2,352
538,000 Hong Kong & Shanghai Bank
Holdings plc....................... 5,806
5,414,000 Hong Kong Telecommunications Ltd..... 10,321
1,523,000 Hopewell Holdings Ltd................ 1,260
1,842,000 Hutchison Whampoa Ltd................ 7,451
1,735,000 New World Development Co., Ltd....... 4,630
51,000 Shandong Huaneng Power Co., Ltd.
ADR................................ 491
200,000 Sum Cheong International............. 111
612,100 Sun Hung Kai Properties Ltd.......... 3,655
661,560 Swire Pacific Ltd., Class A.......... 4,121
1,026,000 Varitronix International Ltd......... 1,459
2,160,000 Wai Kee Holdings Ltd................. 502
607,000 Wharf Holdings Ltd................... 2,048
---------
64,189
---------
INDIA (1.2%)
38,000 Grasim Industries Ltd. GDR........... 912
51,000 Hindaico Industries Ltd. GDR......... 1,721
34,000 SIV Industries Ltd. GDR.............. 612
---------
3,245
---------
INDONESIA (6.8%)
600,000 Asiana Imi Industries (Foreign)...... 573
378,000 Bank International Indonesia
(Foreign).......................... 1,204
450,000 Barito Pacific Timber (Foreign)...... 711
310,913 Charoen Pokphand (Foreign)........... 1,273
517,500 Duta Pertiwi PT (Foreign)............ $ 747
125,000 Indocement Tunggal (Foreign)......... 512
700,000 Indosat PT (Foreign)................. 2,508
513,000 Jembo Cable Co. (Foreign)............ 817
351,600 Kalbe Farma (Foreign)................ 1,448
210,000 Keramika Indonesia Association
(Foreign).......................... 272
377,750 Modern Photo Film Co. (Foreign)...... 1,598
500,000 Ometraco (Foreign)................... 785
267,000 Polysindo Eka Perkasa (Foreign)...... 504
458,400 Sona Topas Tourism (Foreign)......... 1,481
208,000 Sorini Corp. (Foreign)............... 852
85,000 Suba Indah (Foreign)................. 77
184,200 Tempo Scan Pacific (Foreign)......... 884
**1,250,000 Ultra Jaya Milk (Foreign)............ 1,183
644,800 United Tractors (Foreign)............ 1,379
---------
18,808
---------
KOREA (1.7%)
44,900 Korea Electric Power (Foreign)....... 1,549
+81,200 Pohang Iron & Steel Co., Ltd. ADR.... 2,375
14,267 Samsung Electronics Co. GDR.......... 699
---------
4,623
---------
MALAYSIA (22.3%)
696,000 Bandar Raya Developments Bhd......... 1,177
761,500 Genting Bhd.......................... 6,531
+480,000 Granite Industries Bhd............... 1,015
600,000 Land & General Holdings Bhd.......... 2,491
714,000 Magnum Corp. Bhd..................... 1,281
1,642,500 Malayan Banking Bhd.................. 9,906
655,316 Malaysian International Shipping
(Foreign).......................... 1,873
+1,347,000 Malaysian Resources Corp. Bhd........ 2,490
667,333 Mulpha International Bhd............. 852
1,000,000 Renong Bhd........................... 1,238
1,144,000 Resorts World Bhd.................... 6,720
650,000 Sime Darby Bhd....................... 1,489
1,161,000 Tanjong plc.......................... 3,455
810,000 Tan & Tan Development Bhd............ 1,085
+373,000 Technology Resources Industries
Bhd................................ 1,191
1,203,000 Telekom Malaysia Bhd................. 8,150
1,236,000 Tenaga Nasional Bhd.................. 4,889
500,000 Time Engineering Bhd................. 1,243
967,757 United Engineers Ltd. (Malaysia)..... 4,775
---------
61,851
---------
PAKISTAN (0.4%)
7,300 Pakistan Telecommunications GDR...... 989
---------
PHILIPPINES (5.4%)
1,421,000 Aboitiz Equity Ventures.............. 332
708,000 Ayala Corp., Class B................. 1,161
1,148,500 Ayala Land Inc., Class B............. 1,789
+366,600 International Container Terminal
Services, Class B.................. 293
2,579,000 JG Summit Holding, Class B........... 951
133,300 Manila Electric Co., Class B......... 1,830
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
50
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT).
- ------------------------------------------------------------------------------
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
PHILIPPINES (CONT.)
2,194,400 Petron Corp.......................... $ 1,933
18,125 Philippine Long Distance Telephone
Co., ADR........................... 999
15,430 Philippine Long Distance Telephone
Co., Class B....................... 860
82,540 Philippine National Bank, Class B.... 1,167
244,000 San Miguel Corp., Class B............ 1,280
3,860,000 SM Prime Holdings, Inc., Class B..... 1,266
1,381,500 Universal Robina..................... 991
---------
14,852
---------
SINGAPORE (15.7%)
252,000 British-American Tobacco Co.......... 1,193
875,080 City Developments Ltd................ 4,893
400,000 DBS Land Ltd......................... 1,191
572,500 Development Bank of Singapore Ltd.
(Foreign).......................... 5,892
248,800 Fraser & Neave Ltd................... 2,578
800,000 IPC Corp............................. 546
93,750 Jurong Engineering Ltd............... 643
738,000 Keppel Corp., Ltd.................... 6,279
717,166 Oversea-Chinese Banking Corp.
(Foreign).......................... 7,381
32,000 Resources Development Corp., Ltd..... 126
183,000 Sembawang Shipyards Corp............. 1,369
146,000 Singapore Airlines Ltd. (Foreign).... 1,342
169,500 Singapore Press Holdings (Foreign)... 3,082
1,949,000 Singapore Technologies Industrial
Corp............................... 2,340
532,000 Straits Steamship Land Ltd........... 1,825
500,000 Straits Trading Co., Ltd............. 1,194
155,000 United Overseas Bank Ltd............. 1,637
---------
43,511
---------
TAIWAN (0.6%)
140,000 Hocheng Group Corp................... 674
170,000 Taiwan Semiconductor Mfg. Co......... 1,009
---------
1,683
---------
THAILAND (14.8%)
60,000 Advanced Information Services Co.
(Foreign).......................... 832
760,000 Bangkok Bank Ltd..................... 6,236
194,500 Bangkok Bank Ltd. (Foreign).......... 2,076
27,000 Banpu Public Co., Ltd................ 591
50,000 Charoen Pokphand Feedmill Co., Ltd.
(Foreign).......................... 313
290,300 Finance One Co., Ltd. (Foreign)...... 4,510
5,500 International Engineering Co.,
Ltd................................ 46
214,700 International Engineering Co., Ltd.
(Foreign).......................... 1,881
98,200 Land & House Co., Ltd. (Foreign)..... 1,752
324,000 MDX Co., Ltd......................... 897
13,000 MDX Co., Ltd. (Foreign).............. 44
**45,200 National Finance & Securities Co.,
Ltd. (Foreign)..................... 247
185,800 Phatra Thanakit Co., Ltd.
(Foreign).......................... 1,436
116,600 Shinawatra Computer Co., Ltd
(Foreign).......................... 2,545
28,500 Siam Cement Co., Ltd................. 1,626
33,000 Siam Cement Co., Ltd. (Foreign)...... 1,977
105,500 Siam Commercial Bank................. $ 857
221,300 Siam Commercial Bank (Foreign)....... 2,027
79,400 Singer Thailand Ltd.................. 677
158,100 Somprasong Land Co., Ltd.
(Foreign).......................... 608
291,300 Telecomasia Corp. (Foreign).......... 1,120
834,570 Thai Farmers Bank Ltd................ 5,751
118,570 Thai Farmers Bank, Ltd. (Foreign).... 963
586,000 Thai Petrochemical Co., Ltd.......... 1,284
+375,000 Wongpaitoon Footwear Co., Ltd.
(Foreign).......................... 844
---------
41,140
---------
TOTAL COMMON STOCKS (Cost $225,998).............. 260,568
---------
NO. OF
RIGHTS
- ----------
RIGHTS (0.7%)
INDONESIA (0.0%)
**+69,333 Sorini Corp., expiring 1/18/95....... --
---------
THAILAND (0.7%)
**+336,000 National Finance & Securities Co.,
Ltd., expiring 1/95................ 1,459
**+135,600 National Finance & Securities Co.,
Ltd., (Foreign) expiring 1/95...... 605
---------
2,064
---------
TOTAL RIGHTS (Cost $1,578)....................... 2,064
---------
NO. OF
WARRANTS
- ----------
WARRANTS (0.2%)
HONG KONG (0.0%)
+432,000 Wai Kee Holdings Ltd., expiring
12/31/96........................... 7
---------
THAILAND (0.2%)
+66,050 Finance One Co., Ltd., expiring
3/15/99............................ 553
---------
TOTAL WARRANTS (Cost $0).........................
560
---------
FACE
AMOUNT
(000)
- ------------
CONVERTIBLE DEBENTURES (0.4%)
KOREA (0.4%)
$ 1,700 Daewoo Corp., 0.00%, 12/31/04
(Cost $1,732)...................... 1,207
---------
TOTAL FOREIGN SECURITIES (95.4%) (Cost $229,308)...
264,399
---------
SHORT-TERM INVESTMENTS (3.3%)
GOVERNMENT AND AGENCY OBLIGATIONS (1.8%)
UNITED STATES (1.8%)
5,000 Federal Farm Credit Bank Discount
Note, 5.95%, 1/03/95 (Cost
$4,998)............................ 4,997
---------
REPURCHASE AGREEMENT (1.5%)
4,031 U.S. Trust, 5.50%, dated 12/30/94,
due 1/03/95, to be repurchased at
$4,033, collateralized by $4,180
United States Treasury Notes
3.875%, due 3/31/95, valued at
$4,163 (Cost $4,031)............... 4,031
---------
TOTAL SHORT-TERM INVESTMENTS (Cost $9,029)......... 9,028
TOTAL FOREIGN & US SECURITIES (98.7%) (Cost
$238,337).......................................... 273,427
---------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
51
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT).
- ------------------------------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
FOREIGN CURRENCY (1.5%)
HK$ 466 Hong Kong Dollar..................... $ 60
IN 4,470,122 Indonesian Rupiah.................... 2,034
KW 24 Korean Won........................... --
MA 52 Malaysian Ringgit.................... 20
S$ 132 Singapore Dollar..................... 91
T$ 36,963 Taiwan Dollar........................ 1,406
TB 11,953 Thai Baht............................ 476
---------
TOTAL FOREIGN CURRENCY (Cost $4,099)............... 4,087
---------
TOTAL INVESTMENTS (100.2%) (Cost $242,436)......... 277,514
---------
OTHER ASSETS (0.3%)
Receivable for Portfolio Shares Sold.... $ 563
Dividends Receivable.................... 337
Foreign Withholding Tax Reclaim
Receivable............................. 10
Interest Receivable..................... 1
Other................................... 27 938
--------- ---------
LIABILITIES (-0.5%)
Payable for Portfolio Shares Redeemed... (801)
Investment Advisory Fees Payable........ (418)
Custodian Fees Payable.................. (224)
Administrative Fees Payable............. (38)
Unrealized Loss on Forward Foreign
Currency Contract...................... (3)
Directors' Fees & Expenses.............. (1)
Other Liabilities....................... (61) (1,546)
--------- ---------
NET ASSETS (100%).................................. $ 276,906
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 12,854,374 outstanding $.001 par
value shares (authorized 500,000,000 shares)....... $21.54
---------
---------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open at
December 31, 1994, the Portfolio is obligated to deliver
foreign currency in exchange for US dollars as indicated
below:
IN
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE LOSS
(000) (000) DATE (000) (000) (000)
- ------------- --------- ----------- ---------- --------- --------------
IN 4,449,489 $ 2,025 1/03/95 $ 2,022 $ 2,022 $ (3)
--------- --------- ----------
--------- --------- ----------
- ------------------------------------------------------------
+ -- Non-income producing securities
** -- Security is valued at fair value -- See Note A-1
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
IN -- Indonesian Rupiah
Interest rates disclosed for U.S. Government & Agency Discount Notes represent
effective yields.
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
VALUE PERCENT OF NET
INDUSTRY (000) ASSETS
- ---------------------------------------------------------------
Capital Equipment.................. $ 20,043 7.2%
Consumer Goods..................... 18,064 6.5
Energy............................. 16,314 5.9
Finance............................ 102,218 36.9
Materials.......................... 20,392 7.4
Multi-Industry..................... 21,962 7.9
Services........................... 65,406 23.6
--------- -----
$ 264,399 95.4%
--------- -----
--------- -----
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
52
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- ------------------------------------------------------------------------------
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
COMMON STOCKS (80.3%)
ARGENTINA (4.8%)
+6 Acindar Industrial S.A............. $ --
+987,398 Alpargatas S.A..................... 681
81,501 Banco de Galicia y Buenos Aires.... 326
368,143 Banco de Galicia y Buenos Aires
ADR.............................. 6,350
185,816 Banco del Sud Argentina............ 1,412
135,400 Banco Frances ADS.................. 2,894
+193,932 Banesto Banco Shaw S.A............. 620
57,642 Capex S.A., Class A................ 481
119,200 Capex S.A. ADR..................... 1,788
13,000 Central Costanera ADR.............. 345
8,000 Central Puerto S.A................. 40
45,330 Central Puerto S.A. ADR............ 1,281
484,827 CIADEA (Renault) S.A............... 4,242
757,100 Cia Naviera Perez Companc, Class
B................................ 3,119
42,200 Inversiones y Representacion S.A.
GDR.............................. 1,129
89,537 Massalin Particulares.............. 1,030
392,235 Quilmes Industrial S.A............. 9,021
3,804,600 Siderca............................ 2,815
317,450 YPF S.A. ADR....................... 6,785
---------
44,359
---------
BRAZIL (6.0%)
18,483,200 Banco Nacional S.A................. 487
111,995,000 Cia Energetica de Minas Gerais
ADR.............................. 2,716
3,635,480 Cia Energetica de Sao Paulo........ 4,721
46,678 Cia Energetica de Sao Paulo, Class
B................................ 61
+58,807,000 Cia Paulista de Forca E Luz........ 5,207
132,425,000 Cia Siderurgica Nacional........... 4,510
34,000 Cigarros Souza Cruz................ 281
3,800,000 Eletrobras......................... 1,341
9,012,000 Light Servicos de Eletricidade
S.A.............................. 3,256
9,400,000 Rhodia-Ster ADS.................... 135
197,453,000 Telecomunicacoes Brasileiras....... 8,509
462,564,000 Telecomunicacoes Brasileiras ADR... 20,700
5,175,000 Telecomunicacoes de Sao Paulo...... 849
+251,300,000 Usinas Siderurgicas de Minas Gerais
ADR.............................. 3,330
---------
56,103
---------
CHILE (0.3%)
129,810 Banco Osorno y La Union ADR........ 1,396
48,875 Sociedad Quimica y Minera de Chile
S.A. ADR......................... 1,423
---------
2,819
---------
CHINA (1.5%)
750,000 Beiren Printing Machine, Class H... 208
3,008,400 China Merchants Shekou Port
Services, Class B................ 1,652
11,144,000 Maanshan Iron & Steel Co., Class
H................................ 2,348
1,862,000 Shanghai Diesel Engine Co., Ltd.,
Class B.......................... 1,490
803,000 Shanghai Erfanji Co., Ltd., Class
B................................ 161
500,000 Shanghai Industries Sewing Machine,
Class B.......................... 200
949,975 Shanghai Jin Jiang Tower Ltd.,
Class B.......................... 494
3,618,680 Shanghai Jinqiao, Class B.......... 2,533
1,200,000 Shanghai Lujiazui Finance & Trade
Development Co................... $ 972
+1,062,750 Shanghai Outer Gaoqiao Free Zone,
Class B.......................... 627
14,550 Shanghai Petrochemical Co. ADR..... 418
903,800 Shanghai Phoenix Bicycle Ltd.,
Class B.......................... 465
962,000 Shanghai Refrigerator Compressor,
Class B.......................... 332
450,000 Shanghai Shangling Electric, Class
B................................ 387
986,000 Shanghai Tyre & Rubber Co., Class
B................................ 375
354,000 Shanghai Yaohua Pilkington Glass,
Class B.......................... 347
1,874,400 Shenzhen Chiwan Wharf Holdings,
Class B.......................... 727
---------
13,736
---------
COLOMBIA (1.2%)
171,300,000 Banco de Colombia.................. 8,858
78,070 Cementos Paz Del Rio ADR........... 1,561
23,700 Gran Cadena Almacanae Co. ADS...... 385
---------
10,804
---------
GREECE (1.4%)
298,380 Aegek.............................. 5,592
83,700 Ergo Bank S.A...................... 3,449
115,520 Hellenic Bottling Co. S.A.......... 4,090
---------
13,131
---------
HONG KONG (6.2%)
1,123,000 Cheung Kong Holdings Ltd........... 4,572
1,981,000 Citic Pacific Ltd.................. 4,774
11,254,000 C.P. Pokphand Co., Ltd............. 2,632
65,800 Great Wall Electric Ltd. ADR....... 288
9,008,000 Guangdong Investments Ltd.......... 4,453
528,000 Hang Seng Bank Ltd................. 3,787
2,220,000 Harbin Power Equipment Co.......... 746
1,966,000 Hong Kong Telecommunications
Ltd.............................. 3,748
5,230,000 Hopewell Holdings Ltd.............. 4,326
1,715,000 Hutchison Whampoa Ltd.............. 6,938
1,789,000 New World Development Co., Ltd..... 4,775
160,000 Shandong Huaneng Power Co. Ltd.
ADR.............................. 1,540
566,000 Sun Hung Kai Properties Ltd........ 3,380
857,000 Swire Pacific Ltd., Class A........ 5,339
2,004,000 Varitronix International Ltd....... 2,849
2,700,000 Wai Kee Holdings Ltd............... 628
912,000 Wharf Holdings Ltd................. 3,076
---------
57,851
---------
HUNGARY (0.3%)
65,000 Egis............................... 1,379
102,500 Gedeon Richter Ltd................. 1,589
---------
2,968
---------
INDIA (12.6%)
230,000 American Dry Fruits................ 449
120 Andhra Valley Power Supply, Class
B................................ 4
100,000 AP Rayon, Class B.................. 239
100,000 Aruna Sugars & Enterprises, Class
B................................ 239
88,000 Bajaj Auto Ltd., Class A........... 1,992
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
53
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT).
- ------------------------------------------------------------------------------
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
INDIA (CONT.)
987,500 Balaji Foods & Feeds............... $ 866
15,000 Ballapur Industries Ltd., Class
B................................ 122
20,000 Baroda Rayon Corp.................. 427
269,334 Bharat Forge Co., Ltd., Class A.... 1,545
3,300,000 Bharat Heavy Electricals........... 18,410
12,800 Bharat Petroleum Corp., Ltd........ 157
250,000 Bharat Pipes & Fittings Ltd., Class
B................................ 249
100,000 BPL Ltd............................ 733
27,400 Cable Corp. of India Ltd........... 157
195,000 Carrier Aircon Ltd., Class B....... 870
90,000 Cosmo Films Ltd.................... 474
25,000 Crompton Greaves................... 143
77,000 DCM Shriram Industries Ltd......... 388
38,800 Delta Industries Ltd............... 167
185,000 Essab India Ltd.................... 619
2,700 Fabworth (India) Ltd............... 3
57,166 Flex Industries Ltd................ 460
5,000 Fuller............................. 133
371,800 Garware Plastics & Polyester,
Class A.......................... 3,556
314,500 Geekay Exim Ltd.................... 2,306
475,000 Godrej Soaps Ltd................... 2,953
47,500 Hero Honda, Class B................ 470
120,200 Hindustan Petroleum Corp........... 1,422
105,280 Housing Development Finance
Corp............................. 8,558
@*+78,000 India Magnum Fund, Class A
(acquired 11/25/92-3/01/94, Cost
$3,782).......................... 4,524
@+55,194 India Magnum Fund, Class B......... 3,284
644,650 India Organic Chemical Ltd......... 1,516
5,600 Indian Rayon & Industries Ltd.,
Class A.......................... 109
46,000 Indian Seamless Metal Tubes, Class
B................................ 280
40,000 Indian Seamless Steel & Alloys..... 38
60,000 Indo Gulf Fertilizer & Chemical,
Class A.......................... 179
380,800 Indo Rama Synthetic, Class B....... 1,275
100,000 Infosys Technology Ltd............. 1,498
160,200 ITC Argotech, Class B.............. 1,328
2,850 ITW Signode Ltd., Class B.......... 27
134,400 Jai Parabolic Springs Ltd.......... 321
237,600 JK Synthetics Ltd.................. 311
200,000 Kirloskar Oil Engine, Class B...... 893
1,200 Lakme Ltd., Class B................ 14
145,000 Laser Lamp......................... 139
150,000 Lekshima Precision................. 550
770,000 Mahanagar Telephone Nigam.......... 4,787
81,334 Mahavir Spinning Mills Ltd......... 713
22,300 Mahindra Ugine Steel, Class B...... 34
700,000 Maikaal Fibres..................... 669
200,000 Mardia Chemicals Ltd............... 1,148
20 Motor Industries Co., Ltd., Class
A................................ 4
73,650 MRF Ltd., Class B.................. 5,459
24,000 Mukand Iron & Steel Works, Class
A................................ 245
21,606 Nahar Spinning Mills Ltd., Class
B................................ 689
72,000 Nath Pulp & Paper Mills Ltd........ 166
25,000 OM Sindoori Hotels Ltd............. 57
500,000 Orkay Industries Ltd............... 446
250,000 Patheja Forgings & Auto, Class B... 1,016
401,000 PCS Data Products Ltd., Class B.... $ 352
67,500 Pentafour Products Ltd., Class B... 108
254,200 Philips India, Ltd................. 2,836
275,000 Polar Latex........................ 351
232,700 Priyadarshini Cement Ltd., Class
B................................ 289
7,000 Pudumjee........................... 118
350,000 PVD Plastic Mouldings Inds. Ltd.,
Class B.......................... 446
50,000 Rallis Ltd......................... 510
6,450 Ranbaxy Laboratories Ltd., Class
B................................ 137
10,200 Raymond Synthetics Ltd., Class B... 7
3,770 Reliance Industries Ltd. GDS....... 74
73,581 Reliance Industries Ltd. GDS
(New)............................ 1,692
265,400 Reliance Industries Ltd., Class
A................................ 2,887
100,000 Rossel Industries Ltd.............. 351
100,000 Saurashtra Cement & Chemicals,
Class B.......................... 335
535,000 SCICI Ltd., Class B................ 1,620
50,000 Secals Ltd......................... 151
30,000 Shanti Gears Ltd., Class B......... 191
108,000 Sharp Industries Ltd............... 189
360,000 Shipping Corp. of India............ 689
57,860 Shree Vindhya Paper Mills.......... 304
13,200 S.K.F. Bearings Ltd................ 1,452
45,000 Sri Venkatesa Mills Ltd............ 222
1,008,500 State Bank of India................ 7,266
34,000 Sundaram Finance, Class B.......... 470
1,000,000 Super Forgings & Steels............ 1,913
233,300 Tata Engineering & Loco, Class A... 3,868
3,935 Tata Hydro Electric Power.......... 141
2,620 Tata Power Co., Ltd................ 117
100 Teneja Aerospace Aviation.......... --
450,000 Tilagarli Steel.................... 932
1,600 T.P.I. India Ltd................... 3
10,000 T.V.S. Suzuki...................... 67
205,000 Uniworth International Ltd., Class
B................................ 258
783,000 Uttam Galva Steels Ltd., Class B... 1,030
16,604 Videocon International Ltd., Class
A................................ 82
81,600 Videsh Sanchar Nigam Ltd........... 2,406
710,040 VXL Ltd............................ 1,245
34,500 Vysya Bank......................... 2,420
---------
117,359
---------
INDONESIA (5.4%)
26,400 Astra International................ 50
72,000 Astra International (Foreign)...... 96
1,373,000 Bank Bali (Foreign)................ 3,873
1,673,000 Barito Pacific Timber (Foreign).... 2,645
1,662,049 Charoen Pokphand (Foreign)......... 6,805
***200,000 Citra Marga Nusaphala (Foreign).... 237
612,500 Duta Pertiwi PT (Foreign).......... 885
1,046,000 Indocement Tunggal (Foreign)....... 4,283
1,200,000 Indosat PT (Foreign)............... 4,299
1,308,600 Jembo Cable Co. (Foreign).......... 2,084
1,398,200 Kalbe Farma (Foreign).............. 5,757
468,000 Keramika Indonesia Association
(Foreign)........................ 607
925,500 Modern Photo Film Co. (Foreign).... 3,916
534,000 Polysindo Eka Perkasa (Foreign).... 1,008
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
54
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT).
- ------------------------------------------------------------
VALUE
SHARES (000)
- ------------------------------------------------------------
INDONESIA (CONT.)
693,200 Sona Topas Tourism (Foreign)....... $ 2,239
973,500 Sorini Corp. (Foreign)............. 3,986
150,000 Suba Indah (Foreign)............... 137
584,000 Tempo Scan Pacific (Foreign)....... 2,803
2,109,000 United Tractors (Foreign).......... 4,510
---------
50,220
---------
ISRAEL (1.5%)
40,166 Elbit Ltd.......................... 2,733
1,300 First International Bank........... 153
413,335 Israel Land Development............ 1,460
16,800 Koor Industries Ltd................ 1,286
146,500 Osem Investment Ltd................ 937
+137,336 PEC Israel Economic Corp........... 3,880
54,397 Scitex Ltd......................... 904
152,948 Super Sol Ltd., Class B............ 2,605
---------
13,958
---------
MALAYSIA (0.2%)
835,000 Bandar Raya Development Bhd........ 1,413
---------
MEXICO (10.4%)
359,112 Apasco S.A., Class A............... 1,790
3,031,850 Banacci, Class B................... 8,959
438,912 Banacci, Class L................... 1,270
676,890 Cemex CPO ADR...................... 6,681
12,500 Desc Sociedad de Fomento Industrial
S.A. de C.V...................... 295
3,370 FEMSA ADR.......................... 83
694,000 FEMSA, Class B..................... 1,777
21,500 Grupo Carso, S.A., Class A1........ 158
+609,355 Grupo Carso ADR.................... 8,836
801,000 Grupo Financiero Banamex Accival,
Class C.......................... 2,367
670,603 Grupo Financiero Bancomer ADR...... 7,544
3,973,500 Grupo Financiero Bancomer, Class B. 1,909
2,336,000 Grupo Financiero Bancomer, Class C. 1,268
1,868,000 Grupo Financiero Bancrecer, Class
B................................ 1,577
69,380 Grupo Financiero GBM Atlantico ADR. 520
1,248,360 Grupo Financiero Probursa, Class B. 289
3,873,060 Grupo Financiero Probursa, Class C. 1,868
120,800 Grupo Financiero Serfin S.A. ADR... 906
2,254,000 Grupo Herdez, Class A.............. 1,087
55,000 Grupo Iusacell S.A. ADR, Class D... 880
5,000 Grupo Iusacell S.A. ADR, Class L... 93
+182,571 Grupo Mexicano Desarrollo ADR,
Class B.......................... 1,392
42,960 Grupo Mexicano Desarrollo, Class L. 381
+52,600 Grupo Sidek S.A. ADR............... 460
+1,451,800 Grupo Sidek S.A., Class A.......... 3,181
+987,000 Grupo Sidek S.A., Class B.......... 2,182
55,344 Grupo Sidek S.A., Class L.......... 145
180,600 Grupo Televisa S.A. ADR............ 5,734
435,952 Grupo Tribasa S.A. ADR............. 7,248
68,060 Hylsamex S.A. ADR.................. 1,149
310,400 Interceramica, Class C............. 1,030
+30,600 Interceramica ADR.................. 627
82,600 Panamerican Beverages, Inc., Class
A................................ 2,612
385,425 Telefonos de Mexico S.A. ADR, Class
L................................ $ 15,802
547,000 Tolmex S.A., Class B2.............. 4,618
---------
96,718
---------
MOROCCO (0.9%)
41,100 Ona Group.......................... 1,673
146,300 Sni Maroc.......................... 6,726
---------
8,399
---------
PAKISTAN (2.8%)
78,120 Adamjee Insurance Co., Ltd......... 472
1,040,900 Bank of Punjub..................... 1,861
825,814 Cherat Cement Ltd.................. 2,926
13,126 Crescent Investment Bank........... 22
247,600 Crescent Textile Mills Ltd......... 241
275,000 Dewan Salman Fibre................. 1,251
380,100 D.G. Khan Cement Ltd............... 766
3,017,900 Fauji Fertilizer Co., Ltd.......... 8,043
475,860 Imperial Chemical Industries....... 3,743
595,725 Muslim Commercial Bank Ltd......... 1,384
679,297 Nishat Mills Ltd................... 1,231
13,090 Pakistan Telecommunications........ 1,723
13,900 Pakistan Telecommunications GDR.... 1,883
97,850 Philips Electrical................. 636
298,000 Zahur Textile Mills................ 61
---------
26,243
---------
PERU (0.8%)
169,394 Banco de Credito del Peru.......... 375
323,646 Cementos Norte Pacasmayo, Class
T................................ 1,252
***497,000 Cementos Yura...................... 3,109
12,325 Cerveceria Backus y Johnson, Class
C................................ 250
+396,386 Nacional de Cerveza, Class T....... 301
+428,659 Southern Peru Copper, Class T...... 2,389
---------
7,676
---------
PHILIPPINES (3.2%)
3,133,250 Ayala Land Inc., Class B........... 4,880
7,772,250 JG Summit Holding, Class B......... 2,867
306,465 Manila Electric Co., Class B....... 4,207
1,000,000 Negros Navigation Co., Inc......... 481
6,800,000 Petron Corp........................ 5,992
47,490 Philippine Long Distance Telephone
Co. ADR.......................... 2,618
2,000 Philippine Long Distance Telephone
Co., Class B..................... 111
226,858 Philippine National Bank, Class
B................................ 3,208
8,472,500 SM Prime Holdings, Inc., Class B... 2,778
419,500 San Miguel Corp., Class B.......... 2,201
---------
29,343
---------
POLAND (0.8%)
***33,400 Eastbridge......................... 2,245
13,762 Elektrim........................... 647
2,028,000 International UNP Holdings......... 1,229
186,870 Mostostal Exports, Class A......... 1,216
15,000 Okocim............................. 423
8,925 Wedel S.A.......................... 608
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
55
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- -------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- -------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT).
- -------------------------------------------------------------
VALUE
SHARES (000)
- -------------------------------------------------------------
POLAND (CONT.)
15,735 Zwyeic............................. $ 1,089
---------
7,457
---------
PORTUGAL (0.1%)
13,800 Jeronimo Martins................... 591
@8,990 Portuguese Investment Fund......... 598
---------
1,189
---------
RUSSIA (0.8%)
***313,000 Russian Telecom Development
Corp............................. 3,130
***400,000 SFMT Inc........................... 4,000
---------
7,130
---------
SOUTH AFRICA (2.5%)
44,000 Anglo American Industrial
Corporation Ltd.................. 2,269
700,000 Bidvest Group Ltd.................. 2,836
1,223,150 Gencor Ltd......................... 4,386
796,900 Liberty Life Strategic
Investments...................... 2,495
131,300 Randcoal Ltd....................... 887
929,146 Sasol Ltd.......................... 7,701
311,500 Trans Natal Coal Corp., Ltd........ 2,372
---------
22,946
---------
SRI LANKA (0.1%)
19,575 Aitken Spence & Co., Ltd........... 117
113,000 Distillers Corp. S.A. Ltd.......... 21
81,200 John Keells Holdings Ltd........... 442
---------
580
---------
TAIWAN (3.4%)
2,196,600 Hocheng Group Corp................. 10,570
1,696,000 Taiwan Semiconductor Mfg. Co....... 10,065
2,223,891 United Micro Electronics Corp.,
Ltd.............................. 10,617
---------
31,252
---------
THAILAND (7.9%)
293,250 Advanced Information Services Co.
(Foreign)........................ 4,065
1,720,600 Bangkok Bank Ltd................... 14,119
419,500 Bangkok Bank Ltd. (Foreign)........ 4,478
862,600 Finance One Co., Ltd. (Foreign).... 13,400
315,560 International Engineering Co.,
Ltd.............................. 2,665
427,240 International Engineering Co., Ltd.
(Foreign)........................ 3,744
144,400 Land & House Co., Ltd. (Foreign)... 2,577
598,300 MDX Co., Ltd....................... 1,656
234,635 Phatra Thanakit Co., Ltd........... 1,813
546,265 Phatra Thanakit Co., Ltd.
(Foreign)........................ 4,221
85,000 SeaFresh Industry Co., Ltd.
(Foreign)........................ 542
141,800 Shinawatra Computer Co., Ltd
(Foreign)........................ 3,095
94,300 Siam Cement Co., Ltd............... 5,379
15,000 Siam Commercial Bank (Foreign)..... 138
1,671,000 Thai Farmers Bank Ltd.............. 11,515
---------
73,407
---------
TURKEY (4.7%)
2,095,000 Borusan............................ $ 1,516
13,001,600 Ege Biracilik Ve Malt Sanayii...... 8,231
+2,514,000 Ege Seramik Sanayii Ve Ticaret
A.S.............................. 877
6,776,000 Koc Yatirim Ve Sanayii Mamulleri... 5,253
812,000 Migros Turk TAS.................... 1,553
13,510,000 Sarkuysan.......................... 7,855
3,551,000 Tat Konserue....................... 4,863
9,401,000 Tofas Turk Otomobil Fabrikasi...... 8,016
120,000 Tofas Turk Otomobil Fabrikasa ADR,
Class E.......................... 494
1,302,075 Turkas Petroculuk A.S.............. 328
1,085,600 Turkiye Garanti Bankasi ADR........ 2,719
24,085,000 Yapi Ve Kredi Bankasi A.S.......... 2,085
---------
43,790
---------
UNITED KINGDOM (0.2%)
900,924 Lonrho plc......................... 2,145
---------
ZIMBABWE (0.3%)
1,980,000 Trans Zambezi Industries Ltd....... 2,574
---------
TOTAL COMMON STOCKS (Cost $725,564)..............
745,570
---------
PREFERRED STOCKS (13.4%)
BRAZIL (13.4%)
1,059,142,183 Banco Bradesco..................... 9,003
323,910,000 Banco do Brasil.................... 6,386
18,800,000 Banco do Estado Sao Paulo.......... 269
31,814,000 Banco Itau......................... 8,902
304,098,880 Banco Nacional S.A................. 7,719
20,516,870 Bombril............................ 569
21,189,000 Brasmotor.......................... 8,581
62,724,850 Centrais Eletricas Brasileiras,
Class B.......................... 21,772
17,440,160 Cia Acos Especiais Itabira......... 1,483
13,825,000 Cia Cervejaria Brahma.............. 4,552
26,422,494 Cia Energetica de Minas Gerais..... 2,402
1,410,000 Cia Energetica de Sao Paulo........ 1,923
54,149 Cia Energetica de Sao Paulo, Class
B................................ 83
245,160,000 Cia Energetica de Sao Paulo ADR.... 3,248
+6,800,000 Cia Paulista de Forca E Luz........ 466
+904,000 Cia Siderurgica Paulista, Class
B................................ 2,631
37,930,101 Lojas Americanas S.A............... 1,120
+105,758 Lojas Americanas (Bonus)........... 15
104,153,333 Petrobras.......................... 13,156
77,529,000 Petrobras Distribuidora............ 4,165
12,500 Sadia Concordia.................... 17
158,099,175 Telecomunicacoes Brasileiras....... 7,074
162,600 Telecomunicacoes de Sao Paulo...... 73
44,998,215 Telecomunicacoes de Sao Paulo...... 6,402
5,521,151,000 Usinas Siderurgicas de Minas
Gerais........................... 7,496
26,163,000 Vale Do Rio Doce................... 5,004
---------
TOTAL PREFERRED STOCKS (Cost $85,280)............
124,511
---------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
56
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT).
- ------------------------------------------------------------------------------
NO. OF VALUE
RIGHTS (000)
- ------------------------------------------------------------
RIGHTS (0.0%)
INDIA (0.0%)
**+7,142 Indian Seamless Metal Tubes........ $ 9
**+2,500 Pentafour Products Ltd., Class B... --
---------
9
---------
INDONESIA (0.0%)
**+229,500 Sorini Corp., expiring 1/18/95..... --
---------
PAKISTAN (0.0%)
**+6,398 Crescent Investment Bank, expiring
1/30/95.......................... 7
**+92,643 Muslim Commercial Bank Ltd......... 95
---------
102
---------
TOTAL RIGHTS (Cost $12).......................... 111
---------
NO. OF
WARRANTS
- ------------
WARRANTS (0.1%)
HONG KONG (0.0%)
+540,000 Wai Kee Holdings Ltd., expiring
12/31/96......................... 9
---------
INDIA (0.0%)
**+33,571 Bharat Forge Co., Ltd., expiring
1995............................. --
**+27,383 Flex Industries Ltd................ --
---------
--
---------
POLAND (0.0%)
**+1,014,000 International UNP Holdings,
expiring 12/31/95................ --
---------
THAILAND (0.1%)
+138,660 Finance One Co., Ltd., expiring
3/15/99.......................... 1,160
---------
TOTAL WARRANTS (Cost $0)......................... 1,169
---------
NO. OF
UNITS
- ------------
UNITS (0.6%)
HUNGARY (0.5%)
42,000 Mol Magyar Olay-ES................. 4,715
---------
MEXICO (0.1%)
302,800 Interceramica...................... 974
---------
TOTAL UNITS (Cost $5,789)........................ 5,689
---------
SHARES
- ------------
PURCHASED OPTIONS (0.0%)
BRAZIL (0.0%)
37,300,000 Cia Paulista de Forca E Luz, strike
price BRL 70, expiring 10/16/95
(Cost $0)........................ 388
---------
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
CONVERTIBLE DEBENTURES (0.8%)
COLOMBIA (0.4%)
$ 4,115 Banco de Colombia 5.20%, 2/01/99... $ 4,017
---------
INDIA (0.3%)
IR ***25 Bharat Pipes & Fittings Ltd.,
Series A, Zero Coupon,
12/31/99......................... 80
***25 Bharat Pipes & Fittings Ltd.,
Series B, Zero Coupon,
12/31/99......................... 80
336 DCM Shriram Industries Ltd., Zero
Coupon, 3/01/00.................. 641
***15 Indian Seamless 10.00%, 10/12/99... 60
***134 Jai Parabolic Ltd., Series A, Zero
Coupon, 4/01/95.................. 300
***134 Jai Parabolic Ltd., Series B, Zero
Coupon, 4/01/95.................. 300
1,467 Mahavir Spinning Mills Ltd., Series
A, Zero Coupon, 12/31/99......... 51
783 Uttam Galva Steels, Zero Coupon,
12/01/10......................... 874
---------
2,386
---------
THAILAND (0.1%)
TB 880 Banpu Public Co., Ltd. 3.50%,
8/25/04.......................... 1,034
---------
TOTAL CONVERTIBLE DEBENTURES (Cost $7,543)....... 7,437
---------
NON-CONVERTIBLE DEBENTURES (0.5%)
INDIA (0.5%)
IR ***34 Bharat Forge Co., Ltd., 14.50%,
1/01/01.......................... 54
341 DCM Shriram Industries Ltd.,
16.50%, 3/01/00.................. 542
4,470 Garware Plastics & Polyester,
16.00%, 1/01/01.................. 138
8 Mahavir Spinning Mills Ltd., Series
B, Zero Coupon, 12/31/99......... 28
500 Raymond Wollen Mills, 16.00%,
12/31/99......................... 1,546
70 Saurashtra Cement & Chemicals, Zero
Coupon, 12/31/99................. 2,165
***173 VST Tillers Tractors, Zero Coupon,
1/01/96.......................... 612
---------
TOTAL NON-CONVERTIBLE DEBENTURES (Cost $5,641)... 5,085
---------
LOAN AGREEMENTS (3.6%)
ECUADOR (0.4%)
$#~##5,950 Republic of Ecuador Extension and
Refinancing Agreement (Floating
Rate) (Participation: Merrill
Lynch, Chemical Bank)............ 2,736
#~##1,200 Republic of Ecuador New Money
(Floating Rate) (Participation:
Merrill Lynch)................... 552
---------
3,288
---------
PANAMA (1.1%)
$ ++19,400 Republic of Panama Unrestructured
Loans (Floating Rate)............ 10,427
---------
---------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
57
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT).
- ------------------------------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
RUSSIA (2.1%)
CHF ++1,910 Bank for Foreign Economic Affairs
(Floating Rate).................. $ 380
$ ++25,657 Bank for Foreign Economic Affairs
(Floating Rate).................. 7,055
++9,293 Bank for Foreign Economic Affairs,
Series A (Floating Rate)......... 2,556
++32,090 Bank for Foreign Economic Affairs,
Series B (Floating Rate)......... 8,825
++1,000 Bank for Foreign Economic Affairs,
Series C (Floating Rate)......... 275
++1,913 Bank for Foreign Economic Affairs,
Series E (Floating Rate)......... 526
---------
19,617
---------
TOTAL LOAN AGREEMENTS (Cost $41,762)............. 33,332
---------
TOTAL FOREIGN & US SECURITIES (99.3%) (Cost
$871,591)........................................ 923,292
---------
FOREIGN CURRENCY (2.3%)
APS 106 Argentine Peso..................... 106
BLR 134 Brazilian Real..................... 158
CP 220,527 Colombian Peso..................... 265
DM 759 Deutsche Mark...................... 490
HK$ 2,874 Hong Kong Dollar................... 371
IR 336,780 Indian Rupee....................... 10,736
IN 65,248 Indonesian Rupiah.................. 30
MD 639 Moroccan Dhiram.................... 72
PR 173,193 Pakistani Rupee.................... 5,629
PS 1 Peruvian Sol....................... 1
PZ 54,496 Polish Zloty....................... 2
AR 86 South African Commercial Rand...... 24
SA 107 South African Financial Rand....... 26
SL 32 Sri Lankan Rupee................... 1
T$ 63,654 Taiwan Dollar...................... 2,421
TL 15,301,470 Turkish Lira....................... 395
---------
TOTAL FOREIGN CURRENCY (Cost $20,728)............ 20,727
---------
TOTAL INVESTMENTS (101.6%) (Cost $892,319)....... 944,019
---------
OTHER ASSETS (1.5%)
Receivable for Investments Sold....... $ 8,771
Receivable for Portfolio Shares 4,365
Sold.................................
Dividends Receivable.................. 944
Interest Receivable................... 102
Foreign Withholding Tax Reclaim 16
Receivable...........................
Other................................. 90 $ 14,288
---------
LIABILITIES (-3.1%)
Bank Overdraft........................ (11,323)
Payable for Investments Purchased..... (6,689)
Deferred India Taxes.................. (4,779)
Investment Advisory Fees Payable...... (3,224)
Payable for India Taxes............... (1,159)
Payable for Portfolio Shares (598)
Redeemed.............................
Custodian Fees Payable................ (540)
Administrative Fees Payable........... (128)
Sub-Administrative Fees Payable....... (14)
Directors' Fees & Expenses............ (1)
Other Liabilities..................... (214) (28,669)
--------- ---------
NET ASSETS (100%).................................. $ 929,638
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 57,016,212 outstanding $.001 par
value shares (authorized 500,000,000 shares)..... $16.30
---------
---------
- --------------------------------------------------------------
+ -- Non-income producing securities
++ -- Non-income producing securities -- in default
* -- Restricted as to public resale. Total value of restricted securities
at December 31, 1994 was $4,524 or 0.5% of net assets.
** -- Security is valued at fair value -- See Note A-1
*** -- Security is valued at cost -- See Note A-1
@ -- The fund is advised by an affiliate
~ -- The security is currently making partial interest payments.
# -- Participation interests were acquired through the financial
institutions listed parenthetically. All other loan agreements are
assignments. See Note A-7.
## -- Under restructuring at December 31, 1994.
ADR -- American Depositary Receipt
ADS -- American Depositary Shares
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
NCS -- Non Convertible Shares
TB -- Thai Baht
CHF -- Swiss Franc
IR -- Indian Rupee
TL -- Turkish Lira
Floating Rate Securities. Interest rate changes on these instruments are based
on changes in a designated base rate.
SUMMARY OF FOREIGN & US SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ----------------------------------------------------------------
Capital Equipment..................... $ 63,803 6.9%
Consumer Goods........................ 127,015 13.7
Energy................................ 114,476 12.3
Finance............................... 241,236 25.9
Loan Agreements....................... 33,332 3.6
Materials............................. 142,231 15.3
Multi-Industry........................ 74,544 8.0
Services.............................. 126,655 13.6
--------- ---
$ 923,292 99.3%
--------- ---
--------- ---
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
58
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- --------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------
VALUE
SHARES (000)
- --------------------------------------------------------------
COMMON STOCKS (93.9%)
BELGIUM (4.7%)
+3,400 Arbed, S.A.............................. $ 510
11,000 Delhaize Freres et Cie, 'Le Lion',
S.A................................... 447
8,300 G.I.B. Holdings, Ltd.................... 327
55 G.I.B. Holdings, Ltd. (New)............. 2
---------
1,286
---------
DENMARK (1.2%)
+8,500 Unidanmark A/S, Class A (Registered).... 327
---------
FINLAND (4.3%)
22,000 Amer-Yhtymae Oy, Class A................ 381
17,500 Huhtamaki Oy, Series 1.................. 580
+40,600 Kansallis-Osake Pankki.................. 48
17,000 Pohjola Insurance Co., Ltd., Class B.... 185
---------
1,194
---------
FRANCE (12.6%)
600 Bongrain S.A............................ 317
3,000 Cie de Saint Gobain..................... 345
+7,300 Credit Lyonnais CDI..................... 604
6,800 Elf Aquitaine........................... 479
2,400 Eridania Beghin-Say S.A................. 316
2,700 Precision Mecaniques Labinal S.A........ 344
+3,805 Legris Industries S.A................... 234
+18,000 Thomson CSF............................. 539
5,400 Total S.A., Class B..................... 314
---------
3,492
---------
GERMANY (11.7%)
3,100 BASF AG................................. 631
1,760 Bayer AG................................ 408
8,000 Bremer Vulkan Verbund AG................ 492
1,500 Commerzbank AG.......................... 316
575 Karstadt AG............................. 210
1,200 Mannesmann AG........................... 325
+1,500 Varta AG................................ 281
1,700 Veba AG................................. 589
---------
3,252
---------
ITALY (6.0%)
5,000 Editoriale L'Expresso S.p.A............. 13
+162,637 Impregilo S.p.A......................... 163
20,305 Safilo S.p.A............................ 127
191,500 Stet Di Risp (NCS)...................... 454
205,500 Telecom Italia S.p.A.................... 535
10,000 Telecom Italia S.p.A. Di Risp (NCS)..... 20
100,000 Unicem Di Risp (NCS).................... 339
---------
1,651
---------
NETHERLANDS (10.8%)
16,000 ABN Amro Holdings N.V................... 556
2,000 Akzo Nobel N.V.......................... 231
2,200 Hollandsche Beton Groep N.V............. 340
12,500 Internationale Nederlanden Groep N.V.... 591
6,000 Koninklijke Bijenkorf Beheer N.V........ 339
10,000 Koninklijke Van Ommeren N.V............. 263
2,350 Oce-Van Der Grinten N.V................. $ 105
18,500 Philips Electronics N.V................. 548
---------
2,973
---------
NORWAY (3.2%)
+100,000 Den Norske Bank A/S, Class A Free....... 268
16,000 Hafslund Nycomed, Class B............... 336
28,000 Saga Petroleum A/S, Class B............. 290
---------
894
---------
PORTUGAL (0.5%)
+@1,905 Portuguese Investment Fund.............. 127
---------
SPAIN (6.2%)
+11,100 Asturiana de Zinc S.A................... 121
9,520 Banco Espana de Credito S.A............. 67
4,760 Banco Espana de Credito S.A. (New)...... 32
7,615 Bodegas y Bebidas S.A................... 208
+7,870 Grupo Duro Felguera S.A................. 37
90,000 Iberdrola S.A........................... 555
28,000 Sevillana de Electricidad S.A........... 132
47,000 Telefonica Nacional de Espana S.A....... 555
---------
1,707
---------
SWEDEN (1.9%)
+48,000 Skandinaviska Enskilda Banken, Class
A..................................... 274
+16,000 S.K.F. AB, Class B...................... 264
---------
538
---------
SWITZERLAND (14.6%)
650 Alusuisse-Lonza Holdings Ltd.
(Registered).......................... 325
+200 Ascom Holdings AG (Bearer).............. 212
300 Bobst AG (Bearer)....................... 346
900 Ciba Geigy AG (Bearer).................. 538
115 Ciba Geigy AG (Registered).............. 69
500 Forbo Holdings AG (Registered).......... 420
700 Hero AG (Bearer)........................ 340
500 Holderbank Glarus AG (Bearer)........... 379
750 Magazine Globus (Participating
Certificates)......................... 449
700 Moevenpick Holding AG (Participating
Certificates)......................... 265
470 Schweizerische Industrie-Gesellschaft
Holdings (Registered)................. 431
+450 SwissAir (Registered)................... 265
---------
4,039
---------
UNITED KINGDOM (16.2%)
130,500 Asprey plc.............................. 284
75,000 Associated British Foods plc............ 663
+249,990 Automated Security Holdings plc......... 254
20,000 Bass plc................................ 161
200,000 BET plc................................. 318
152,550 Christian Salvesen plc.................. 650
37,400 Hillsdown Holdings plc.................. 105
118,856 John Mowlem & Co. plc................... 188
70,000 Kwik Save Group plc..................... 603
24,895 McAlpine (Alfred) plc................... 67
41,875 Nurdin & Peacock plc.................... 107
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
59
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- --------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO (CONT).
- --------------------------------------------------------------
VALUE
SHARES (000)
- --------------------------------------------------------------
UNITED KINGDOM (CONT.)
30,000 Reckitt & Colman plc.................... $ 276
37,401 Rolls-Royce plc......................... 105
120,795 Royal Insurance Holdings plc............ 528
95,165 Sketchley plc........................... 139
+253,775 Wembley plc............................. 20
---------
4,468
---------
TOTAL COMMON STOCKS (Cost $26,082)................. 25,948
---------
PREFERRED STOCKS (5.3%)
GERMANY (5.3%)
1,400 RWE AG.................................. 316
2,500 Spar Handels AG......................... 525
2,800 Volkswagen AG........................... 615
---------
TOTAL PREFERRED STOCKS (Cost $1,518)............... 1,456
---------
CUMULATIVE UNSECURED LOAN STOCK (0.7%)
UNITED KINGDOM (0.7%)
36,000 Reckitt & Colman plc (Cost $186)........ 191
---------
NO. OF
RIGHTS
- ---------
RIGHTS (0.0%)
SPAIN (0.0%)
**7,615 Bodegas y Bebidas, expiring 1/24/95
(Cost $0)............................. 1
---------
TOTAL FOREIGN SECURITIES (99.9%) (Cost $27,786).... 27,596
---------
FACE
AMOUNT
(000)
- ------------
FOREIGN CURRENCY (0.8%)
L 142 British Pound......................... 223
IL 20,882 Italian Lira.......................... 13
NG 1 Netherlands Guilder................... --
---------
TOTAL FOREIGN CURRENCY (Cost $236).................. 236
---------
TOTAL INVESTMENTS (100.7%) (Cost $28,022)........... 27,832
---------
OTHER ASSETS (1.8%)
Receivable for Investments Sold........ $ 450
Dividends Receivable................... 40
Foreign Withholding Tax Reclaim
Receivable............................ 15
Other.................................. 1 506
---------
LIABILITIES (-2.5%)
Bank Overdraft......................... (505)
Payable for Portfolio Shares Redeemed.. (114)
Investment Advisory Fees Payable....... (19)
Payable for Investments Purchased...... (14)
Net Unrealized Loss on Forward Foreign
Currency Contracts................... (9)
Custodian Fees Payable................. (8)
Filing and Registration Fees Payable... (5)
Administrative Fees Payable............ (5)
Directors' Fees & Expenses............. (1)
Other Liabilities...................... (24) $ (704)
--------- --------
NET ASSETS (100%)........................ $ 27,634
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 1,981,678 outstanding $.001 par value shares
(authorized 500,000,000 shares).............................. $13.94
------
------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open at December
31, 1994, the Portfolio is obligated to deliver foreign currency in
exchange for US dollars as indicated below:
IN NET
CURRENCY TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE LOSS
(000) (000) DATE (000) (000) (000)
- ------------ ----------- ----------- ----------- ----------- ------------
L 142 $ 223 1/04/95 $ 222 $ 222 $ (1)
DM 400 261 8/09/95 $ 253 253 (8)
----- ----- --
$ 484 $ 475 $ (9)
----- ----- --
----- ----- --
- ------------------------------------------------------------
+ -- Non-income producing securities
** -- Security is valued at fair value -- See Note A-1
@ -- The fund is advised by an affiliate.
NCS -- Non Convertible Shares
L -- British Pound
DM -- Deutsche Mark
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
VALUE PERCENT OF NET
INDUSTRY (000) ASSETS
- ------------------------------------------------------------------
Capital Equipment..................... $ 4,788 17.3%
Consumer Goods........................ 5,560 20.1
Energy................................ 2,120 7.7
Finance............................... 4,216 15.3
Materials............................. 4,892 17.7
Multi-Industry........................ 544 2.0
Services.............................. 5,476 19.8
--------- ---
$ 27,596 99.9%
--------- ---
--------- ---
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
60
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- --------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------
VALUE
SHARES (000)
- --------------------------------------------------------------
COMMON STOCKS (99.6%)
AUSTRALIA (0.9%)
+400,000 McPhersons Ltd.......................... $ 68
190,488 Westpac Banking Corp.................... 641
---------
709
---------
BELGIUM (2.0%)
38,000 Delhaize Freres et Cie 'Le Lion' S.A.... 1,543
---------
CANADA (0.7%)
+200,000 Canadian Pioneer Energy................. 456
70,000 Northern Reef Exploration Ltd........... 130
---------
586
---------
DENMARK (0.1%)
+1,200 Unidanmark A/S, Class A (Registered).... 46
---------
FRANCE (5.5%)
1,050 Bongrain S.A............................ 555
+12,000 Credit Lyonnais CDI..................... 994
18,573 Elf Aquitaine........................... 1,308
+5,500 Legris Industries S.A................... 339
7,200 Precision Mecaniques Labinal S.A........ 917
6,000 Sediver S.A............................. 247
---------
4,360
---------
GERMANY (8.0%)
4,700 BASF AG................................. 957
5,372 Bayer AG................................ 1,245
18,000 Bremer Vulkan Verbund AG................ 1,106
1,000 Karstadt AG............................. 365
2,212 Mannesmann AG........................... 600
2,764 Sinn AG................................. 593
+3,825 Varta AG................................ 716
1,910 Veba AG................................. 662
260 Volkswagen AG........................... 71
---------
6,315
---------
HONG KONG (0.9%)
220,000 Jardine Strategic Holdings, Inc......... 722
---------
IRELAND (2.8%)
710,680 Anglo Irish Bank Corp. plc.............. 604
73,900 Arnotts plc............................. 257
470,000 Avonmore Foods plc, Class A............. 894
230,000 Green Property plc...................... 473
---------
2,228
---------
ITALY (3.2%)
500,000 Stet Di Risp (NCS)...................... 1,186
36,240 Stet-Societa Finanziaria Telefonica..... 107
620,000 Telecom Italia S.p.A. Di Risp (NCS)..... 1,237
---------
2,530
---------
JAPAN (9.8%)
80,000 Fuji Photo Film Ltd..................... 1,855
24,000 Hitachi Ltd............................. 238
110,000 Kao Corp................................ 1,248
800 Murata Manufacturing Co., Ltd........... 31
130,000 Nichido Fire & Marine Insurance Co...... 1,126
18,000 Sony Corp............................... 1,021
30,000 Stanley Electric Co..................... 227
72,100 Sumitomo Rubber Industries.............. 700
5,000 TDK Corp................................ 243
30,000 Toyo Seikan Kaisha Ltd.................. 1,000
---------
7,689
---------
NETHERLANDS (8.2%)
46,222 ABN Amro Holdings N.V................... 1,607
2,050 Hollandsche Beton Groep N.V............. 317
31,393 Internationale Nederlanden Groep N.V.... 1,484
30,000 Koninklijke Van Ommern N.V.............. 788
+15,160 Nedlloyd Groep N.V...................... 497
15,500 Oce-Van Der Grinten N.V................. 694
37,690 Philips Electronics N.V................. 1,117
---------
6,504
---------
SPAIN (1.7%)
112,300 Telefonica Nacional de Espana S.A....... 1,328
---------
SWEDEN (1.4%)
+188,000 Skandinaviska Enskilda Banken, Class
A..................................... 1,075
---------
SWITZERLAND (5.5%)
+450 Ascom Holdings AG (Bearer).............. 478
500 Bobst AG (Bearer)....................... 577
1,200 Ciba-Geigy AG (Registered).............. 716
700 Forbo Holdings AG (Registered).......... 588
250 Grands Magasins Jelmoli (Bearer)........ 140
450 Grands Magasins Jelmoli (Registered).... 46
780 Holderbank Sin Glarus (Bearer).......... 591
195 Kuoni Riesebuero AG (Participating
Certificates)......................... 252
600 Magazine Globus (Participating
Certificates)......................... 359
70 Nestle S.A. (Registered)................ 67
600 Schweizerische Industrie-Gesellschaft
Holdings (Registered)................. 550
---------
4,364
---------
UNITED KINGDOM (12.7%)
700,000 ASDA Group plc.......................... 740
101,443 Barclays plc............................ 970
165,000 Bass plc................................ 1,330
265,000 Christian Salvesen plc.................. 1,129
200,000 Forte plc............................... 752
196,000 Hillsdown Holdings plc.................. 550
219,726 John Mowlem & Co. plc................... 348
80,000 Kwik Save Group plc..................... 689
180,000 Matthew (Bernard) plc................... 322
49,900 McAlpine (Alfred) plc................... 134
+653,333 Pentos plc.............................. 148
93,333 Perry Group plc......................... 235
257,157 Pilkington plc.......................... 669
60,674 Rolls-Royce plc......................... 171
130,000 Tate & Lyle plc......................... 861
52,000 Unilever plc............................ 943
+260,200 Wembley plc............................. 20
---------
10,011
---------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
61
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- --------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO (CONT).
- --------------------------------------------------------------
VALUE
SHARES (000)
- --------------------------------------------------------------
UNITED STATES (36.2%)
+89,000 Addington Resources, Inc................ $ 868
10,500 Aluminum Company of America............. 910
30,000 American Pacific Corp................... 210
43,800 American Premier Underwriters, Inc...... 1,133
17,050 AMR Corp................................ 908
59,975 Aviall, Inc............................. 457
50,500 Beazer Homes USA, Inc................... 587
7,900 Boise Cascade Corp...................... 211
23,000 Brooklyn Bancorp, Inc................... 696
+150,000 Cadiz Land Co., Inc..................... 778
48,100 Comsat Corp............................. 896
+44,500 Cray Research, Inc...................... 701
+60,000 Data General Corp....................... 600
+110,000 Egghead, Inc............................ 1,292
48,100 Enhance Financial Services Group,
Inc................................... 823
24,000 Gap, Inc................................ 732
+110,000 GenRad, Inc............................. 591
16,000 Georgia Pacific Corp.................... 1,144
31,200 GFC Financial Corp...................... 991
+20,100 Hartmarx Corp........................... 118
50,000 Johnstown America Industries, Inc....... 819
+31,000 Kaiser Steel Resources, Inc............. 194
31,500 Mellon Bank Corp........................ 965
+65,000 Mercer International, Inc............... 886
42,500 Midlantic Corp.......................... 1,126
21,600 MMI Cos., Inc........................... 343
20,600 National Gypsum Co...................... 839
+20,000 Pacific Bank N.A. (New)................. 255
15,000 Paco Pharmaceutical Services, Inc....... 131
20,000 Philip Morris Cos., Inc................. 1,150
12,000 Prime Retail, Inc....................... 159
+32,000 Rohr, Inc............................... 332
35,000 Ryder Systems, Inc...................... 770
52,000 Sierra Tucson Cos., Inc................. 149
25,000 Sun Co., Inc............................ 719
+20,000 Sun Microsystems, Inc................... 710
+25,000 Team, Inc............................... 47
13,100 Tecumseh Products Co., Class A.......... 589
+98,400 Unionfed Financial Corp. (New).......... 43
29,200 US Shoe Corp............................ 548
+20,000 UST Corp................................ 205
55,000 Waban, Inc.............................. 976
+270,000 WorldCorp, Inc.......................... 1,958
---------
28,559
---------
TOTAL COMMON STOCKS (Cost $77,013)................. 78,569
---------
CONVERTIBLE PREFERRED SECURITIES (0.0%)
HONG KONG (0.0%)
21,000 Jardine Strategic Holdings, Inc. IDR,
7.50%, 5/07/97........................ 26
---------
NETHERLANDS (0.0%)
293 ABN Amro Holdings N.V................... 1
---------
TOTAL CONVERTIBLE PREFERRED SECURITIES (Cost $23).. 27
---------
NO. OF VALUE
WARRANTS (000)
- ------------------------------------------------------------
WARRANTS (0.0%)
NETHERLANDS (0.0%)
3,024 Internationale Nederlanden Groep N.V.
expiring 3/15/01.................... $ 6
---------
SWITZERLAND (0.0%)
500 Forbo Holdings (Registered), expiring
11/1/95............................. 1
1,250 Grands Magasins Jelmoli (Bearer),
expiring 3/29/96.................... 2
450 Grands Magasins Jelmoli (Registered),
expiring 3/29/96.................... 1
---------
4
---------
TOTAL WARRANTS (Cost $2)............................ 10
---------
TOTAL FOREIGN & US SECURITIES (99.6%) (Cost $77,038). 78,606
---------
FACE
AMOUNT
(000)
- ------------
SHORT-TERM INVESTMENT (2.5%)
REPURCHASE AGREEMENT (2.5%)
$ 2,008 U.S. Trust 5.50% dated 12/30/94, due
1/03/95 to be repurchased at $2,009,
collateralized by $2,085 United
States Treasury Notes, 3.875%, due
3/31/95, valued at $2,077 (Cost
$2,008)............................. 2,008
---------
FOREIGN CURRENCY (0.1%)
BF 401 Belgian Franc......................... 13
L 15 British Pound......................... 23
Y 1,138 Japanese Yen.......................... 11
---------
TOTAL FOREIGN CURRENCY (Cost $47)................... 47
---------
TOTAL INVESTMENTS (102.2%) (Cost $79,093)........... 80,661
---------
OTHER ASSETS (0.3%)
Cash.................................... $ 3
Dividends Receivable.................... 167
Foreign Withholding Tax Reclaim
Receivable............................. 35
Other................................... 6 211
---------
LIABILITIES (-2.5%)
Payable for Investments Purchased....... (1,751)
Investment Advisory Fees Payable........ (115)
Administrative Fees Payable............. (10)
Custodian Fees Payable.................. (8)
Unrealized Loss on Forward Foreign
Currency Contract...................... (2)
Directors' Fees & Expenses.............. (1)
Other Liabilities....................... (50) (1,937)
--------- ---------
NET ASSETS (100%)......................... $ 78,935
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 5,889,277 outstanding $.001 par value
shares (authorized 500,000,000 shares)............. $13.40
------
------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
62
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO (CONT).
- ------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open at
December 31, 1994, the Portfolio is to receive foreign
currency in exchange for US dollars as indicated below:
IN
CURRENCY TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE LOSS
(000) (000) DATE (000) (000) (000)
- ----------- ----- ----------- ---------- ----- ---------------
$136 $ 136 1/03/95 A$ 173 $ 134 $ (2)
----- ----- --
----- ----- --
- ------------------------------------------------------------
+ -- Non-income producing securities
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
A$ -- Australian Dollar
- ------------------------------------------------------------
SUMMARY OF FOREIGN & US SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------------------------------------------------
Capital Equipment..................... $ 15,004 19.0%
Consumer Goods........................ 11,592 14.7
Energy................................ 4,143 5.2
Finance............................... 18,120 23.0
Materials............................. 7,258 9.2
Multi-Industry........................ 4,601 5.8
Services.............................. 17,888 22.7
--------- -----
$ 78,606 99.6%
--------- -----
--------- -----
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
63
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- --------------------------------------------------------------
THE GOLD PORTFOLIO
- --------------------------------------------------------------
VALUE
SHARES (000)
- --------------------------------------------------------------
COMMON STOCKS (91.0%)
AUSTRALIA (15.9%)
200,000 Acacia Resources Ltd.................... $ 365
500,000 Central Norseman Gold Corporation
Ltd................................... 310
+418,000 Delta Gold N.L.......................... 914
462,100 Gold Mines of Kalgoorlie Ltd............ 358
390,000 Great Central Mines N.L................. 832
25,000 Great Central Mines N.L. ADR............ 150
321,000 Newcrest Mining Ltd..................... 1,431
+500,000 Wiluna Mines Ltd........................ 446
---------
4,806
---------
CANADA (41.3%)
98,047 American Barrick Resources Corp......... 2,182
230,400 Bema Gold Corp.......................... 411
+25,000 BGR Precious Metals, Inc., Class A...... 250
100,000 Bolivar Goldfields Ltd.................. 168
60,000 Cambior, Inc............................ 690
+500,000 Campbell Resources, Inc................. 267
+105,800 Dakota Mining Corp...................... 145
102,500 Echo Bay Mines Ltd...................... 1,090
126,700 Goldcorp., Inc., Class A................ 711
131,300 Hemlo Gold Mines, Inc................... 1,329
45,500 Kinross Gold Corp....................... 235
351,500 Miramar Mining.......................... 1,504
56,946 Placer Dome, Inc........................ 1,239
+80,600 Prime Resource Group, Inc............... 582
367,814 Royal Oak Mines, Inc.................... 1,195
+75,000 TVX Gold, Inc........................... 508
---------
12,506
---------
UNITED STATES (33.8%)
+86,200 Amax Gold, Inc.......................... 517
52,314 Battle Mountain Gold Co................. 575
125,000 Freeport McMoran, Inc................... 2,219
2,266 Freeport McMoran Copper & Gold, Inc.,
Class A............................... 49
97,400 Gold Reserve Corp....................... 823
+45,950 Helca Mining Co......................... 465
72,700 Homestake Mining Co..................... 1,245
63,800 Newmont Gold Co......................... 2,273
10,000 Newmont Mining Corp..................... 360
+35,985 Pegasus Gold, Inc....................... 409
100,000 Santa Fe Pacific Gold Corp.............. 1,288
---------
10,223
---------
TOTAL COMMON STOCKS (Cost $30,257)................. 27,535
---------
NO. OF
WARRANTS
- ---------
WARRANTS (0.1%)
UNITED STATES (0.1%)
25,000 Gold Reserve Corp., expiring 3/15/95
(Cost $0)........................... 18
---------
FACE VALUE
AMOUNT (000)
- ------------------------------------------------------------
CONVERTIBLE BONDS (1.9%)
CANADA (1.3%)
+++**$400 Bema Gold Corp. 7.50%, 9/28/99.......... $ 404
---------
UNITED STATES (0.6%)
250 Canyon Resources 6.00%, 6/01/98......... 177
---------
TOTAL CONVERTIBLE BONDS (Cost $686)................ 581
---------
TOTAL FOREIGN & US SECURITIES (93.0%) (Cost
$30,943)........................................... 28,134
---------
SHORT-TERM INVESTMENT (8.4%)
REPURCHASE AGREEMENT (8.4%)
2,540 U.S. Trust 5.50%, dated 12/30/94, due
1/03/95 to be repurchased at $2,541,
collateralized by $2,640 United States
Treasury Notes, 3.875%, due 3/31/95,
valued at $2,629 (Cost $2,540)........ 2,540
---------
TOTAL INVESTMENTS (101.4%) (Cost $33,483).......... 30,674
---------
OTHER ASSETS (0.1%)
Interest Receivable...................... $ 10
Other.................................... 1 11
--------
LIABILITIES (-1.5%)
Payable for Investments Purchased........ (317)
Payable for Portfolio Shares Redeemed.... (40)
Investment Sub-Advisory Fees Payable..... (29)
Investment Advisory Fees Payable......... (14)
Administrative Fees Payable.............. (4)
Custodian Fees Payable................... (3)
Directors' Fees & Expenses............... (1)
Other Liabilities........................ (34) (442)
--------- --------
NET ASSETS (100%)......................... $ 30,243
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 3,313,487 outstanding $.001 par value
shares (authorized 500,000,000 shares)......... . $9.13
- ------------------------------------------------------------
+ -- Non-income producing securities
+++ -- Security is subject to delayed delivery -- See Note A-6
** -- Security is valued at fair value -- See Note A-1
ADR -- American Depositary Receipt
- ------------------------------------------------------------
SUMMARY OF FOREIGN & US SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -----------------------------------------------------------------
Gold Mines............................. $ 28,134 93.0%
--------- ---
--------- ---
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
GOLD PORTFOLIO
64
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ----------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ----------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
- ----------------------------------------------------------
VALUE
SHARES (000)
- ----------------------------------------------------------
COMMON STOCKS (88.3%)
AUSTRALIA (4.0%)
3,000,000 Brambles Industries Ltd........... $ 28,664
3,000,000 CSR Ltd........................... 10,354
+1,500,000 McPhersons Ltd.................... 256
3,934,882 Westpac Banking Corp.............. 13,244
---------
52,518
---------
BELGIUM (1.7%)
+63,700 Arbed S.A......................... 9,552
155,500 Delhaize Freres et Cie, 'Le Lion',
S.A............................. 6,316
160,000 G.I.B. Holdings, Ltd.............. 6,317
2,156 G.I.B. Holdings, Ltd. (New)....... 84
---------
22,269
---------
CANADA (0.4%)
+273,000 Cominco Ltd....................... 4,842
---------
DENMARK (1.1%)
236,000 Danisco........................... 8,422
+140,000 Unidanmark A/S, Class A
(Registered).................... 5,387
---------
13,809
---------
FINLAND (1.5%)
350,000 Huhtamaki Oy, Series 1............ 11,603
+361,000 Kansallis-Osake Pankki............ 422
721,000 Pohjola Insurance Co., Ltd., Class
B............................... 7,856
---------
19,881
---------
FRANCE (5.6%)
7,200 Bongrain S.A...................... 3,804
111,560 Cie de Saint Gobain............... 12,834
+148,000 Credit Lyonnais CDI............... 12,256
186,724 Elf Aquitaine..................... 13,150
25,800 Salomon S.A., Series A............ 10,320
+242,500 Thomson CSF....................... 7,260
224,170 Total S.A., Class B............... 13,028
---------
72,652
---------
GERMANY (10.3%)
110,000 BASF AG........................... 22,392
105,000 Bayer AG.......................... 24,337
105,000 Bremer Vulkan Verbund AG.......... 6,453
46,200 Commerzbank AG.................... 9,739
16,700 Hoechst AG........................ 3,520
55,000 Karstadt AG....................... 20,063
73,125 Mannesmann AG..................... 19,828
+17,030 Varta AG.......................... 3,189
75,000 Veba AG........................... 25,993
---------
135,514
---------
HONG KONG (1.9%)
90,600 China Light & Power Co. Ltd....... 427
7,300,000 Jardine Strategic Holdings,
Inc............................. 23,964
---------
24,391
---------
ITALY (3.3%)
2,910,000 Olivetti Di Risp (NCS)............ $ 2,781
2,568,000 SME Meridonale.................... 6,329
9,000,000 Stet Di Risp (NCS)................ 21,348
4,720,000 Telecom Italia S.p.A.............. 12,287
---------
42,745
---------
JAPAN (18.4%)
470,000 Aisin Seiki Co., Ltd.............. 6,559
800,000 Canon, Inc........................ 13,574
1,259,000 Daibiru Corp...................... 13,272
2,700 East Japan Railway Co............. 13,500
1,650,000 Fuji Photo Film, Ltd.............. 38,268
1,700,000 Hitachi Ltd....................... 16,880
1,180,000 Kao Corp.......................... 13,388
600,000 Kirin Brewery Co., Ltd............ 6,687
1,440,000 Matsushita Electric Industries
Ltd............................. 23,711
81,400 Murata Manufacturing Co., Ltd..... 3,146
2,302,000 Nichido Fire & Marine Insurance
Co.............................. 19,946
660 Nippon Telegraph & Telephone
Corp............................ 5,838
290,000 Sony Corp......................... 16,451
672,000 Stanley Electric Co............... 5,074
1,946,700 Sumitomo Rubber Industries........ 18,900
165,000 TDK Corp.......................... 8,002
500,000 Toyo Seikan Kaisha................ 16,667
---------
239,863
---------
NETHERLANDS (11.8%)
769,281 ABN Amro Holdings N.V............. 26,739
112,500 Akzo Nobel N.V.................... 12,996
79,082 Hollandsche Beton Groep N.V....... 12,227
629,362 Internationale Nederlanden Groep
N.V............................. 29,748
247,500 Koninklijke Bijenkorf Beheer
N.V............................. 13,981
+153,050 Nedlloyd Groep N.V................ 5,020
256,600 Oce-Van Der Grinten N.V........... 11,493
1,122,000 Philips Electronics N.V........... 33,244
61,200 Randstad Holdings N.V............. 3,313
8,915 Unilever N.V...................... 1,043
30,500 Unilever N.V. (Certificate)....... 3,585
---------
153,389
---------
NEW ZEALAND (0.5%)
2,098,671 Fisher & Paykel Industries Ltd.... 6,113
392,500 Smith City Group Ltd.............. --
---------
6,113
---------
NORWAY (1.4%)
+2,265,000 Den Norske Bank A/S, Class A
Free............................ 6,065
600,000 Hafslund Nycomed, Class B......... 12,605
---------
18,670
---------
SINGAPORE (0.3%)
3,265,000 Neptune Orient Lines Ltd.
(Foreign)....................... 4,480
---------
SPAIN (2.8%)
404,600 Banco Espana de Credito S.A....... 2,843
202,300 Banco Espana de Credito S.A.
(New)........................... 1,422
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
65
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ----------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ----------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- ----------------------------------------------------------
VALUE
SHARES (000)
- ----------------------------------------------------------
SPAIN (CONT.)
+297,500 Grupo Duro Felguera S.A........... $ 1,379
889,500 Iberdrola SA...................... 5,487
294,000 Sevillana de Electricidad S.A..... 1,389
2,000,000 Telefonica Nacional de Espana
S.A............................. 23,628
---------
36,148
---------
SWEDEN (2.1%)
+2,251,800 Skandinaviska Enskilda Banken,
Class A......................... 12,879
+473,000 S.K.F. AB, Class B................ 7,798
401,200 Svenska Cellulosa AB, Class B..... 6,290
---------
26,967
---------
SWITZERLAND (7.9%)
29,583 Alusuisse-Lonza Holdings Ltd.
(Registered).................... 14,808
2,605 Ascom Holdings AG (Bearer)........ 2,767
25,000 Ciba-Geigy AG (Registered)........ 14,922
8,000 Forbo Holdings AG (Registered).... 6,725
1,650 Grands Magasins Jelmoli
(Bearer)........................ 921
19,585 Grands Magasins Jelmoli
(Registered).................... 2,006
33,210 Holderbank Glarus (Bearer)........ 25,152
27,740 Moevenpick Holding AG
(Participating Certificates).... 10,494
7,620 Nestle S.A. (Registered).......... 7,262
31,500 SwissAir (Registered)............. 18,536
---------
103,593
---------
UNITED KINGDOM (13.3%)
8,103,000 ASDA Group plc.................... 8,568
1,065,000 Associated British Foods plc...... 9,409
+1,360,104 Automated Security Holdings plc... 1,385
2,028,870 Barclays plc...................... 19,403
1,820,000 Bass plc.......................... 14,668
1,236,785 BOC Group plc..................... 13,639
786,436 British Aerospace plc............. 5,267
1,992,000 Christian Salvesen plc............ 8,488
2,748,221 Forte plc......................... 10,332
1,675,000 Grand Metropolitan plc............ 10,679
3,440,000 Hillsdown Holdings plc............ 9,646
4,841,985 John Mowlem & Co. plc............. 7,661
229,723 Kleinwort Benson plc.............. 1,990
1,100,000 Kwik Save Group plc............... 9,477
943,000 McAlpine (Alfred) plc............. 2,526
1,871,543 Pilkington plc.................... 4,867
290,500 Reckitt & Colman plc.............. 2,671
2,074,588 Rolls-Royce plc................... 5,834
3,345,205 Royal Insurance Holdings plc...... 14,620
755,000 Unilever plc...................... 13,696
---------
174,826
---------
TOTAL COMMON STOCKS (Cost $932,804)............ 1,152,670
---------
PREFERRED STOCKS (4.2%)
GERMANY (4.2%)
32,750 Fag Kugelficsher AG............... $ 4,757
100,000 RWE AG............................ 22,597
29,525 Spar Handels AG................... 6,195
100,000 Volkswagen AG..................... 21,983
---------
TOTAL PREFERRED STOCKS (Cost $47,077).......... 55,532
---------
CONVERTIBLE PREFERRED SECURITIES (0.3%)
HONG KONG (0.3%)
1,863,000 Jardine Strategic Holdings, Inc.
IDR, 7.50%, 5/07/97............. 2,268
---------
NETHERLANDS (0.0%)
1,506 ABN Amro Holdings N.V............. 6
2,196 International Nederlanden Groep
N.V............................. 9
---------
15
---------
TOTAL CONVERTIBLE PREFERRED SECURITIES (Cost
$1,923)........................................ 2,283
---------
CUMULATIVE UNSECURED LOAN STOCK (0.4%)
UNITED KINGDOM (0.4%)
863,500 Reckitt & Colman plc (Cost
$4,717)......................... 4,586
---------
NO. OF
RIGHTS
- -----------
RIGHTS (0.0%)
FINLAND (0.0%)
361,000 Kansallis-Osake Pankki (Cost
$0)............................. 179
---------
NO. OF
WARRANTS
- -----------
WARRANTS (0.0%)
SWITZERLAND (0.0%)
120 Ciba-Geigy AG, expiring 6/06/95... --
7,280 Forbo Holding AG (Registered),
expiring 11/01/95............... 18
---------
TOTAL WARRANTS (Cost $1).......................
18
---------
TOTAL FOREIGN SECURITIES (93.2%) (Cost
$986,522)...................................... 1,215,268
---------
FACE
AMOUNT
(000)
- ------------
SHORT-TERM INVESTMENTS (7.1%)
US GOVERNMENT AND AGENCY OBLIGATIONS (3.4%)
$ 20,000 US Treasury Bill, 1/19/95.......... 19,950
25,000 Federal Farm Credit Bank, Discount
Note, 5.95%, 1/03/95............. 24,985
---------
44,935
---------
REPURCHASE AGREEMENT (3.7%)
47,996 Goldman Sachs, 5.30%, dated
12/30/94, due 1/03/95, to be
repurchased at $48,010,
collateralized by $48,530 United
States Treasury Notes, 7.875%,
due 11/15/99, valued at
$49,074.......................... 47,996
---------
TOTAL SHORT-TERM INVESTMENTS (Cost $92,938)...... 92,931
---------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
66
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
FOREIGN CURRENCY (0.2%)
A$ 2 Australian Dollar................ $ 2
L 359 British Pound.................... 562
C$ 1,156 Canadian Dollar.................. 824
DK 2,156 Danish Krone..................... 355
DM 591 Deutsche Mark.................... 382
Y 110,270 Japanese Yen..................... 1,107
NG 18 Netherlands Guilder.............. 11
NZ$ 1 New Zealand Dollar............... --
-------
TOTAL FOREIGN CURRENCY (Cost $3,219).............. 3,243
---------
TOTAL INVESTMENTS (100.5%)
(Cost $1,082,679)............................... 1,311,442
---------
OTHER ASSETS (0.5%)
Cash.................................. $ 17
Dividends Receivable.................. 2,529
Receivable for Investments Sold....... 1,695
Receivable for Portfolio Shares
Sold................................. 1,458
Foreign Withholding Tax Reclaim
Receivable........................... 1,095
Interest Receivable................... 14
Other................................. 125 6,933
---------
LIABILITIES (-1.0%)
Payable for Investments Purchased..... (7,437)
Net Unrealized Loss on Forward Foreign
Currency Contracts................... (2,962)
Investment Advisory Fees Payable...... (2,434)
Payable for Portfolio Shares
Redeemed............................. (334)
Administrative Fees Payable........... (170)
Custodian Fees Payable................ (85)
Directors' Fees & Expenses............ (1)
Other Liabilities..................... (182) (13,605)
--------- ---------
NET ASSETS (100%).................................. $1,304,770
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 85,070,714 outstanding $.001 par
value shares (authorized 500,000,000 shares)..... $15.34
---------
---------
- ------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open
at December 31, 1994, the Portfolio is obligated to deliver
or is to receive foreign currency in exchange for US dollars
or foreign currency as indicated below:
IN NET
CURRENCY TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------- --------- ----------- ----------- --------- -------------
C$ 1,156 $ 824 1/03/95 $ 823 $ 823 $ (1)
$ 663 663 1/03/95 Y 66,214 664 1
DM 590 381 1/03/95 $ 381 381 --
$ 454 454 1/03/95 SK 3,389 456 2
L 3,407 5,333 1/18/95 $ 5,000 5,000 (333)
C$ 80,352 57,254 3/01/95 Y 5,750,000 58,170 916
Y 5,750,000 58,170 3/01/95 C$ 75,648 53,902 (4,268)
SP 4,100,000 30,860 6/01/95 $ 31,079 31,079 219
DM 40,000 26,096 8/09/95 $ 25,252 25,252 (844)
Y 6,115,000 63,832 9/27/95 $ 64,627 64,627 795
CHF 66,500 52,128 11/14/95 $ 52,749 52,749 621
FF 206,000 38,811 11/20/95 $ 38,741 38,741 (70)
--------- --------- -------------
$ 334,806 $ 331,844 $ (2,962)
--------- --------- -------------
--------- --------- -------------
- ------------------------------------------------------------
+ -- Non-income producing securities
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
L -- British Pound
C$ -- Canadian Dollar
DM -- Deutsche Mark
FF -- French Franc
SP -- Spanish Peseta
SK -- Swedish Krona
CHF -- Swiss Franc
Y -- Japanese Yen
The interest rate disclosed for the Federal Farm Credit Bank Discount Note
represents effective yield.
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ----------------------------------------------------------------
Capital Equipment................. $ 232,575 17.8%
Consumer Goods.................... 242,951 18.6
Energy............................ 59,475 4.6
Finance........................... 224,292 17.2
Materials......................... 214,019 16.4
Multi-Industry.................... 41,254 3.2
Services.......................... 200,702 15.4
--------- ---
$1,215,268 93.2%
--------- ---
--------- ---
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
67
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
- ------------------------------------------------------------
VALUE
SHARES (000)
- ------------------------------------------------------------
COMMON STOCKS (96.0%)
AUSTRALIA (10.7%)
990,079 Bains Harding Ltd.................... $ 560
2,430,385 BRL Hardy Ltd........................ 2,903
140,833 BRL Hardy Ltd. (New)................. 57
2,106,000 Burswood Property Trust.............. 2,156
2,351,732 Country Road Ltd..................... 2,152
+3,099,000 McPhersons Ltd....................... 529
1,096,000 Palmer Tube Mills Ltd................ 867
5,138,265 Parbury Ltd.......................... 2,590
1,249,957 S.E.A.S. Sapfor Ltd.................. 4,120
1,527,800 Solution 6 Holdings Ltd.............. 1,126
---------
17,060
---------
DENMARK (1.2%)
53,900 SYD-Sonderjylland Holdings........... 1,861
---------
FINLAND (2.5%)
85,500 Amer-Yhtymae Oy, Class A............. 1,480
180,000 Hartwall Oy, Class A................. 2,547
---------
4,027
---------
FRANCE (9.3%)
29,400 Dauphin O.T.A........................ 1,763
5,400 De Dietrich et Compagnie............. 2,893
4,980 Galeries Layfayette.................. 2,137
+39,000 Legris Industries S.A................ 2,400
24,500 Precision Mecaniques Labinal S.A..... 3,121
61,700 Sediver S.A.......................... 2,543
---------
14,857
---------
GERMANY (6.5%)
11,345 Duerr Beteiligungs AG................ 4,285
10,688 Sinn AG.............................. 2,291
+15,880 Varta AG............................. 2,973
2,210 Vossloh AG........................... 799
---------
10,348
---------
HONG KONG (1.0%)
5,200,000 Pico Far East Holdings Ltd........... 564
5,000,000 Tungtex Holdings Co., Ltd............ 582
1,218,000 Vitasoy International Holdings
Ltd................................ 421
---------
1,567
---------
IRELAND (3.2%)
1,042,003 Anglo Irish Bank Corp. plc (Irish
Pound Shares)...................... 886
275,110 Arnotts plc.......................... 957
990,000 Avonmore Foods plc, Class A.......... 1,882
687,000 Green Property plc................... 1,413
---------
5,138
---------
ITALY (1.7%)
34,200 Pininfarina S.p.A.................... 367
30,000 Safilo S.p.A......................... 187
444,000 Unicem Di Risp (NCS)................. 1,507
30,000 Vincenzo Zucchi S.p.A................ 161
212,500 Vincenzo Zucchi S.p.A. (NCS)......... $ 577
---------
2,799
---------
JAPAN (11.5%)
15,000 Daikin Manufacturing Ltd............. 316
231,000 Foster Electric Co., Ltd............. 1,749
707,000 Japan Oil Transportation............. 4,848
213,000 Japan Vilene Co., Ltd................ 1,495
99,000 Kansei Corp.......................... 937
87,000 Nifco, Inc........................... 1,328
179,000 Toc Co............................... 3,594
442,000 Tokai Senko K.K...................... 2,751
170,000 Toyoda Gosei Co...................... 1,417
---------
18,435
---------
NETHERLANDS (9.7%)
15,700 Ahrend Groep N.V..................... 1,645
11,790 Holdingsmij de Telegraaf N.V......... 1,359
23,000 Hollandsche Beton Groep N.V.......... 3,553
28,885 Industriemij Welna N.V............... 783
36,200 Konin Nijverdal-Ten Carte N.V........ 1,649
124,600 Koninklijke Van Ommeren N.V.......... 3,275
8,450 Polynorm N.V......................... 830
44,400 Randstad Holdings N.V................ 2,403
---------
15,497
---------
NEW ZEALAND (2.5%)
645,592 Fisher & Paykel Industries Ltd....... 1,881
359,600 Wilson & Horton Ltd.................. 2,060
---------
3,941
---------
NORWAY (2.0%)
9,100 Adelsten, Class B.................... 1,548
228,020 Oceanor.............................. 641
14,350 Simrad A/S Nokio, Class A............ 159
90,000 Simrad A/S Nokio, Class B............ 906
---------
3,254
---------
SPAIN (4.1%)
+65,500 Asturiana del Zinc S.A............... 712
61,693 Bodegas y Bebidas S.A................ 1,687
73,300 Gas y Electricidad S.A............... 3,108
25,545 Prosegur Comp Securidad S.A.......... 485
40,285 Viscofan Envolturas Celulosicas
S.A................................ 612
---------
6,604
---------
SWITZERLAND (14.1%)
3,385 Bobst AG (Bearer).................... 3,906
7,060 Elco Looser Holding AG
(Registered)....................... 2,698
885 Grands Magasins Jelmoli (Bearer)..... 494
3,800 Hero AG.............................. 1,844
995 Kuoni Riesebuero AG (Participating
Certificates)...................... 1,285
5,424 Magazine Globus (Participating
Certificates)...................... 3,245
5,850 Porst Holding AG (Bearer)............ 975
590 Schweizerische Industrie-Gesellschaft
Holdings (Bearer).................. 1,118
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
68
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
SWITZERLAND (CONT.)
4,140 Schweizerische Industrie-Gesellschaft
Holdings (Registered).............. $ 3,797
+4,775 Zellweger Uster AG (Bearer).......... 3,284
---------
22,646
---------
UNITED KINGDOM (16.0%)
3,500,000 Anglo Irish Bank Corp. plc (British
Pound Shares)...................... 2,961
392,000 Asprey plc........................... 854
+1,449,216 Blagden Industries plc............... 2,338
212,000 Bluebird Toys plc.................... 760
447,000 Burtonwood Brewery plc............... 1,232
3,790,000 Casket plc........................... 1,544
214,300 Church & Co. plc..................... 1,611
162,120 Davis Service Group plc.............. 610
+3,045,850 Donelon Tyson plc.................... 573
952,000 GEI International plc................ 1,148
212,000 Hadleigh Industries Group plc........ 442
390,000 Hornby Group plc..................... 819
877,294 John Mowlem & Co. plc................ 1,388
206,335 Mallett plc.......................... 272
854,805 Matthew (Bernard) plc................ 1,527
98,000 Moss Bros. Group plc................. 520
32,000 Nurdin & Peacock plc................. 82
117,905 Partridge Fine Arts plc.............. 144
+2,659,393 Pentos plc........................... 604
345,526 Perry Group plc...................... 871
3,120,000 Shandwick plc........................ 1,979
691,000 Sketchley plc........................ 1,007
1,370,000 The 600 Group plc.................... 1,717
418,735 Waterman Partnership Holdings plc.... 354
+1,497,300 Wembley plc.......................... 117
804,695 YRM plc.............................. 214
---------
25,688
---------
TOTAL COMMON STOCKS (Cost $155,094).............. 153,722
---------
PREFERRED STOCKS (1.7%)
GERMANY (1.7%)
1,385 Jil Sander AG........................ 791
7,745 Shaerf AG............................ 1,925
---------
TOTAL PREFERRED STOCKS (Cost $2,710)............. 2,716
---------
NO. OF
RIGHTS
- ----------
RIGHTS (0.0%)
SPAIN (0.0%)
**61,693 Bodegas y Bebidas S.A., expiring
1/24/95 (Cost $0).................. 7
---------
NO. OF
WARRANTS
- ----------
WARRANTS (0.0%)
HONG KONG (0.0%)
452,000 Pico Far East Holdings Ltd, expiring
4/30/96 (Cost $0).................. 6
---------
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
CONVERTIBLE DEBENTURES (0.2%)
ITALY (0.2%)
IL 518,000 Mediobanca S.p.A. 5.50%, 1/01/00
(Cost $328)........................ $ 275
---------
TOTAL FOREIGN SECURITIES (97.9%) (Cost
$158,132)........................................ 156,726
---------
SHORT-TERM INVESTMENT (2.3%)
REPURCHASE AGREEMENT (2.3%)
$ 3,725 U.S. Trust 5.50%, dated 12/30/94, due
1/03/95, to be repurchased at
$3,727, collateralized by $3,875
United States Treasury Notes,
3.875%, due 4/30/95, valued at
$3,845 (Cost $3,725)............... 3,725
---------
FOREIGN CURRENCY (0.2%)
L 140 British Pound........................ 220
Y 3 Japanese Yen......................... --
CHF 85 Swiss Franc.......................... 65
---------
TOTAL FOREIGN CURRENCY (Cost $285)............... 285
---------
TOTAL INVESTMENTS (100.4%) (Cost $162,142)....... 160,736
---------
OTHER ASSETS (0.2%)
Dividends Receivable................... $ 156
Foreign Withholding Tax Reclaim
Receivable............................ 109
Interest Receivable.................... 9
Receivable for Portfolio Shares Sold... 3
Other.................................. 13 290
------
LIABILITIES (-0.6%)
Investment Advisory Fees Payable....... (302)
Payable for Investments Purchased..... (285)
Net Unrealized Loss on Forward Foreign
Currency Contracts................... (139)
Bank Overdraft........................ (86)
Custodian Fees Payable................ (21)
Administrative Fees Payable........... (20)
Directors' Fees & Expenses............ (1)
Other Liabilities..................... (71) (925)
------- ---------
NET ASSETS (100%)....................... $ 160,101
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 10,566,294 outstanding $.001 par
value shares (authorized 500,000,000 shares)...... $15.15
---------
---------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
69
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open at
December 31, 1994, the Portfolio is obligated to deliver or
is to receive foreign currency in exchange for US dollars or
foreign currency as indicated below:
IN NET
CURRENCY TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------ --------- ----------- --------- --------- -------------
Y 400,000 $ 4,047 3/01/95 C$ 5,262 $ 3,750 $ (297)
C$ 5,590 3,983 3/01/95 Y400,000 4,047 64
Y 725,000 7,568 9/27/95 $ 7,662 7,662 94
--------- --------- -----
$ 15,598 $ 15,459 $ (139)
--------- --------- -----
--------- --------- -----
- ------------------------------------------------------------
+ -- Non-income producing securities
** -- Security is valued at fair value -- See Note A-1
NCS -- Non Convertible Shares
C$ -- Canadian Dollar
IL -- Italian Lira
Y -- Japanese Yen
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ----------------------------------------------------------------------
Capital Equipment........................... $ 41,203 25.7%
Consumer Goods.............................. 32,010 20.0
Energy...................................... 3,819 2.4
Finance..................................... 13,368 8.4
Materials................................... 20,684 12.9
Multi-Industry.............................. 3,094 1.9
Services.................................... 42,548 26.6
--------- -----
$ 156,726 97.9%
--------- -----
--------- -----
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
70
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- --------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------
VALUE
SHARES (000)
- --------------------------------------------------------------
COMMON STOCKS (97.6%)
CAPITAL EQUIPMENT (19.9%)
80,000 Amada Co., Ltd......................... $ 1,004
40,000 Daifuku................................ 675
91,000 Daikin Industries Ltd.................. 808
31,000 Fuji Machine Manufacturing Co.......... 1,021
100,000 Kyudenko Co., Ltd...................... 1,255
100,000 Matsui Construction.................... 859
120,000 Mitsubishi Heavy Industries Ltd........ 916
56,000 Nifco, Inc............................. 855
80,000 Ricoh Co., Ltd......................... 795
100,000 Taisei Corp., Ltd...................... 620
111,000 Teijin Seiki Co., Ltd.................. 641
100,000 Tsubakimoto Chain...................... 542
---------
9,991
---------
CONSUMER GOODS (16.5%)
40,000 Aoyama Trading Co...................... 912
35,000 Fuji Photo Film Ltd.................... 812
15,000 Ito Yokado Co., Ltd.................... 803
100,000 Japan Vilene Co., Ltd.................. 702
20,000 Nintendo Corp. Ltd..................... 1,082
150,000 Nissan Motor Co........................ 1,239
25,000 Sankyo Co., Ltd........................ 622
130,000 Suzuki Motor Co., Ltd.................. 1,527
30,000 Yamanouchi Pharmaceutical Co........... 617
---------
8,316
---------
ELECTRICAL & ELECTRONICS (24.7%)
44,000 CMK.................................... 826
170,000 Hitachi Ltd............................ 1,688
12,000 Kyocera Corp........................... 890
100,000 Matsushita Electric Industries Ltd..... 1,647
80,000 Mitsumi Electric Co., Ltd.............. 1,124
100,000 NEC Corp............................... 1,145
34,000 Nitto Denko Corp....................... 539
16,000 Sony Corp.............................. 908
120,000 Stanley Electric Co.................... 906
27,000 TDK Corp............................... 1,309
200,000 Toshiba Corp........................... 1,452
---------
12,434
---------
FINANCE (13.5%)
85,000 Daiwa Securities Co., Ltd.............. 1,229
48,000 Keihanshin Real Estate................. 429
80,000 Mitsubishi Estate Co., Ltd............. 859
85,000 Nichido Fire & Marine Insurance........ 736
60,000 Nomura Securities Co................... 1,247
64,000 Sumitomo Corporation's Leasing......... 598
95,000 Sumitomo Marine & Fire Insurance....... 820
150,000 Sumitomo Realty & Development.......... 889
---------
6,807
---------
MATERIALS (9.5%)
50,000 Asahi Tec Corp......................... 470
120,000 Kaneka Corp............................ 898
100,000 Kansei Corp............................ 947
100,000 Okura Industrial Co., Ltd.............. 813
98,000 Sekisui Chemical Co.................... 974
20,000 Toyo Seikan Kaisha..................... 667
---------
4,769
---------
MULTI-INDUSTRY (1.7%)
14,000 FamilyMart............................. 864
---------
SERVICES (11.8%)
50,000 Dai Nippon Printing Co., Ltd........... $ 853
60,000 Inabata & Co........................... 491
85,000 Nippon Konpo Unyu Soko................. 777
47,000 Nishio Rent All Co..................... 1,175
26,000 Sangetsu Co., Ltd...................... 783
16,000 Secom Co., Ltd......................... 996
130,000 Tokyu Corp............................. 861
---------
5,936
---------
TOTAL COMMON STOCKS (Cost $49,593)................. 49,117
---------
FACE
AMOUNT
(000)
- ------------
SHORT-TERM INVESTMENTS (2.2%)
REPURCHASE AGREEMENT (1.6%)
$ 829 U.S. Trust, 5.50%, dated 12/30/94, due
1/03/95, to be repurchased at $830,
collateralized by $865 United States
Treasury Notes, 3.875%, due,
3/31/95, valued at $861............. 829
---------
TIME DEPOSIT (0.6%)
Y 28,842 Sanwa Bank 2.25%, 1/04/95............. 290
---------
TOTAL SHORT-TERM INVESTMENTS (Cost $1,119).......... 1,119
---------
FOREIGN CURRENCY (0.2%)
Y 11,560 Japanese Yen (Cost $116).............. 116
---------
TOTAL INVESTMENTS (100%) (Cost $50,828)............. 50,352
---------
OTHER ASSETS (0.6%)
Unrealized Gain on Forward Foreign
Currency Contract...................... $ 261
Dividends Receivable.................... 14
Other................................... 5 280
---------
LIABILITIES (-0.6%)
Payable for Portfolio Shares Redeemed... (163)
Investment Advisory Fees Payable........ (76)
Administrative Fees Payable............. (7)
Custodian Fees Payable.................. (6)
Directors' Fees & Expenses Payable...... (1)
Other Liabilities....................... (47) (300)
--------- ---------
NET ASSETS (100%)....................................
$ 50,332
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 5,120,660 outstanding $.001 par value
shares (authorized 500,000,000 shares)............. $9.83
-----
-----
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open at
December 31, 1994, the portfolio is obligated to deliver
foreign currency in exchange for US dollars as indicated
below:
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN
(000) (000) DATE (000) (000) (000)
- ------------- --------- ----------- ------------ --------- ---------------
Y 1,795,000 $ 18,363 5/22/95 $ 18,624 $ 18,624 $ 261
--------- ------------ --------- -----
--------- ------------ --------- -----
- ------------------------------------------------------------
Y -- Japanese Yen
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
71
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
- ------------------------------------------------------------------------------
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
COMMON STOCKS (95.6%)
CAPITAL GOODS/CONSTRUCTION (0.9%)
ELECTRICAL EQUIPMENT (0.3%)
10,000 Molex, Inc., Class A.................. $ 310
---------
ENVIRONMENTAL CONTROLS (0.6%)
+48,000 Western Waste Industries.............. 720
---------
TOTAL CAPITAL GOODS/CONSTRUCTION............... 1,030
---------
CONSUMER CYCLICAL (22.9%)
AUTOMOTIVE (1.6%)
60,000 Pep Boys-Manny, Moe & Jack............ 1,860
---------
BROADCAST-RADIO & TELEVISION (1.3%)
44,700 Lee Enterprises, Inc.................. 1,542
---------
FOOD SERVICE & LODGING (8.1%)
+100,000 Bertucci's, Inc....................... 1,100
+59,700 Brinker International, Inc............ 1,082
+80,000 Cheesecake Factory, Inc............... 1,220
90,000 Cracker Barrel Old Country Store, Inc. 1,642
48,700 Hospitality Franchise Systems, Inc.... 1,291
+75,000 ShoLodge, Inc......................... 1,594
+80,000 Sonic Corp............................ 1,620
---------
9,549
---------
GAMING & LODGING (0.0%)
4,740 National Gaming Corp.................. 57
---------
PUBLISHING (1.3%)
+29,700 Scholastic Corp....................... 1,507
---------
RETAIL - GENERAL (10.6%)
+70,000 Bed, Bath & Beyond, Inc............... 2,100
80,000 Central Tractor Farm & Country, Inc... 1,160
+70,000 Dress Barn, Inc....................... 744
+70,000 General Nutrition Cos., Inc........... 2,030
65,000 Heilig Meyers Co...................... 1,641
+40,000 Kohl's Corp........................... 1,590
+80,000 Lechters, Inc......................... 1,340
+80,000 Sunglass Hut International, Inc....... 1,840
---------
12,445
---------
TOTAL CONSUMER CYCLICAL........................ 26,960
---------
CONSUMER STAPLES (26.4%)
DRUGS (6.2%)
+60,000 Alza Corp. (Delaware), Class A........ 1,080
50,000 Forest Laboratories, Inc.............. 2,331
+5,400 Genzyme Corp. - Tissue Repair......... 20
+40,000 Genzyme Corp. - General Division...... 1,240
+80,000 Immucor, Inc.......................... 400
+50,000 Scherer (R.P.) Corp................... 2,269
---------
7,340
---------
HEALTH CARE SUPPLIES & SERVICES (20.2%)
50,000 Arrow International, Inc.............. 1,687
41,600 Ballard Medical Products.............. 442
+100,000 Biomet, Inc........................... 1,375
+50,000 Coastal Healthcare Group, Inc......... $ 1,369
+80,000 Haemonetics Corp...................... 1,380
+47,400 Health Management, Inc................ 847
+65,000 Health Management Systems, Inc........ 2,112
+60,000 Healthsource, Inc..................... 2,453
+55,000 HEALTHSOUTH Rehabilitation Corp....... 2,035
+50,000 IDEXX Laboratories, Inc............... 1,800
+75,000 Mariner Health Group, Inc............. 1,622
+50,000 Physician Corp. of America............ 1,025
+60,000 Quantum Health Resources, Inc......... 1,710
+65,000 Vencor, Inc........................... 1,812
+75,000 Vivra, Inc............................ 2,100
---------
23,769
---------
TOTAL CONSUMER STAPLES......................... 31,109
---------
FINANCE (7.4%)
BANKING (1.1%)
45,000 State Street Boston Corp.............. 1,282
---------
FINANCIAL SERVICES (3.8%)
100,000 CashAmerica Investments, Inc.......... 988
35,000 First Financial Management Corp....... 2,157
75,000 SEI Corp.............................. 1,256
---------
4,401
---------
INSURANCE (2.5%)
50,000 Mutual Risk Management Ltd............ 1,313
50,000 NAC Re Corp........................... 1,675
---------
2,988
---------
TOTAL FINANCE.................................. 8,671
---------
MATERIALS (3.7%)
MISCELLANEOUS MATERIALS & COMMODITIES (3.7%)
+85,000 Viking Office Products, Inc........... 2,593
90,000 X-Rite, Inc........................... 1,778
---------
TOTAL MATERIALS................................ 4,371
---------
SERVICES (9.4%)
PROFESSIONAL SERVICES (9.4%)
60,000 Cintas Corp........................... 2,100
+90,000 CUC International, Inc................ 3,015
110,000 G & K Services, Inc., Class A......... 1,829
+50,000 Medaphis Corp......................... 2,300
50,000 Premier Industrial Corp............... 1,181
+46,800 Vallen Corp........................... 643
---------
TOTAL SERVICES................................. 11,068
---------
TECHNOLOGY (24.9%)
ELECTRONICS (11.3%)
+39,200 Electroglas, Inc...................... 1,308
46,200 Fusion Systems Corp................... 1,213
+24,600 Level One Communications, Inc......... 369
60,000 Linear Technology, Inc................ 2,955
+62,000 Maxim Integrated Products, Inc........ 2,170
40,000 Sensormatic Electronics............... 1,440
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
72
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO (CONT.)
- ------------------------------------------------------------
VALUE
SHARES (000)
- ------------------------------------------------------------
ELECTRONICS (CONT.)
+65,000 Xilinx, Inc........................... $ 3,835
---------
13,290
---------
OFFICE EQUIPMENT (13.0%)
+70,000 BISYS Group, Inc...................... 1,549
+55,000 Compuware Corp........................ 1,966
+60,000 Concord EFS Corp...................... 1,485
+60,000 EMC Corp.............................. 1,298
+90,000 Informix Corp......................... 2,891
+50,000 Progress Software Corp................ 1,888
+50,000 SPS Transaction Services, Inc......... 1,312
+55,000 SunGard Data Systems, Inc............. 2,090
+20,000 Wall Data, Inc........................ 795
---------
15,274
---------
TELECOMMUNICATIONS (0.6%)
+40,000 Mobile Telecommunications Technologies
Corp................................ 780
---------
TOTAL TECHNOLOGY............................... 29,344
---------
TOTAL COMMON STOCKS (Cost $87,557)........... 112,553
---------
FACE
AMOUNT
(000)
- ---------
SHORT-TERM INVESTMENT (3.9%)
REPURCHASE AGREEMENT (3.9%)
$4,566 U.S. Trust, 5.50%, dated 12/30/94, due
1/03/95, to be repurchased at
$4,569, collateralized by $4,735
United States Treasury Notes 3.875%,
due 3/31/95-4/30/95, valued at
$4,712 (Cost $4,566)................ 4,566
---------
TOTAL INVESTMENTS (99.5%) (Cost $92,123)......... 117,119
---------
VALUE
(000)
- -------------------------------------------------------------
OTHER ASSETS (1.6%)
Cash................................... $ 1
Receivable for Portfolio Shares Sold... 1,784
Dividends Receivable................... 32
Interest Receivable.................... 1
Other.................................. 10 $ 1,828
---------
LIABILITIES (-1.1%)
Payable for Portfolio Shares
Redeemed.............................. (914)
Investment Advisory Fees Payable....... (289)
Payable for Investments Purchased...... (26)
Administrative Fees Payable............ (15)
Custodian Fees Payable................. (6)
Directors' Fees & Expenses............. (1)
Other Liabilities...................... (27) (1,278)
--------- ---------
NET ASSETS (100%)................................... $ 117,669
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 7,301,095 outstanding $.001 par
value shares (authorized 500,000,000 shares)...... $16.12
---------
---------
- ------------------------------------------------------------
+ -- Non-income producing securities
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
73
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- -------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- -------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO
- -------------------------------------------------------------
VALUE
SHARES (000)
- -------------------------------------------------------------
COMMON STOCKS (88.2%)
CAPITAL GOODS/CONSTRUCTION (13.5%)
AEROSPACE & DEFENSE (10.4%)
17,700 General Dynamics Corp................. $ 770
28,600 General Motors Corp., Class H......... 998
22,100 Loral Corp............................ 837
21,900 McDonnell Douglas Corp................ 3,110
37,600 Rockwell International Corp........... 1,344
49,500 United Technologies Corp.............. 3,112
---------
10,171
---------
BUILDING & CONSTRUCTION (0.7%)
+34,700 USG Corp.............................. 677
---------
ELECTRICAL EQUIPMENT (1.6%)
30,000 General Electric Co................... 1,530
---------
MACHINERY (0.8%)
13,500 Caterpillar, Inc...................... 744
---------
TOTAL CAPITAL GOODS/CONSTRUCTION.................. 13,122
---------
CONSUMER-CYCLICAL (20.8%)
AUTOMOTIVE (4.5%)
42,800 Chrysler Corp......................... 2,097
39,500 Ford Motor Co......................... 1,106
34,200 Goodyear Tire & Rubber Co............. 1,150
---------
4,353
---------
BROADCAST-RADIO & TELEVISION (3.6%)
6,400 Capital Cities ABC, Inc............... 546
6,940 CBS, Inc.............................. 384
70,500 New World Communications.............. 828
31,700 Turner Broadcasting System, Inc.,
Class B............................. 519
+3,104 Viacom, Inc., Class A................. 129
+25,918 Viacom, Inc., Class B................. 1,053
---------
3,459
---------
FOOD SERVICE & LODGING (3.4%)
+41,150 Boston Chicken, Inc................... 715
65,100 Cracker Barrel Old Country Store,
Inc................................. 1,204
54,000 Hospitality Franchise Systems, Inc.... 1,431
---------
3,350
---------
GAMING & LODGING (1.4%)
+29,250 Mirage Resorts, Inc................... 600
4,950 National Gaming Corp.................. 59
+22,600 Promus Cos., Inc...................... 701
---------
1,360
---------
HOUSEHOLD FURNISHINGS & APPLIANCES (0.8%)
17,700 Duracell International, Inc........... 768
---------
LEISURE RELATED (1.2%)
24,600 Eastman Kodak Co...................... 1,175
---------
PUBLISHING (1.5%)
12,100 Gannett Co., Inc...................... 644
22,600 Time Warner, Inc...................... 794
---------
1,438
---------
RETAIL-GENERAL (4.4%)
+50,800 Autozone, Inc......................... $ 1,232
+43,100 General Nutrition Cos., Inc........... 1,250
23,400 Home Depot, Inc....................... 1,076
20,800 Lowe's Cos., Inc...................... 723
---------
4,281
---------
TOTAL CONSUMER-CYCLICAL........................... 20,184
---------
CONSUMER-STAPLES (16.9%)
BEVERAGES & TOBACCO (8.1%)
45,500 Coca Cola Co.......................... 2,343
34,400 PepsiCo, Inc.......................... 1,247
46,400 Philip Morris Cos., Inc............... 2,668
+115,400 RJR Nabisco Holdings Corp............. 635
36,450 UST, Inc.............................. 1,011
---------
7,904
---------
DRUGS (3.5%)
21,700 Merck & Co., Inc...................... 828
17,750 Pfizer, Inc........................... 1,371
15,800 Schering-Plough Corp.................. 1,169
---------
3,368
---------
FOOD (1.9%)
10,500 Kellogg Co............................ 610
32,500 Ralcorp Holdings, Inc................. 723
9,900 Wrigley (Wm.) Jr. Co.................. 489
---------
1,822
---------
HEALTH CARE SUPPLIES & SERVICES (2.8%)
29,400 Columbia/HCA Healthcare Corp.......... 1,073
+6,800 Foundation Health Corp................ 211
+33,900 Humana, Inc........................... 767
15,900 United Healthcare Corp................ 717
---------
2,768
---------
PERSONAL CARE PRODUCTS (0.6%)
8,100 Gillette Co........................... 606
---------
TOTAL CONSUMER-STAPLES............................ 16,468
---------
DIVERSIFIED (2.0%)
57,000 AlliedSignal, Inc..................... 1,938
---------
ENERGY (4.1%)
COAL, GAS, & OIL (4.1%)
10,400 Exxon Corp............................ 632
13,900 Mobil Corp............................ 1,171
12,400 Royal Dutch Petroleum Co.............. 1,333
9,900 Tenneco, Inc.......................... 421
18,900 Williams Cos., Inc.................... 475
---------
TOTAL ENERGY...................................... 4,032
---------
FINANCE (18.1%)
BANKING (7.4%)
18,800 Citicorp.............................. 778
9,500 First Interstate Bancorp.............. 642
26,300 Morgan (J.P.) & Co., Inc.............. 1,473
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
74
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- -------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- -------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO (CONT.)
- -------------------------------------------------------------
VALUE
SHARES (000)
- -------------------------------------------------------------
BANKING (CONT.)
29,800 Wells Fargo & Co...................... $ 4,321
---------
7,214
---------
FINANCIAL SERVICES (10.7%)
18,300 Dean Witter Discover & Co............. 620
68,400 Federal Home Loan Mortgage Corp....... 3,454
42,100 Federal National Mortgage
Association......................... 3,068
15,600 Franklin Resources, Inc............... 556
10,350 Loews Corp............................ 899
8,800 Salomon, Inc.......................... 330
25,900 Student Loan Marketing Association.... 842
19,400 Travelers, Inc........................ 631
---------
10,400
---------
TOTAL FINANCE..................................... 17,614
---------
MATERIALS (2.4%)
BUILDING MATERIALS & COMPONENTS (0.6%)
+13,800 Applied Material, Inc................. 583
---------
CHEMICALS (1.8%)
11,600 Hercules, Inc......................... 1,338
5,900 Monsanto Co........................... 416
---------
1,754
---------
TOTAL MATERIALS................................... 2,337
---------
SERVICES (1.0%)
PROFESSIONAL SERVICES (1.0%)
+27,800 CUC International, Inc................ 931
---------
TECHNOLOGY (9.4%)
COMPUTERS (2.1%)
+13,350 Cabletron Systems, Inc................ 621
+13,800 Compaq Computer Corp.................. 545
11,200 International Business Machines Corp.. 823
---------
1,989
---------
ELECTRONICS (4.6%)
15,850 Intel Corp............................ 1,012
8,800 Linear Technology, Inc................ 436
10,700 Motorola, Inc......................... 619
67,700 Watkins-Johnson Co.................... 2,014
+6,400 Xilinx, Inc........................... 379
---------
4,460
---------
SOFTWARE SERVICES (0.4%)
+9,600 Oracle System Corp.................... 424
---------
TELECOMMUNICATIONS (2.3%)
+15,900 Airtouch Communications............... 463
27,200 American Telephone & Telegraph Corp... 1,367
11,100 Telefonos de Mexico S.A. ADR, Class L. 455
---------
2,285
---------
TOTAL TECHNOLOGY................................ $ 9,158
---------
TOTAL COMMON STOCKS (Cost $84,907)................ 85,784
---------
NO. OF
RIGHTS
- ----------
RIGHTS (0.1%)
BROADCAST-RADIO & TELEVISION (0.1%)
+38,800 Viacom, Inc., expiring 7/07/95 (Cost
$168)............................... 44
---------
FACE
AMOUNT
(000)
- ----------
SHORT-TERM INVESTMENTS
US GOVERNMENT AND AGENCY OBLIGATIONS (12.4%)
$ 4,500 Federal Farm Credit Bank
Discount Note 5.95%, 1/03/95........... 4,497
7,600 Federal Home Loan Bank
Discount Note 5.75%, 1/03/95........... 7,600
---------
TOTAL US GOVERNMENT AND AGENCY OBLIGATIONS (Cost
$12,096)......................................... 12,097
---------
TOTAL INVESTMENTS (100.7%) (Cost $97,171)............ 97,925
---------
OTHER ASSETS (2.1%)
Cash.................................... $ 45
Receivable for Investments Sold......... 1,080
Receivable for Portfolio Shares Sold.... 705
Dividends Receivable.................... 168
Other................................... 8 2,006
---------
LIABILITIES (-2.8%)
Payable for Investments Purchased....... (2,512)
Investment Advisory Fees Payable........ (108)
Administrative Fees Payable............. (13)
Custodian Fees Payable.................. (9)
Payable for Portfolio Shares Redeemed... (1)
Directors' Fees & Expenses.............. (1)
Other Liabilities....................... (28) (2,672)
--------- ---------
NET ASSETS (100%).................................... $ 97,259
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 8,089,923 outstanding $.001 par value
shares (authorized 500,000,000 shares)............. $12.02
------
------
- ------------------------------------------------------------
+ -- Non-income producing securities
ADR -- American Depositary Receipt
Interest rates disclosed for US Government and Agency Obligations represent
effective yields.
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
75
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- -------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- -------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
- -------------------------------------------------------------
VALUE
SHARES (000)
- -------------------------------------------------------------
COMMON STOCKS (96.7%)
AEROSPACE (3.4%)
32,900 AAR Corp.............................. $ 440
18,000 Thiokol Corp.......................... 502
85,300 United Industrial Corp................ 416
---------
1,358
---------
BANKING (9.0%)
13,300 BB&T Financial Corp................... 372
15,000 Deposit Guaranty Corp................. 452
16,950 First Security Corp. (Delaware)....... 386
13,700 Fourth Financial Corp................. 425
11,400 Mercantile Bancorp.................... 356
16,000 Onbancorp, Inc........................ 372
16,000 Standard Federal Bank................. 382
22,110 Summit Bancorp., Inc.................. 428
15,200 Union Bank of San Francisco........... 407
---------
3,580
---------
BUILDING (3.3%)
14,300 Ameron, Inc. (Delaware)............... 416
29,800 Gilbert Associates, Inc., Class A..... 425
24,500 Pratt & Lambert, Inc.................. 459
---------
1,300
---------
CAPITAL GOODS (3.2%)
20,803 Binks Manufacturing Co................ 385
19,800 Cascade Corp.......................... 470
19,500 Starret (L.S.) Co., Class A........... 436
---------
1,291
---------
CHEMICALS (4.4%)
29,920 Aceto Corp............................ 419
20,600 Dexter Corp........................... 448
24,100 Learonal, Inc......................... 443
23,800 Quaker Chemical Corp.................. 446
---------
1,756
---------
COMMUNICATIONS (1.1%)
23,600 Comsat Corp........................... 440
---------
COMPUTERS (0.8%)
24,400 Gerber Scientific, Inc................ 317
---------
CONSUMER-DURABLES (3.2%)
18,000 Arvin Industries, Inc................. 419
23,298 Knape & Vogt Manufacturing Co......... 454
31,300 Oneida Ltd............................ 407
---------
1,280
---------
CONSUMER-RETAIL (5.8%)
25,300 CPI Corp.............................. 452
58,500 Deb Shops, Inc........................ 175
18,800 Edison Brothers Stores, Inc........... 348
21,700 Guilford Mills, Inc................... 483
12,800 Springs Industries, Inc., Class A..... 474
34,500 Venture Stores, Inc................... 401
---------
2,333
---------
CONSUMER-STAPLES (5.8%)
19,300 American Maize Products Co., Class A.. $ 490
13,802 Block Drug Co., Inc., Class A......... 525
25,700 Coors (Adolph), Inc., Class B......... 430
25,900 International Multifoods Corp......... 476
25,300 Nash Finch Co......................... 417
---------
2,338
---------
ENERGY (2.2%)
17,000 Diamond Shamrock, Inc................. 440
17,300 Ultramar Corp......................... 441
---------
881
---------
FINANCIAL-DIVERSIFIED (2.2%)
10,100 GATX Corp............................. 445
13,300 GFC Financial Corp.................... 422
---------
867
---------
HEALTH CARE (6.6%)
15,500 Beckman Instruments, Inc.............. 432
22,600 Bergen Brunswig Corp., Class A........ 472
31,500 Bindley Western Industries............ 488
18,700 Diagnostic Products Corp.............. 491
53,200 Hooper Holmes, Inc.................... 339
63,700 Kinetic Concepts, Inc................. 438
---------
2,660
---------
INDUSTRIAL (6.6%)
15,200 American Filtrona Corp................ 410
11,400 Barnes Group, Inc..................... 433
33,700 GenCorp, Inc.......................... 400
44,500 Kaman Corp., Class A.................. 490
32,900 Zero Corp. (Delaware)................. 461
24,300 Zurn Industries, Inc.................. 437
---------
2,631
---------
INSURANCE (5.1%)
14,200 Argonaut Group, Inc................... 401
25,000 Enhance Financial Services Group, Inc. 428
15,500 Provident Life & Accident Co. of
America, Class B.................... 337
16,900 Selective Insurance Group, Inc........ 427
13,300 USLife Corp........................... 464
---------
2,057
---------
METALS (2.1%)
7,700 Carpenter Technology Corp............. 431
11,400 Cleveland-Cliffs Iron Co.............. 422
---------
853
---------
PAPER & PACKAGING (3.5%)
15,500 Ball Corp............................. 488
11,400 Potlatch Corp......................... 425
27,300 Sealright Co., Inc.................... 498
---------
1,411
---------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
76
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
SERVICES (10.8%)
20,500 ABM Industries, Inc................... $ 477
16,600 Angelica Corp......................... 459
2,100 Bowne & Co............................ 36
25,700 Cross (A.T.) Co., Class A............. 350
27,800 Gibson Greetings, Inc................. 410
40,000 Handleman Co.......................... 455
16,200 National Service Industries, Inc...... 415
23,900 New England Business Services, Inc.... 448
51,400 Piccadilly Cafeterias, Inc............ 411
29,500 Russ Berrie & Co., Inc................ 406
16,100 Wallace Computer Services, Inc........ 467
---------
4,334
---------
TECHNOLOGY (6.9%)
88,200 American Software, Inc................ 265
11,500 Avnet, Inc............................ 426
5,600 CTS Corp.............................. 155
21,800 Cubic Corp............................ 387
15,900 Joslyn Corp........................... 403
17,100 Kuhlman Corp.......................... 207
18,000 MTS Systems Corp...................... 396
33,500 National Computer Systems, Inc........ 519
---------
2,758
---------
TRANSPORTATION (2.4%)
20,800 Overseas Shipholding Group, Inc....... 478
19,800 Yellow Corp........................... 473
---------
951
---------
UTILITIES (8.3%)
17,700 Central Hudson Gas & Electric......... 469
35,000 Central Maine Power Co................ 481
10,100 Commonwealth Energy Systems Cos....... 368
15,000 Eastern Enterprises................... 394
22,900 Oneok, Inc............................ 412
13,700 Orange & Rockland Utilities, Inc...... 445
10,900 SJW Corp.............................. 352
28,500 Washington Water Power Co............. 388
---------
3,309
---------
TOTAL COMMON STOCKS (Cost $39,631)................ 38,705
---------
SHORT-TERM INVESTMENT (3.1%)
REPURCHASE AGREEMENT (3.1%)
$1,239 U.S. Trust, 5.50%, dated 12/30/94, due
1/03/95, to be repurchased at $1,240,
collateralized by $1,295 United States
Treasury Notes, 3.875%, due 4/30/95,
valued at $1,285 (Cost $1,239)....... $ 1,239
---------
TOTAL INVESTMENTS (99.8%) (Cost $40,870).......... 39,944
---------
OTHER ASSETS (1.6%)
Receivable for Investments Sold........ $ 521
Dividends Receivable................... 111
Other.................................. 4 636
---------
LIABILITIES (-1.4%)
Payable for Investments Purchased...... (456)
Investment Advisory Fees Payable....... (50)
Custodian Fees Payable................. (6)
Administrative Fees Payable............ (6)
Directors' Fees & Expenses Payable..... (1)
Other Liabilities...................... (28) (547)
--------- ---------
NET ASSETS (100%).................................. $ 40,033
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 3,706,877 outstanding $.001 par
value shares (authorized 500,000,000 shares)..... $10.80
---------
---------
- -------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
77
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- -------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- -------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
- -------------------------------------------------------------
VALUE
SHARES (000)
- -------------------------------------------------------------
COMMON STOCKS (96.8%)
AEROSPACE (2.3%)
27,100 United Technologies Corp.............. $ 1,704
---------
BANKING (9.7%)
28,650 BankAmerica Corp...................... 1,132
20,200 Bankers Trust (New York) Corp......... 1,118
29,200 Boatmens Bancshares, Inc.............. 792
48,100 Chemical Banking Corp................. 1,726
37,650 Mellon Bank Corp...................... 1,153
21,700 Morgan (J.P.) & Co., Inc.............. 1,215
---------
7,136
---------
CAPITAL GOODS (1.9%)
21,300 Deere & Co............................ 1,411
---------
CHEMICALS (4.0%)
31,775 Eastman Chemical Co................... 1,605
19,100 Monsanto Co........................... 1,346
---------
2,951
---------
COMMUNICATIONS (7.1%)
36,500 NYNEX Corp............................ 1,341
33,100 SBC Communications, Inc............... 1,336
49,800 Sprint Corp........................... 1,376
31,800 U.S. West, Inc........................ 1,133
---------
5,186
---------
CONSUMER-DURABLES (4.7%)
53,900 Ford Motor Co......................... 1,509
46,300 General Motors Corp................... 1,956
---------
3,465
---------
CONSUMER-RETAIL (4.6%)
79,000 Kmart Corp............................ 1,027
26,500 V.F. Corp............................. 1,289
72,000 Woolworth Corp........................ 1,080
---------
3,396
---------
CONSUMER-SERVICE & GROWTH (5.9%)
50,400 Deluxe Corp........................... 1,336
34,800 Eastman Kodak Co...................... 1,662
71,500 Ogden Corp............................ 1,340
---------
4,338
---------
CONSUMER-STAPLES (10.1%)
39,000 American Brands, Inc.................. 1,462
28,200 Anheuser Busch Cos., Inc.............. 1,435
27,200 CPC International, Inc................ 1,448
61,400 Fleming Cos., Inc..................... 1,428
44,600 Heinz (H.J.) Co....................... 1,639
---------
7,412
---------
ENERGY (7.9%)
38,300 Ashland Oil, Inc...................... 1,321
18,350 Mobil Corp............................ 1,546
13,050 Royal Dutch Petroleum Co.............. 1,403
25,550 Texaco, Inc........................... 1,530
---------
5,800
---------
FINANCIAL-DIVERSIFIED (1.8%)
40,650 Student Loan Marketing Association.... $ 1,321
---------
HEALTH CARE (12.4%)
38,500 Bausch & Lomb, Inc.................... 1,304
64,700 Baxter International, Inc............. 1,828
24,200 Becton Dickinson & Co................. 1,162
24,700 Bristol-Myers Squibb Co............... 1,430
45,200 Merck & Co., Inc...................... 1,723
54,800 Upjohn Co............................. 1,685
---------
9,132
---------
INDUSTRIAL (3.8%)
70,400 Hanson plc ADR........................ 1,267
42,700 Rockwell International Corp........... 1,527
---------
2,794
---------
INSURANCE (5.7%)
48,800 American General Corp................. 1,378
38,500 Aon Corp.............................. 1,232
35,300 St. Paul Cos., Inc.................... 1,580
---------
4,190
---------
METALS (1.7%)
19,800 Phelps Dodge Corp..................... 1,225
---------
TECHNOLOGY (3.7%)
40,200 Harris Corp........................... 1,709
13,200 International Business Machines Corp.. 970
---------
2,679
---------
TRANSPORTATION (2.2%)
34,000 Burlington Northern, Inc.............. 1,636
---------
UTILITIES (7.3%)
68,600 General Public Utilities Corp......... 1,801
60,600 Northern Indiana Public Service Co.... 1,803
53,900 Texas Utilities Co.................... 1,725
---------
5,329
---------
TOTAL COMMON STOCKS (Cost $73,400)................ 71,105
---------
NO. OF
WARRANTS
- ----------
WARRANTS (0.0%)
BANKING (0.0%)
23 Chase Manhattan Corp., expiring
6/30/96 (Cost $0)................... --
---------
FACE
AMOUNT
(000)
- ----------
SHORT-TERM INVESTMENT (1.8%)
REPURCHASE AGREEMENT (1.8%)
$1,306 U.S. Trust, 5.50%, dated 12/30/94, due
1/03/95, to be repurchased at
$1,307, collateralized by $1,370
United States Treasury Notes,
3.875%, due 4/30/95, valued at
$1,360 (Cost $1,306)................ 1,306
---------
TOTAL INVESTMENTS (98.6%) (Cost $74,706).......... 72,411
---------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
78
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------
VALUE
(000)
- ------------------------------------------------------------------------------
OTHER ASSETS (1.5%)
Receivable for Portfolio Shares Sold................ $ 796
Dividends Receivable................................ 321
Other............................................... 7 $ 1,124
-------
LIABILITIES (-0.1%)
Investment Advisory Fees Payable.................... (73)
Administrative Fees Payable......................... (10)
Custodian Fees Payable.............................. (5)
Payable for Portfolio Shares Redeemed............... (1)
Directors' Fees & Expenses Payable.................. (1)
Other Liabilities................................... (39) (129)
------- -------
NET ASSETS (100%)............................................... $73,406
-------
-------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 6,382,908 outstanding $.001 par value
shares (authorized 500,000,000 shares)........................ $11.50
------
------
- ------------------------------------------------
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
79
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
- ------------------------------------------------------------------------------
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
COMMON STOCKS (49.5%)
AEROSPACE (1.1%)
3,100 United Technologies Corp................. $ 195
---------
BANKING (5.1%)
3,900 BankAmerica Corp......................... 154
2,900 Bankers Trust (New York) Corp............ 160
3,400 Boatmens Bancshares, Inc................. 92
6,400 Chemical Banking Corp.................... 230
5,100 Mellon Bank Corp......................... 156
2,800 Morgan (J.P.) & Co., Inc................. 157
---------
949
---------
CAPITAL GOODS (1.1%)
3,000 Deere & Co............................... 198
---------
CHEMICALS (2.0%)
3,425 Eastman Chemical Co...................... 173
2,700 Monsanto Co.............................. 190
---------
363
---------
COMMUNICATIONS (3.8%)
4,600 NYNEX Corp............................... 169
4,500 SBC Communications, Inc.................. 182
7,100 Sprint Corp.............................. 196
4,400 U.S. West, Inc........................... 157
---------
704
---------
CONSUMER-DURABLES (2.4%)
6,900 Ford Motor Co............................ 193
6,100 General Motors Corp...................... 258
---------
451
---------
CONSUMER-RETAIL (2.6%)
11,600 Kmart Corp............................... 151
3,600 V.F. Corp................................ 175
10,400 Woolworth Corp........................... 156
---------
482
---------
CONSUMER-SERVICE & GROWTH (3.0%)
6,900 Deluxe Corp.............................. 183
3,900 Eastman Kodak Co......................... 186
9,400 Ogden Corp............................... 176
---------
545
---------
CONSUMER-STAPLES (5.3%)
7,100 American Brands, Inc..................... 266
3,600 Anheuser Busch Cos., Inc................. 183
3,300 CPC International, Inc................... 176
8,600 Fleming Cos., Inc........................ 200
4,000 Heinz (H.J.) Co.......................... 147
---------
972
---------
ENERGY (3.5%)
5,200 Ashland Oil, Inc......................... 179
1,650 Mobil Corp............................... 139
1,550 Royal Dutch Petroleum Co................. 167
2,700 Texaco, Inc.............................. 162
---------
647
---------
FINANCIAL-DIVERSIFIED (1.0%)
5,700 Student Loan Marketing Association....... $ 185
---------
HEALTH CARE (5.8%)
5,600 Bausch & Lomb, Inc....................... 190
6,500 Baxter International, Inc................ 184
3,200 Becton Dickinson & Co.................... 153
2,700 Bristol-Myers Squibb Co.................. 156
5,800 Merck & Co., Inc......................... 221
5,400 Upjohn Co................................ 166
---------
1,070
---------
INDUSTRIAL (2.2%)
11,100 Hanson plc ADR........................... 200
5,900 Rockwell International Corp.............. 211
---------
411
---------
INSURANCE (3.0%)
7,900 American General Corp.................... 223
4,950 Aon Corp................................. 159
4,000 St. Paul Cos., Inc....................... 179
---------
561
---------
METALS (0.9%)
2,600 Phelps Dodge Corp........................ 161
---------
TECHNOLOGY (1.7%)
5,800 Harris Corp.............................. 247
1,050 International Business Machines Corp..... 77
---------
324
---------
TRANSPORTATION (1.2%)
4,800 Burlington Northern, Inc................. 231
---------
UTILITIES (3.8%)
9,100 General Public Utilities Corp............ 239
8,000 Northern Indiana Public Service Co....... 238
7,150 Texas Utilities Co....................... 229
---------
706
---------
TOTAL COMMON STOCKS (Cost $9,057).................... 9,155
---------
FACE
AMOUNT
(000)
- ----------
FIXED INCOME SECURITIES (44.2%)
US TREASURY NOTES (44.2%)
$ 4,300 8.25%, 7/15/98........................... 4,353
4,243 5.50%, 4/15/00........................... 3,817
---------
TOTAL FIXED INCOME SECURITIES (Cost $8,764).......... 8,170
---------
SHORT-TERM INVESTMENT (2.5%)
REPURCHASE AGREEMENT (2.5%)
466 U.S. Trust, 5.50%, dated 12/30/94, due
1/03/95, to be repurchased at $466,
collateralized by $490 United States
Treasury Notes, 3.875%, due 3/31/95,
valued at $488 (Cost $466)............. 466
---------
TOTAL INVESTMENTS (96.2%) (Cost $18,287)............. 17,791
---------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
BALANCED PORTFOLIO
80
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE BALANCED PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------
VALUE
(000)
- ------------------------------------------------------------------------------
OTHER ASSETS (4.0%)
Cash...................................... $ 1
Receivable for Investments Sold........... 469
Interest Receivable....................... 214
Dividends Receivable...................... 49
Other..................................... 1 $ 734
--------
LIABILITIES (-0.2%)
Custodian Fees Payable.................... (4)
Administrative Fees Payable............... (3)
Investment Advisory Fees Payable.......... (2)
Directors' Fees & Expenses Payable........ (1)
Other Liabilities......................... (23) (33)
-------- --------
NET ASSETS (100%)...................................... $ 18,492
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,064,203 outstanding $.001 par value
shares (authorized 500,000,000 shares)............... $8.96
-----
-----
- ------------------------------------------------------------
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
BALANCED PORTFOLIO
81
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
- ------------------------------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
DEBT INSTRUMENTS (100.0%)
ALGERIA (1.3%)
LOAN AGREEMENTS (1.3%)
$ 5,788 Algeria Refinanced Loan
Agreements, Tranche A, (Floating
Rate) 7.875%, 12/31/00.......... $ 1,896
---------
ARGENTINA (26.3%)
BONDS (26.3%)
$ 2,000 Banco Rio de la Plata S.A. 8.75%,
12/15/03........................ 1,400
500 Republic of Argentina (Floating
Rate) 6.50%, 3/31/05............ 319
4,500 Republic of Argentina Local
Markets Trust 13.375%,
8/15/01......................... 3,803
24,750 Republic of Argentina Par Bonds,
Series L 4.25%, 3/31/23......... 10,488
29,250 Republic of Argentina Series L
"Euro" (Floating Rate) 6.50%,
3/31/05......................... 18,665
3,000 Republic of Argentina BOCON PIK
Pre2 (Floating Rate) 4/01/07.... 1,665
2,000 Telefonica de Argentina (Yankee
Bond) 11.875%, 11/01/04......... 1,810
---------
38,150
---------
BRAZIL (26.7%)
BONDS (26.7%)
$ 3,215 Cia Brasil Projectos 12.50%,
12/22/97........................ 3,135
9,700 Federative Republic of Brazil New
Money Bond (Floating Rate)
6.75%, 4/15/09.................. 5,990
12,700 Federative Republic of Brazil Debt
Conversion Bonds Series L
(Floating Rate) 6.75%,
4/15/12......................... 7,604
2,000 Federative Republic of Brazil Par
Bond, Series YL3 4.00%,
4/15/24......................... 811
1,960 Federative Republic of Brazil IDU
"Euro" (Floating Rate) 6.063%,
1/01/01......................... 1,642
3,545 Federative Republic of Brazil
Series C (Floating Rate) 8.00%,
4/15/14......................... 1,699
17,860 Federative Republic of Brazil
Series C "Euro" 8.00%,
4/15/14......................... 8,562
22,750 Federative Republic of Brazil Par
Bond Series Y 4.00%, 4/15/24.... 9,228
---------
38,671
---------
BULGARIA (3.9%)
BONDS (3.9%)
$ 4,500 Bulgaria Discount Series A "Euro"
(Floating Rate) 6.063%,
7/28/24......................... 2,098
2,290 Bulgaria Discount Series A
(Floating Rate) 6.063%,
7/28/24......................... 1,068
762 Bulgaria Discount Series B
(Floating Rate) 6.563%,
7/28/24......................... 355
1,914 Bulgaria Front Loaded Interest
Reduction Bond Series A "Euro"
(Floating Rate) 2.00%,
7/28/12......................... 421
$ 2,086 Reduction Bond Series A
(Floating Rate) 2.00%,
7/28/12......................... $ 459
2,983 Bulgaria Interest Arrears Bonds
(Floating Rate) 6.063%,
7/28/11......................... 1,260
---------
5,661
---------
ECUADOR (3.3%)
LOAN AGREEMENTS (3.3%)
$ #~##4,500 Republic of Ecuador Consolidated
Loan (Floating Rate)
(Participation: Merrill Lynch,
Salomon Brothers)............... 2,071
#~##2,800 Republic of Ecuador Extension and
Refinancing Agreement (Floating
Rate) (Participation: JP Morgan,
U.S. West Master Trust)......... 1,288
#~##2,260 Republic of Ecuador Multi Year
Refinancing Agreement (Floating
Rate) (Participation: Swiss Bank).. 1,040
#~##3,000 Republic of Ecuador New Money
Credit Agreement (Floating Rate)
(Participation: Chemical Bank,
Salomon Brothers)................. 1,380
--------
5,779
--------
LESS PORTION OF INVESTMENTS SOLD
+++3,140 Republic of Ecuador Par Bond
3.25%, 12/19/49 (When-Issued)... (944)
--------
4,835
--------
MEXICO (4.4%)
LOAN AGREEMENTS (4.4%)
$ 5,000 United Mexican States Old New
Money Loans (Floating Rate)
7.4125-7.625%, 3/20/05.......... 3,649
--------
3,664 United Mexican States Multi-Year
Refinancing Agreement 6.625%,
12/31/06........................ 2,675
--------
6,324
--------
MOROCCO (6.2%)
LOAN AGREEMENTS (6.2%)
$ #13,500 Morocco Restructuring and
Consolidating Agreement Tranche
A (Floating Rate) 1/01/09
(Participation: JP Morgan,
Goldman Sachs, Salomon
Brothers)....................... 8,952
---------
PANAMA (7.7%)
LOAN AGREEMENTS (4.2%)
$ ++7,500 Republic of Panama Refinanced Loan
Agreement (Floating Rate)....... 4,031
d*++3,800 Republic of Panama Unrestructured
Loans (Floating Rate)........... 2,043
---------
6,074
---------
BONDS (3.5%)
6,120 Republic of Panama (Floating Rate)
7.125%, 5/10/02................. 5,018
---------
11,092
---------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
82
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
POLAND (6.7%)
BONDS (6.7%)
$ 10,500 Republic of Poland PDI "Euro"
Bonds (Floating Rate) 3.25%,
10/27/14..................... $ 4,712
10,487 Republic of Poland Interest Arrears
PDI Bonds 3.25%, 10/27/14....... 4,706
500 Republic of Poland Registered
Discount "Euro" Bonds (Floating
Rate) 6.813%, 10/27/24.......... 360
---------
RUSSIA (4.9%)
LOAN AGREEMENTS (4.9%)
$ ++25,500 Bank for Foreign Economic
Affairs (Floating Rate)... 7,108
---------
TRINIDAD & TOBAGO (0.2%)
LOAN AGREEMENTS (0.2%)
Y 27,000 Trinidad & Tobago Loans, Tranche
A (Floating Rate) 7.1425%, 9/30/00... 225
---------
VENEZUELA (8.4%)
BONDS (8.4%)
$ 3,250 Republic of Venezuela Front
Loaded Interest Reduction
Bond Series A (Floating Rate)
7.00%, 3/31/07... 1,499
5,000 Republic of Venezuela Front
Loaded Interest Reduction Bond
Series B (Floating Rate) 7.00%,
3/31/07... 2,306
18,500 Republic of Venezuela Debt Conversion
Bond Series DL (Floating Rate)
7.688%, 12/18/07... 8,406
--------
12,211
--------
TOTAL DEBT INSTRUMENTS (Cost $154,477)........... 144,903
--------
NO. OF
WARRANTS
- -----------
WARRANTS (0.0%)
POLAND (0.0%)
+17 Morgan Grenfell Eastern Europe,
expiring 2/21/95... 1
---------
VENEZUELA (0.0%)
+11 Venezuela Par Bond, expiring 3/01/95.. 1
**+36,480 Venezuela Oil, expiring 3/01/95... --
---------
1
---------
TOTAL WARRANTS (Cost $147)......................... 2
---------
FACE
AMOUNT
(000)
- --------
SHORT-TERM INVESTMENTS (1.6%)
US GOVERNMENT AND AGENCY OBLIGATIONS (1.6%)
$ 2,300 Treasury Bills 1/19/95
(Cost $2,295)... 2,295
FOREIGN CURRENCY (0.0%)
CHF 43 Swiss Franc (Cost $34)........ 33
----------
TOTAL INVESTMENTS (101.6%) (Cost $156,953)... 147,233
----------
VALUE
(000)
- ------------------------------------------------------------
OTHER ASSETS (16.7%)
Cash.................................. $ 922
Receivable for Investments Sold....... 20,209
Interest Receivable................... 2,998
Due from Broker for Premium on Written
Options.............................. 105
Other................................. 12 $ 24,246
---------
LIABILITIES (-18.3%)
Payable for Investments Purchased..... (21,333)
Securities Sold Short................. (4,594)
Investment Advisory Fees Payable...... (365)
Custodian Fees Payable................ (118)
Administrative Fees Payable........... (19)
Written Options Outstanding, at
Value................................ (8)
Directors' Fees & Expenses............ (1)
Other Liabilities..................... (92) (26,530)
--------- ----------
NET ASSETS (100%).................................. $ 144,949
----------
----------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 16,881,216 outstanding $.001 par
value shares (authorized 500,000,000 shares)..... $8.59
----------
----------
- ------------------------------------------------------------
+ -- Non-income producing securities
++ -- Non-income producing securities -- in default
+++ -- Security is subject to delayed delivery -- See Note
A-6
** -- Security is valued at fair value -- See Note A-1
d -- Terms of loan agreement not final at December 31,
1994.
# -- Participation interests were acquired through the
financial institutions listed parenthetically. All
other loan agreements are assignments. See Note A-7.
## -- Under restructuring at December 31, 1994.
~ -- This security is making partial interest payments.
PIK -- Payment-In-Kind. Income may be received in additional
securities or cash at the discretion of the issuer.
Y -- Japanese Yen
- ------------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
SECURITIES SOLD SHORT (NOTE A-8)
MEXICO
BONDS
$ 6,250 United Mexican States Discount
Bonds, Series D (Variable Rate)
7.25%, 12/31/19 (Proceeds
$4,945)......................... 4,594
---------
WRITTEN CALL OPTIONS (NOTE A-9)
VENEZUELA
CALL OPTIONS
15,000 Republic of Venezuela Debt
Conversion Bond 7.688%,
12/18/07, strike price $51.50,
expiring 1/09/95 (Proceeds
$105)........................... 8
---------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
83
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
- ------------------------------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
FIXED INCOME SECURITIES (91.1%)
US GOVERNMENT AND AGENCY OBLIGATIONS (58.7%)
US Treasury Bonds
$ 14,000 8.125%, 8/15/19................... $ 14,186
---------
US Treasury Notes
25,000 4.625%, 2/29/96................... 24,238
8,000 7.50%, 10/31/99................... 7,885
8,000 7.25%, 8/15/04.................... 7,679
---------
39,802
---------
Federal Home Loan Mortgage Corporation
145 8.00%, 12/01/02 (15 Yr. Dwarf).... 141
19 13.00%, 9/01/10................... 22
---------
163
---------
Federal National Mortgage Association
89 8.50%, 12/01/06................... 89
---------
Government National Mortgage Association
212 8.00%, 3/15/04.................... 211
32 14.00%, 6/15/11................... 37
9 11.00%, 12/15/15.................. 10
45 10.50%, 1/15/16................... 48
124 10.00%, 5/15/19-11/15/20.......... 130
27,608 6.00%, 1/15/24-2/15/24............ 23,027
39,157 7.00%, 5/15/24-6/15/24............ 35,143
+++10,000 7.50%, 11/22/24................... 9,978
---------
68,584
---------
TOTAL US GOVERNMENT AND AGENCY OBLIGATIONS....... 122,824
---------
FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS (6.3%)
10,000 Quebec Province 7.50%, 7/15/23.... 8,462
5,000 Hydro Quebec 8.05%, 7/07/24....... 4,807
---------
TOTAL FOREIGN GOVERNMENT AND AGENCY
OBLIGATIONS...................................... 13,269
---------
CORPORATE BONDS AND NOTES (25.5%)
FINANCE (18.6%)
5,000 Abbey National plc 8.20%,
10/15/04........................ 4,881
7,500 American Re 10.875%, 9/15/04...... 7,934
10,000 Ford Motor Credit Co. 5.625%,
3/03/97......................... 9,472
10,000 General Motors Acceptance Corp.
7.375%, 6/22/00................. 9,436
5,000 Goldman Sachs 7.80%, 7/15/02...... 4,744
2,800 Traveler's, Inc. 6.125%,
6/15/00......................... 2,514
---------
38,981
---------
METALS (4.5%)
10,000 USX Corp. 9.125%, 1/15/13......... 9,540
---------
UTILITIES (2.4%)
5,000 Central Maine Power 7.98%,
10/04/96........................ 4,985
---------
TOTAL CORPORATE BONDS AND NOTES.................. 53,506
---------
ASSET BACKED SECURITIES (0.6%)
33 Case Equipment Loan Trust, 92-A
5.40%, 6/15/98.................. 33
$ 255 Collateralized Mortgage Obligation
Trust, 39-Y, 8.65%, 3/01/03...... $ 255
37 Federal Home Loan Mortgage Corp.,
REMIC 16-B 10.00%, 10/15/19...... 37
Federal National Mortgage Association
REMIC:
25 92-59F 6.37%, 8/25/06.......... 25
175 88-17B 9.40%, 10/25/17......... 178
100 Ford Credit Auto Loan Master Trust,
92-1A 6.875%, 1/15/99............. 98
27 General Motors Acceptance Corp.
Trust, 92-DA 5.55%, 5/15/97....... 27
228 Goldman Sachs Trust 2, E-3 8.95%,
8/01/02........................... 229
84 Goldman Sachs Trust 3, C-4 8.00%,
7/07/15........................... 83
217 Ryland Acceptance Corp. 4 REMIC, 80-A,
9.40%, 2/01/16.................... 219
--------
TOTAL ASSET BACKED SECURITIES...................... 1,184
--------
TOTAL FIXED INCOME SECURITIES (Cost $195,665)...... 190,783
--------
SHORT-TERM INVESTMENTS (11.9%)
US GOVERNMENT AND AGENCY OBLIGATIONS (11.9%)
Federal Farm Credit Bank
14,800 Discount Note, 5.95%, 1/03/95....... 14,790
Federal National Mortgage Association
10,045 Discount Note, 5.74%, 1/23/95....... 10,013
--------
TOTAL SHORT-TERM INVESTMENTS (Cost $24,805)........ 24,803
--------
TOTAL INVESTMENTS (103.0%) (Cost $220,470)......... 215,586
--------
OTHER ASSETS (2.3%)
Cash.................................. $ 27
Interest Receivable................... 3,517
Receivable for Portfolio Shares
Sold................................. 1,219
Net Unrealized Gain on Forward Foreign
Currency Contracts................... 44
Receivable for Investments Sold....... 4
Other................................. 23 4,834
---------
LIABILITIES (-5.3%)
Payable for Investments Purchased..... (10,036)
Payable for Portfolio Shares
Redeemed............................. (873)
Investment Advisory Fees Payable...... (106)
Administrative Fees Payable........... (36)
Custodian Fees Payable................ (9)
Directors' Fees & Expenses............ (1)
Other Liabilities..................... (28) (11,089)
--------- ---------
NET ASSETS (100%).................................. $ 209,331
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 21,312,756 outstanding $.001
par value shares (authorized 500,000,000
shares)....................................... $9.82
-----
-----
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
84
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open
at December 31, 1994, the Portfolio is obligated to deliver
or is to receive foreign currency in exchange for US dollars
as indicated below:
IN
CURRENCY TO EXCHANGE NET UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------ --------- ----------- ---------- --------- ---------------
$ 5,230 $ 5,230 2/27/95 DM 8,074 $ 5,222 $ (8)
$ 3,075 3,075 2/27/95 DM 4,750 3,072 (3)
DM 12,824 8,294 2/27/95 $ 8,349 8,349 55
--------- --------- ---
$ 16,599 $ 16,643 $ 44
--------- --------- ---
--------- --------- ---
- ------------------------------------------------------------
+++ -- Security is subject to delayed delivery -- See Note A-6
DM -- Deutsche Mark
REMIC -- Real Estate Mortgage Investment Conduit
Interest rates disclosed for US Government & Agency Discount Notes represent
effective yields.
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
85
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
- ------------------------------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
FIXED INCOME SECURITIES (87.0%)
AUSTRALIAN DOLLAR (2.7%)
GOVERNMENT BONDS (2.7%)
A$ 4,600 Government of Australia 10.00%,
10/15/02........................... $ 3,559
---------
BRITISH POUND (2.9%)
GOVERNMENT BONDS (2.9%)
L 2,500 United Kingdom Treasury Bond 8.00%,
6/10/03............................ 3,733
---------
CANADIAN DOLLAR (10.7%)
EUROBONDS (8.1%)
C$ 7,000 British Columbia Province 7.75%,
6/16/03............................ 4,536
6,750 Kingdom of Norway 8.375%, 1/27/03.... 4,503
2,500 Export-Import Bank of Japan 7.75%,
10/08/02........................... 1,615
---------
10,654
---------
GOVERNMENT BONDS (2.6%)
5,200 Government of Canada 7.50%,
12/01/03........................... 3,344
---------
13,998
---------
DANISH KRONE (7.6%)
GOVERNMENT BONDS (7.6%)
DK 69,500 Kingdom of Denmark 7.00%, 12/15/04... 9,909
---------
DEUTSCHE MARK (12.4%)
EUROBONDS (7.4%)
DM 12,000 LKB Baden-Wurttemberg 6.50%,
9/15/08............................ 6,740
5,500 Republic of Austria 6.50%, 1/10/24... 2,912
---------
9,652
---------
GOVERNMENT BONDS (5.0%)
8,500 Deutscheland Republic 6.25%,
1/04/24............................ 4,432
3,500 Treuhandanstalt 6.75%, 5/13/04....... 2,125
---------
6,557
---------
16,209
---------
FINNISH MARKKA (1.9%)
GOVERNMENT BONDS (1.9%)
FM 12,000 Finnish Government 9.50%, 3/15/04.... 2,477
---------
FRENCH FRANC (5.1%)
GOVERNMENT BONDS (5.1%)
FF 17,800 France O.A.T. 8.50%, 12/26/12........ 3,347
25,000 France O.A.T. 6.00%, 10/25/25........ 3,366
---------
6,713
---------
ITALIAN LIRA (3.8%)
GOVERNMENT BONDS (3.8%)
IL9,100,000 Republic of Italy Treasury Bond
8.50%, 8/01/99..................... 4,945
---------
JAPANESE YEN (4.7%)
EUROBONDS (4.7%)
Y 255,000 European Investment Bank 6.625%,
3/15/00............................ 2,845
Y 320,000 International Bank for Reconstruction
& Development 5.25%, 3/20/02....... $ 3,355
---------
6,200
---------
NETHERLANDS GUILDER (6.0%)
GOVERNMENT BONDS (6.0%)
NG 14,400 Government of Netherlands 7.50%,
1/15/23............................ 7,807
---------
NEW ZEALAND DOLLAR (3.2%)
GOVERNMENT BONDS (3.2%)
NZ$ 6,800 New Zealand Government 8.00%,
4/15/04............................ 4,222
---------
SPANISH PESETA (3.4%)
GOVERNMENT BONDS (3.4%)
SP 615,000 Spanish Government 10.90%, 8/30/03... 4,433
---------
UNITED STATES DOLLAR (22.6%)
EUROBONDS (2.0%)
$ 2,700 Republic of Italy 6.875%, 9/27/23.... 2,120
500 Statens Bostads 8.50%, 5/30/97....... 552
---------
2,672
---------
US GOVERNMENT AND AGENCY OBLIGATIONS (18.3%)
US Treasury Bonds
500 12.75%, 11/15/10..................... 671
3,800 8.125%, 8/15/19...................... 3,849
1,600 8.00%, 11/15/21...................... 1,581
US Treasury Notes
5,900 7.875%, 2/15/96...................... 5,926
2,900 7.625%, 4/30/96...................... 2,905
400 5.875%, 5/31/96...................... 391
675 7.25%, 5/15/04....................... 648
US Treasury STRIPS
1,600 2/15/98, Principal Only.............. 1,259
1,352 5/15/03, Principal Only.............. 707
Government National Mortgage
Association
+++6,014 ARM 7.50%, 1/15/25................. 5,997
---------
23,934
---------
CORPORATE BONDS AND NOTES (1.5%)
2,000 Salomon, Inc., 6.32%, 2/05/97........ 1,909
---------
YANKEE BONDS (0.8%)
1,000 Hydro Quebec 8.05%, 7/07/24.......... 961
---------
29,476
---------
TOTAL FIXED INCOME SECURITIES (Cost $120,157)..... 113,681
---------
SHORT-TERM INVESTMENTS (14.4%)
DEUTSCHE MARK (5.0%)
TIME DEPOSIT (5.0%)
DM 10,101 Bank of Austria 5.125%, 1/06/95...... 6,522
---------
BRITISH POUND (2.8%)
TIME DEPOSIT (2.8%)
L 2,365 Bank of Austria 5.25%, 1/03/95....... 3,704
---------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
86
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
UNITED STATES DOLLAR (6.6%)
US GOVERNMENT AND AGENCY OBLIGATIONS (3.7%)
$ 4,835 US Treasury Bill 1/19/95.............. $ 4,823
---------
REPURCHASE AGREEMENT (2.9%)
3,778 U.S. Trust, 5.50%, dated 12/30/94,
due 1/03/95, to be repurchased at
$3,780, collateralized by $3,935
United States Treasury Notes 3.875%,
due 4/30/95, 3,778 valued at $3,905... 3,778
---------
8,601
---------
TOTAL SHORT-TERM INVESTMENTS (Cost $18,775)......... 18,827
---------
FOREIGN CURRENCY (0.0%)
DK 2 Danish Krone.......................... 1
IL 2 Italian Lira.......................... --
---------
TOTAL FOREIGN CURRENCY (Cost $1)................... 1
---------
TOTAL INVESTMENTS (101.4%) (Cost $138,933).......... 132,509
---------
OTHER ASSETS (4.0%)
Cash................................... $ 1,916
Interest Receivable.................... 3,323
Other.................................. 12 5,251
---------
LIABILITIES (-5.4%)
Payable for Investments Purchased...... (6,657)
Net Unrealized Loss on Forward Foreign
Currency Contracts.................... (285)
Investment Advisory Fees Payable....... (77)
Custodian Fees Payable................. (14)
Administrative Fees Payable............ (19)
Directors' Fees & Expenses............. (1)
Other Liabilities...................... (32) (7,085)
--------- ---------
NET ASSETS (100%)................................... $ 130,675
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 12,703,651 outstanding $.001 par
value shares (authorized 500,000,000 shares)...... $10.29
---------
---------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open at
December 31, 1994, the Portfolio is obligated to deliver or
is to receive foreign currency in exchange for US dollars or
foreign currency as indicated below:
IN NET
CURRENCY TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------- --------- ----------- --------------- --------- -------------
NG 13,000 $ 7,500 1/13/95 $ 7,519 $ 7,519 $ 19
DM 10,000 6,465 2/17/95 $ 6,376 6,376 (89)
SP 280,000 2,121 2/21/95 IL 3,455,620 2,125 4
DK 40,000 6,584 3/07/95 $ 6,493 6,493 (91)
A$ 4,643 3,585 3/20/95 NZ$ 5,642 3,580 (5)
SP 290,000 2,183 6/01/95 $ 2,186 2,186 3
DM 10,000 6,504 6/06/95 $ 6,378 6,378 (126)
--------- --------- -----
$ 34,942 $ 34,657 $ (285)
--------- --------- -----
--------- --------- -----
- ------------------------------------------------------------
+++ -- Security is subject to delayed delivery -- See Note A-6
-- 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.
A$ -- Australian Dollar
DK -- Danish Krone
DM -- Deutsche Mark
IL -- Italian Lira
NG -- Netherlands Guilder
NZ$ -- New Zealand Dollar
SP -- Spanish Peseta
- ------------------------------------------------------------
SUMMARY OF FIXED INCOME SECURITES BY INDUSTRY CLASSIFICATION (UNAUDITED)
VALUE PERCENT OF NET
INDUSTRY (000) ASSETS
- -----------------------------------------------------------------
Energy............................. $ 961 0.8%
Finance............................ 17,016 13.0
Foreign Government and Agency
Obligations....................... 71,770 54.9
US Government and Agency
Obligations.................... 23,934 18.3
--------- -----
$ 113,681 87.0%
--------- -----
--------- -----
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
87
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
- ------------------------------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
CORPORATE BONDS AND NOTES (84.2%)
AEROSPACE & DEFENSE (1.5%)
$ 1,500 Tracor, Inc., 10.875%, 8/15/01.......... $ 1,444
---------
BROADCAST-RADIO & TELEVISION (10.6%)
2,250 Ackerley Communications, Inc., Series B,
10.75%, 10/01/03...................... 2,124
500 ACT III Broadcasting, Inc., 9.625%,
12/15/03.............................. 454
2,500 American Telecasting, 0.00% to 6/15/99,
12.50% to 6/15/04..................... 1,075
4,250 Bell Cablemedia plc (Yankee Bond), 0.00%
to 7/15/99, 11.95% to 7/15/04......... 2,263
1,000 Cablevision Systems Corp., 9.875%,
2/15/13............................... 905
1,250 Comcast Corp., 9.50%, 1/15/08........... 1,128
1,000 Continental Cablevision, Inc., 9.50%,
8/01/13............................... 912
600 Helicon Group, Series B, 9.00% to
11/01/96, 11.00% to 11/01/03.......... 513
400 Heritage Media, 11.00%, 10/01/02........ 392
500 Katz Corp., 12.75%, 11/15/02............ 526
225 SpectraVision, Inc., (Floating Rate),
11.65%, 12/01/02...................... 34
---------
10,326
---------
BUILDING MATERIALS & COMPONENTS (4.8%)
725 American Standard, 9.25%, 12/01/16...... 663
600 Hillsborough Holdings/Walter
Participating Notes, 7.50%,
12/31/50.............................. 966
2,000 Tarkett International, 9.00%, 3/01/02... 1,858
850 USG Corp., 8.75%, 3/01/17............... 723
++750 Walter Industries Corp., 17.00%,
1/01/96............................... 457
---------
4,667
---------
CHEMICALS (5.1%)
600 Arcadian Partners L.P., Series B,
10.75%, 5/01/05....................... 581
1,000 General Chemical, 9.25%, 8/15/03........ 930
1,000 Plastic Specialties & Technologies,
Inc., 11.25%, 12/01/03................ 875
2,000 Rexene Corp., 11.75%, 12/01/04.......... 2,040
500 Sherritt, Inc., 10.50%, 3/31/14......... 497
---------
4,923
---------
COAL, GAS & OIL (4.5%)
1,300 Clark R&M Holdings, Zero Coupon,
2/15/00............................... 715
++474 Columbia Gas Systems, Inc., Employee
Thrift Plan Obligation, 9.875%,
11/30/01.............................. 512
500 Deeptech International, 12.00%,
12/15/00.............................. 477
500 Ferrell Gas L.P., Series A, 10.00%,
8/01/01............................... 492
2,000 Freeport-McMoRan Resources, 8.75%,
2/15/04............................... 1,755
101 Mesa Capital Corp., Secured Notes, 0.00%
to 6/30/95, 12.75% to 6/30/98......... 87
500 Triton Energy, Zero Coupon, 11/01/97.... 367
---------
4,405
---------
COMPUTERS (0.2%)
200 Unisys Corp., 13.50%, 7/01/97........... 214
---------
DIVERSIFIED (0.9%)
1,000 Sequa Corp., 9.375%, 12/15/03........... $ 848
---------
ELECTRICAL EQUIPMENT (2.0%)
1,500 Pricellular Wire, 0.00% to 11/15/97,
14.00% to 11/15/01.................... 990
1,000 Protection One Alarm, Inc., 12.00%,
11/01/03.............................. 950
---------
1,940
---------
ELECTRONICS (7.3%)
400 ADT Operations, 9.25%, 8/01/03.......... 370
250 Bell & Howell Co., Series B, 10.75%,
10/01/02.............................. 238
4,500 Bell & Howell Co., Series B, 0.00% to
3/01/00, 11.50% to 3/01/05............ 2,194
1,500 Imax Corp., 7.00% to 3/01/97, 10.00% to
3/01/01............................... 1,239
1,500 International Semi-Tech (Yankee Bond),
0.00% to 8/15/00, 11.50% to 8/15/03... 673
2,750 Viacom International, 8.00%, 7/07/06.... 2,358
---------
7,072
---------
ENTERTAINMENT & LEISURE (0.9%)
800 ACT III Theatres, 11.875%, 2/01/03...... 828
---------
FINANCIAL SERVICES (4.2%)
500 Delaware Management Holding, 10.25%,
3/15/04............................... 524
800 GPA Delaware, Inc., 8.75%, 12/15/98..... 615
1,209 GPA Equipment Trust Participating
Certificates (Floating Rate), 9.125%,
12/02/96.............................. 1,103
550 GPA Investments, 6.40%, 11/19/98........ 330
1,189 Tiphook Finance Corp., 8.00%, 3/15/00... 832
886 Tiphook Finance Corp., 10.75%,
11/01/02.............................. 665
---------
4,069
---------
FOOD (1.8%)
750 Americold Corp. 1st Mortgage Bond,
Series B, 11.50%, 3/01/05............. 685
1,150 Pilgrim's Pride Corp., 10.875%,
8/01/03............................... 1,107
---------
1,792
---------
FOOD SERVICE & LODGING (2.8%)
600 Flagstar Corp., 10.75%, 9/15/01......... 558
500 Flagstar Corp., 11.25%, 11/01/04........ 412
400 La Quinta Inns, Inc., 9.25%, 5/15/03.... 379
1,300 Motels of America, 12.00%, 4/15/04...... 1,339
---------
2,688
---------
FOREST PRODUCTS & PAPER (4.6%)
2,000 Doman Industries Ltd., 8.75%, 3/15/04... 1,755
1,750 Stone Consolidated, Senior Secured
Notes, 10.25%, 12/15/00............... 1,706
1,000 S.D. Warren Co., 12.00%, 12/15/04....... 1,025
---------
4,486
---------
GAMING & LODGING (1.9%)
1,250 Casino Magic Finance Corp., 11.50%,
10/15/01.............................. 784
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
88
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
GAMING & LODGING (CONT.)
$ 300 GNF Corp. (Bally), 10.625%, 4/01/03..... $ 198
275 Louisiana Casino Cruises, 11.50%,
12/01/98.............................. 226
800 Trump Plaza 1st Mortgage Notes, 10.875%,
6/15/01............................... 608
---------
1,816
---------
HEALTH CARE SUPPLIES & SERVICES (1.5%)
1,000 American Medical International, Series
B, 9.50%, 4/15/06..................... 986
625 Eyecare Centers of America, 12.00%,
10/01/03.............................. 505
---------
1,491
---------
HOSPITAL MANAGEMENT (1.8%)
500 Charter Medical Corp., 11.25%,
4/15/04............................... 501
150 Healthtrust, Inc., 10.75%, 5/01/02...... 160
1,000 Healthtrust, Inc., 10.25%, 4/15/04...... 1,065
---------
1,726
---------
INSURANCE (1.8%)
500 Nacolah Holding Corp., 9.50%,
12/01/03.............................. 459
1,500 Reliance Group Holdings, 9.75%,
11/15/03.............................. 1,320
---------
1,779
---------
METALS (2.9%)
500 Armco, Inc., 9.375%, 11/01/00........... 453
1,000 Sheffield Steel Corp. 1st Mortgage
Notes, 12.00%, 11/01/01............... 942
1,000 Venture Holdings, 9.75%, 4/01/04........ 881
500 Wolverine Tube, 10.125%, 9/01/02........ 507
---------
2,783
---------
PACKAGING & CONTAINER (3.1%)
1,000 Crown Packaging Holdings, 0.00% to
11/01/00, 12.25% to 11/01/03.......... 471
500 Owens-Illinois, Inc., 10.50%, 6/15/02... 486
500 Owens-Illinois, Inc., 9.75%, 8/15/04.... 473
750 Stone Container Corp., 11.875%,
12/01/98.............................. 775
600 Stone Container Corp., 9.875%,
2/01/01............................... 567
250 Stone Container Corp. 1st Mortgage Note,
10.75%, 10/01/02...................... 250
---------
3,022
---------
PERSONAL CARE PRODUCTS (0.2%)
250 Playtex Family Products, 9.00%,
12/15/03.............................. 219
---------
PROFESSIONAL SERVICES (0.3%)
300 Card Establishment Services, 10.00%,
10/01/03.............................. 312
---------
PUBLISHING (2.1%)
1,000 Marvel III Holdings, Inc., Series B,
9.125%, 2/15/98....................... 871
1,900 Marvel Parent Holdings, Zero Coupon,
4/15/98............................... 1,178
---------
2,049
---------
RETAIL-GENERAL (3.1%)
+++1,000 Federated Department Stores, 11.29%,
6/30/02 (When-Issued)................. 1,009
$ 625 Penn Traffic Co., 9.625%, 4/15/05........ $ 544
2,175 Southland Corp., 5.00%, 12/15/03......... 1,468
---------
3,021
---------
TELECOMMUNICATIONS (4.9%)
500 Allnet Communication Services, 9.00%,
5/15/03................................ 479
4,000 Dial Call Communications, 0.00% to
4/15/99, 12.25% to 4/15/04............. 1,280
450 Horizon Cellular Telephone, 0.00% to
10/01/97, 11.375% to 10/01/00.......... 318
1,000 MFS Communications, 0.00% to 1/15/99,
9.375% to 1/15/04...................... 593
1,500 Nextel Communications, 0.00% to 2/15/99,
9.75% to 8/15/04....................... 525
250 Paging Network, Inc., 8.875%, 2/01/06.... 197
1,500 Telefonica de Argentina (Yankee Bond),
11.875%, 11/01/04...................... 1,354
---------
4,746
---------
TEXTILES & APPAREL (4.0%)
300 ACME Boot Co., Inc., 11.50%, 12/15/00.... 120
839 JPS Textile Group, 10.85%, 6/01/99....... 516
1,000 PT Polysindo Eka Perkasa (Yankee Bond),
13.00%, 6/15/01........................ 975
2,500 Westpoint Stevens, Inc., 9.375%,
12/15/05............................... 2,250
---------
3,861
---------
TRANSPORTATION (2.8%)
++393 America West Airlines, 6.00%, 3/31/97.... 358
2,000 Moran Transportation Co., 11.75%,
7/15/04................................ 1,945
500 Sabreliner Corp., Series A, 12.50%,
4/15/03................................ 450
---------
2,753
---------
UTILITIES (2.6%)
650 AES Corp., 9.75%, 6/15/00................ 622
1,478 Beaver Valley Funding Corp. (Lease
Obligation Bond), 9.00%, 6/01/17....... 1,049
900 First PV Funding Corp., (Lease Obligation
Bond) 10.15%, 1/15/16.................. 846
---------
2,517
---------
TOTAL CORPORATE BONDS AND NOTES (Cost $89,387)....... 81,797
---------
FOREIGN GOVERNMENT (1.0%)
BOND (1.0%)
1,500 Republic of Argentina, Series L,
(Floating Rate), 6.50%, 3/31/05 (Cost
$1,048)................................ 956
---------
SHARES
- ------
COMMON STOCKS (0.1%)
BROADCAST-RADIO & TELEVISION (0.0%)
+16,443 SpectraVision, Inc., Class B............. 4
---------
FINANCIAL SERVICES (0.0%)
729 Duff & Phelps Corp....................... 6
243 Duff & Phelps Credit Rating Co........... 2
+1,268 WestFed Holdings, Inc., Class B.......... --
---------
8
---------
FOOD SERVICE & LODGING (0.1%)
+1,300 Motels of America, Inc................... 112
---------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
89
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- -----------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- -----------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
- -----------------------------------------------------------------
VALUE
SHARES (000)
- -----------------------------------------------------------------
GAMING & LODGING (0.0%)
+500 Trump Taj Mahal, Class A................. $ 5
---------
MACHINERY (0.0%)
+25 Bucyrus-Erie............................. --
---------
TEXTILES & APPAREL (0.0%)
+3,100 ACME Boot Co............................. 3
---------
TOTAL COMMON STOCKS (Cost $232)....................... 132
---------
PREFERRED STOCKS (1.0%)
COAL, GAS & OIL (0.9%)
50,000 Maxus Energy Corp. 10.00%................ 913
---------
FINANCIAL SERVICES (0.0%)
+3,239 WestFed Holdings, Inc., Series A......... --
---------
TEXTILES & APPAREL (0.1%)
400 ACME Boot Co., Series B, 12.50%,
12/15/03............................... 40
---------
TOTAL PREFERRED STOCKS (Cost $1,704).................. 953
---------
NO. OF
RIGHTS
- -----------
RIGHTS (0.0%)
BROADCAST-RADIO & TELEVISION (0.0%)
+35,000 SpectraVision, Inc., expiring 10/08/97
(Cost $133)............................ 4
---------
NO. OF
WARRANTS
- -----------
WARRANTS (0.2%)
AEROSPACE & DEFENSE (0.0%)
+*500 Sabreliner Corp., expiring 4/15/03
(acquired 6/21/93, cost $10)........... 5
---------
BROADCAST-RADIO & TELEVISION (0.0%)
+12,500 American Telecasting, expiring 6/23/99... 25
---------
ELECTRICAL EQUIPMENT (0.1%)
+28,000 Protection One Alarm, Inc., expiring
11/01/03............................... 105
---------
GAMING & LODGING (0.0%)
+1,250 Capital Gaming International, Inc.,
expiring 2/01/99....................... --
+2,700 Casino Magic Corp., expiring 10/14/96.... --
+825 Louisiana Casino Cruises, expiring
12/01/98............................... 13
---------
13
---------
HEALTH CARE SUPPLIES & SERVICES (0.0%)
+625 Eye Care Centers of America, expiring
10/01/03............................... 3
---------
INSURANCE (0.0%)
+500 Horace Mann Educators Corp., expiring
8/15/99................................ 7
---------
METALS (0.0%)
+5,000 Sheffield Steel Corp., expiring
11/01/01............................... 15
---------
PACKAGING & CONTAINER (0.1%)
+1,000 Crown Packaging Holdings, expiring
11/01/03............................... 40
---------
TELECOMMUNICATIONS (0.0%)
+4,000 Dial Page, Inc., expiring 4/25/99........ --
---------
TOTAL WARRANTS (Cost $214)............................ 213
---------
NO. OF
UNITS VALUE
(000) (000)
- ------------------------------------------------------------
UNITS (7.0%)
AUTOMOTIVE (1.0%)
1,000 Petro PSC Properties L.P., 12.50%,
6/01/02................................ $ 960
---------
GAMING & LODGING (3.7%)
1,750 Casino America, 11.50%, 11/15/01......... 1,470
500 Santa Fe Hotel, Inc., 11.00%, 12/15/00... 436
2,564 Trump Taj Mahal Funding, Inc., PIK,
11.35%, 11/15/99....................... 1,705
---------
3,611
---------
METALS (1.0%)
1,000 Sheffield Steel Corp., 12.00%,
11/01/01............................... 965
---------
TRANSPORTATION (1.3%)
2,208 Maritime Group, 13.50%, 2/15/97.......... 1,281
---------
TOTAL UNITS (Cost $8,807)............................. 6,817
---------
FACE
AMOUNT
(000)
- -----------
SHORT-TERM INVESTMENT (5.7%)
REPURCHASE AGREEMENT (5.7%)
$5,587 U.S. Trust, 5.50%, dated 12/30/94, due
1/03/95, to be repurchased at $5,590,
collateralized by $5,810 United States
Treasury Notes, 3.875%, due 4/30/95,
valued at $5,765 (Cost $5,587)......... 5,587
---------
TOTAL INVESTMENTS (99.2%) (Cost $107,112)............. 96,459
---------
OTHER ASSETS (4.0%)
Interest Receivable..................... $ 1,647
Receivable for Investments Sold......... 1,469
Receivable for Portfolio Shares Sold.... 789
Other................................... 11 3,916
---------
LIABILITIES (-3.2%)
Payable for Investments Purchased....... (2,782)
Payable for Portfolio Shares Redeemed... (193)
Investment Advisory Fees Payable........ (120)
Administrative Fees Payable............. (14)
Custodian Fees Payable.................. (4)
Directors' Fees & Expenses.............. (1)
Other Liabilities....................... (38) (3,152)
--------- ---------
NET ASSETS (100.0%).................................. $ 97,223
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 10,180,900 outstanding $.001 par
value shares (authorized 500,000,000 shares)....... $9.55
-----
-----
- ------------------------------------------------------------
+ -- Non-income producing securities
++ -- Non-income producing securities - in default
+++ -- Security is subject to delayed delivery -- See Note A-6.
* -- Restricted as to public resale. Total value of restricted securities held
at December 31, 1994 was $5 or 0.0% of net assets (Total Cost $10).
PIK -- Payment-In-Kind. Income may be received in additional securities or cash
at the discretion of the issuer.
Floating Rate Security. The 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, 1994.
At December 31, 1994 approximately 92% 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.
- ------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
90
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
- ------------------------------------------------------------------------------
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
MONEY MARKET INSTRUMENTS (81.6%)
US GOVERNMENT & AGENCY OBLIGATIONS (72.9%)
US GOVERNMENT OBLIGATIONS (11.4%)
US Treasury Bills
$ 50,000 3/09/95............................... $ 49,537
30,000 5/04/95............................... 29,499
-----------
79,036
-----------
AGENCY DISCOUNT NOTES (32.7%)
Federal Farm Credit Bank
10,000 5.60%, 1/24/95........................ 9,964
Federal Home Loan Bank
22,410 5.60%, 1/03/95........................ 22,403
14,270 6.06%, 2/27/95........................ 14,133
Federal Home Loan Mortgage Corp.
20,000 5.75%, 1/05/95........................ 19,987
20,000 5.80%, 1/18/95........................ 19,945
27,555 5.80%, 1/30/95........................ 27,426
Federal National Mortgage Association
10,000 5.80%, 1/04/95........................ 9,995
30,000 5.86%, 1/13/95........................ 29,942
30,000 5.35%, 1/20/95........................ 29,915
10,000 5.60%, 2/17/95........................ 9,927
Tennessee Valley Authority
32,000 5.80%, 1/30/95........................ 31,851
-----------
225,488
-----------
AGENCY FLOATING RATE NOTES (28.8%)
Federal National Mortgage Association
25,000 5.54%, 10/16/95....................... 24,996
65,000 5.79%, 9/02/97........................ 65,000
25,000 6.53%, 6/02/99........................ 25,000
13,000 6.53%, 7/26/99........................ 12,937
25,000 6.53%, 9/22/99........................ 25,000
Student Loan Marketing Association
46,000 6.07%, 10/30/97....................... 46,075
-----------
199,008
-----------
TOTAL US GOVERNMENT & AGENCY OBLIGATIONS (Cost
$503,532)........................................ 503,532
-----------
COMMERCIAL PAPER (3.6%)
FINANCE (3.6%)
15,000 Commerzbank AG (New York) 6.00%,
1/30/95............................. 14,928
10,000 Societe Generale 5.55%, 1/04/95....... 9,995
-----------
TOTAL COMMERCIAL PAPER (Cost $24,923)............ 24,923
-----------
CORPORATE FLOATING RATE NOTES (5.1%)
FINANCE (5.1%)
$ 10,000 Bank of New York Co., Inc. 5.64%,
6/07/95............................. $ 9,998
25,000 Merrill Lynch 5.69%, 7/12/95.......... 25,000
-----------
TOTAL CORPORATE FLOATING RATE NOTES
(Cost $34,998).................................. 34,998
-----------
TOTAL MONEY MARKET INSTRUMENTS (Cost $563,453)... 563,453
-----------
VALUE
(000)
-----------
SHORT TERM INVESTMENT (18.4%)
REPURCHASE AGREEMENT (18.4%)
127,002 Goldman Sachs 5.50%, dated 12/30/94,
due 1/03/95, to be repurchased at
$127,080, collateralized by $133,200
United States Treasury Notes 7.625%,
due 11/15/22, valued at $129,954
(Cost $127,002)..................... 127,002
-----------
TOTAL INVESTMENTS (100.0%) (Cost $690,455)....... 690,455
-----------
OTHER ASSETS (0.4%)
Cash................................... $ 1
Interest Receivable.................... 2,368
Other.................................. 77 2,446
---------
LIABILITIES (-0.4%)
Distributions Payable.................. (1,639)
Investment Advisory Fees Payable....... (530)
Administrative Fees Payable............ (101)
Custodian Fees Payable................. (50)
Directors' Fees & Expenses Payable..... (1)
Other Liabilities...................... (77) (2,398)
--------- ---------
NET ASSETS (100%)................................... $ 690,503
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 690,597,424 outstanding $.001 par
value shares (authorized 1,000,000,000 shares).... $1.00
---------
---------
- ------------------------------------------------------------
Floating Rate Notes. The interest rate changes on these instruments are based on
changes in a designated base rate. The rates shown were those in effect at
December 31, 1994.
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.
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
91
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
- ------------------------------------------------------------------------------
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (98.4%)
FIXED RATE INSTRUMENTS (50.6%)
NOTES (2.7%)
$ 1,000 Harris County, Texas, 9.25%, 8/01/14,
Prerefunded 2/01/95 at 103........... $ 1,035
3,000 Illinois State Certificates, 4.75%,
6/15/95.............................. 3,009
500 Triborough Bridge & Tunnel Authority,
New York, Convention Center Project,
Series 85D, 9.00%, 7/01/95........... 523
5,000 Wisconsin State 4.50%, 6/15/95......... 4,998
-----------
9,565
-----------
PUT OPTION BONDS (0.4%)
1,500 Putnam County, Florida, Development
Authority, Pollution Control Revenue,
Seminole Electric, 3.75%, 3/15/14
(Putable on 3/15/95)................. 1,500
-----------
TAX & REVENUE ANTICIPATION NOTES (6.5%)
6,450 Colorado State General Fund, 4.50%,
6/27/95, TRANS....................... 6,464
3,000 Idaho State, 4.50%, 6/29/95, TANS...... 3,004
1,015 Los Angeles County, California, 4.50%,
6/30/95, TRANS....................... 1,017
8,810 Maine State, 4.50%, 6/30/95, TANS...... 8,825
4,000 Texas State, 5.00%, 8/31/95, TRANS..... 4,005
-----------
23,315
-----------
COMMERCIAL PAPER (41.0%)
3,000 Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light
Series 90C, 3.55%, 2/23/95........... 3,000
1,100 Brazos River, Texas, Harbor &
Navigation District, Series 90,
3.40%, 1/19/95....................... 1,100
2,500 Burke County, Georgia, Development
Authority, Oglethorpe, Series 92A,
3.80%, 2/13/95....................... 2,500
4,600 Burlington, Kansas, Kansas City Power &
Light Co., 3.50%, 1/18/95............ 4,600
3,500 City of Austin, Texas, Series A, 3.55%,
2/16/95.............................. 3,500
4,530 City of Dallas, Texas, Series A, 4.20%,
3/13/95.............................. 4,530
1,200 Connecticut State Health & Education
Facilities Authority, Yale
University, Series N, 3.75%,
3/10/95.............................. 1,200
1,000 Converse County, Wyoming, Pacificorp
Series 88, 3.80%, 3/10/95............ 1,000
3,500 East Baton Rouge Parish, Louisiana,
3.45%, 1/25/95....................... 3,500
4,500 Emery County, Utah, Pacificorp Series
91, 3.55%, 2/23/95................... 4,500
1,000 Florida Municipal Power, Series A,
3.50%, 1/12/95....................... 1,000
2,525 Gainesville, Florida, 3.60%, 2/27/95... 2,525
2,000 Illinois Development Finance Authority,
Series 94A, 3.60%, 3/08/95........... 2,000
1,000 Illinois Health Facilities Authority,
Series 89A, 3.85%, 2/24/95........... 1,000
4,400 Intermountain Power Agency, Utah,
Series E, 3.70%, 3/09/95............. 4,400
3,100 Intermountain Power Agency, Utah,
Series E, 4.00%, 3/16/95............. 3,100
700 Intermountain Power Agency, Utah,
Series F2, 4.00%, 2/28/95............ 700
1,500 Intermountain Power Agency, Utah,
Series 85F, 4.00%, 2/28/95........... 1,500
7,700 Jacksonville, Florida, Electric
Authority, 3.80%, 3/08/95............ 7,700
3,600 Jasper County, Indiana, Series 88B,
3.60%, 1/18/95....................... 3,600
2,000 Jasper County, Indiana, Series 88C,
3.55%, 2/16/95....................... 2,000
1,100 Lehigh County, Pennsylvania, General
Purpose Authority, Series A, 3.60%,
2/27/95.............................. 1,100
3,000 Maricopa County, Arizona, So. Cal. Ed.,
Series 85C, 3.60%, 2/07/95........... 3,000
6,600 Massachusetts Health & Education
Facilities Authority, Harvard
University, 3.50%, 1/18/95........... 6,600
1,500 Michigan State Strategic Fund, Dow
Chemical Series, 3.85%, 2/24/95...... 1,500
2,520 Montgomery, Alabama, Industrial
Development Board, General Electric
Series, 3.80%, 1/11/95............... 2,520
3,500 Montgomery, Alabama, Industrial
Development Board, General Electric
Series, 3.50%, 2/17/95............... 3,500
1,000 Mount Vernon, Indiana, General Electric
Series 89A, 3.80%, 2/21/95........... 1,000
3,000 Mount Vernon, Indiana, General Electric
Series 89A, 3.75%, 2/21/95........... 3,000
3,685 Municipal Electric Authority of
Georgia, Series 1, 3.70%, 1/11/95.... 3,685
3,500 Municipal Electric Authority of
Georgia, Series 2, 3.60%, 1/19/95.... 3,500
2,300 Municipal Electric Authority of
Georgia, Series 3, 3.70%, 1/11/95.... 2,300
1,000 North Carolina Eastern Municipal Power,
3.65%, 2/07/95....................... 1,000
3,025 North Carolina Eastern Municipal Power,
3.60%, 2/09/95....................... 3,025
300 Northeastern Pennsylvania Hospital
Authority, Series B, 3.50%,
2/17/95.............................. 300
3,290 Omaha, Nebraska, Public Power District,
3.75%, 2/21/95....................... 3,290
1,000 Petersburg, Indiana, Indiana Power &
Light, Series 91, 3.50%, 2/22/95..... 1,000
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
92
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE MUNICPAL MONEY MARKET PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
COMMERCIAL PAPER (CONT.)
$2,000 Petersburg, Indiana, Indiana Power &
Light, Series 91, 4.20%, 3/14/95 $2,000
2,200 Platte River Authority, Colorado,
4.00%, 1/26/95......................... 2,200
1,000 Port of Corpus Christi, Texas, Union
Pacific Series, 3.65%, 2/13/95......... 1,000
1,500 Rochester, Minnesota, Health Facilities,
Mayo Clinic, Series C, 3.90%, 2/28/95.. 1,500
1,500 Rochester, Minnesota, Health Facilities,
Mayo Clinic, Series F, 3.65%, 2/07/95.. 1,500
1,065 Rochester, Minnesota, Health Facilities,
Mayo Clinic, Series E, 3.90%, 2/28/95.. 1,065
2,000 Salt River, Arizona, 3.50%, 1/12/95...... 2,000
4,000 Salt River, Arizona, 3.60%, 1/13/95...... 4,000
2,000 Salt River, Arizona, 3.55%, 2/23/95...... 2,000
2,000 Sunshine State, Florida, Government
Finance Authority, Series 86,
3.55%, 2/27/95......................... 2,000
2,000 Texas Municipal Power Agency,
3.85%, 2/24/95......................... 2,000
6,600 Texas Municipal Power Agency,
3.80%, 3/06/95......................... 6,600
5,000 Trimble County, Kentucky, Louisville
Gas & Electric Series, 3.85%, 2/15/95.. 5,000
1,000 Trimble County, Kentucky, Louisville
Gas & Electric Series, 3.50%, 2/22/95.. 1,000
5,500 University of Minnesota, Series A,
3.65%, 3/09/95......................... 5,500
2,000 University of North Carolina at Chapel
Hill, School of Medicine,
3.65%, 2/09/95......................... 2,000
1,100 University of North Carolina at Chapel
Hill, 3.80%, 3/10/95................... 1,100
3,000 University of Texas, Series A,
3.70%, 3/07/95......................... 3,000
2,500 Vanderbilt University, Tennessee,
Series 89A, 3.60%, 2/24/95............. 2,500
----------
147,240
----------
TOTAL FIXED RATE INSTRUMENTS.......................... 181,620
----------
VARIABLE/FLOATING RATE INSTRUMENTS (47.8%)
DAILY VARIABLE RATE BONDS (29.9%)
400 California Pollution Control Financing
Authority, Southern Edison,
Series 87D, 5.00%, 2/28/08............. 400
4,000 Chattanooga-Hamilton County, Tennessee,
Hospital Authority Revenue, Erlanger
Medical Center, 5.95%, 10/01/17........ 4,000
4,600 District of Columbia, Series 92A-6,
5.40%, 10/01/07........................ 4,600
2,400 Farmington, New Mexico, Pollution
Control Revenue Bonds, Series A,
5.85%, 5/01/24......................... 2,400
5,000 Hapeville, Georgia, Industrial
Development Authority, Series 85,
6.05%, 11/01/15........................ 5,000
$4,200 Harris County, Texas, Health Facilities
Development Corp., Methodist Hospital,
5.85%, 12/01/25........................ $4,200
1,400 Harris County, Texas, Health Facilities
Development Corp., St. Luke's
Episcopal, Series B, 5.85%, 2/15/16.... 1,400
4,200 Harris County, Texas, Health Facilities
Development Corp., St. Luke's
Episcopal, Series D, 5.85%, 2/15/16.... 4,200
2,200 Jackson County, Mississippi, Pollution
Control Revenue, Chevron Project,
Series 93, 5.20%, 6/01/23.............. 2,200
8,100 Jackson County, Mississippi, Port
Facility, Chevron Project, Series 93,
5.20%, 6/01/23......................... 8,100
1,930 Joliet, Illinois, Regional Port District,
Industrial Revenue, 6.05%, 7/15/03..... 1,930
900 Kansas City, Kansas, Industrial
Development Authority, PQ Corp.,
6.05%, 8/01/15......................... 900
1,900 Lake Charles, Louisiana, Harbor &
Terminal District Port Facilities,
Series 84, 5.30%, 11/01/11............. 1,900
1,500 Lincoln County, Wyoming, Pollution
Control Revenue, Exxon Project
Series 84A, 6.00%, 11/01/14............ 1,500
2,820 Louisiana Public Facilities Authority,
Industrial Development, Kenner Hotel
Series, 6.05%, 12/01/15................ 2,820
4,500 Maricopa County, Arizona, Pollution
Control Revenue, Series B,
5.20%, 5/01/29......................... 4,500
1,500 Massachusetts Health & Education
Facilities Authority, Series B,
5.20%, 7/01/05......................... 1,500
2,600 Massachusetts Health & Education
Facilities Authority, Series C,
5.20%, 7/01/05......................... 2,600
6,700 Michigan State Strategic Fund, Consumers
Power Series 88A, 5.25%, 4/15/18....... 6,700
1,570 Missouri State Health & Educational
Facilities Authority Revenue,
Washington University, Series 89A
5.95%, 3/01/17......................... 1,570
3,300 New York City, New York, Water Finance
Authority, Water and Sewer System
Revenue, Series 92C, 6.00%, 6/15/22.... 3,300
3,600 New York City, New York, Water Finance
Authority, Water and Sewer System
Revenue, Series 94C, 6.00%, 6/15/23.... 3,600
5,900 New York State Energy Research &
Development Authority, Pollution
Control Revenue, Niagara Mohawk Power,
Series A, 5.00%, 7/01/15............... 5,900
2,700 Nueces River Authority, Texas, Pollution
Control Revenue, Series 85,
6.05%, 12/01/99........................ 2,700
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
93
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE MUNICPAL MONEY MARKET PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
DAILY VARIABLE RATE BONDS (CONT.)
$2,480 Peninsula Ports Authority, Virginia,
Coal Revenue, 5.30%, 7/01/16........... $ 2,480
4,000 Phoenix, Arizona, Series 1,
5.85%, 6/01/18......................... 4,000
3,800 Platte County, Wyoming, Pollution Control
Revenue, Series A, 6.05%, 7/01/14...... 3,800
900 Platte County, Wyoming, Pollution Control
Revenue, Series B, 6.05%, 7/01/14...... 900
1,600 Port of Saint Helens, Oregon, Pollution
Control Revenue, Portand General
Electric Co., Series B,
5.30%, 6/01/10......................... 1,600
1,400 Saint Charles Parish, Louisiana,
Pollution Control Revenue, Shell Oil
Project, 5.20%, 10/01/22............... 1,400
4,800 Southwest, Texas, Higher Education
Authority Revenue, Southern Methodist
University Series 85, 5.30%, 7/01/15... 4,800
4,000 Sublette County, Wyoming, Pollution
Control Revenue, Exxon Project,
5.20%, 11/01/14........................ 4,000
6,700 Valdez, Alaska, Marine Terminal
Authority, Exxon. Series 85,
5.20%, 10/01/25........................ 6,700
----------
107,600
----------
WEEKLY VARIABLE RATE BONDS (17.9%)
1,000 Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light
Series 90A, 5.65%, 8/01/20............. 1,000
1,000 Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light
Series 90B, 5.65%, 8/01/09............. 1,000
1,000 Brunswick & Glynn County, Georgia,
Development Authority, Series 85,
5.00%, 12/01/15........................ 1,000
7,000 Burke County, Georgia, Development
Authority, Oglethorpe, Series 93A,
4.95%, 1/01/16......................... 7,000
7,900 Charlotte, North Carolina, Airport,
Series 93A, 4.95%, 7/01/16............. 7,900
2,500 City of Columbia, Missouri, Special
Revenue Bonds, Series 88A,
5.00%, 6/01/08......................... 2,500
1,500 City of Columbia, Missouri, Water &
Electric Revenue Bonds, Series 85B,
5.00%, 12/01/15........................ 1,500
300 City of Forsyth, Montana, Pollution
Control Revenue, Series B,
5.65%, 6/01/13......................... 300
700 City of Forsyth, Montana, Pollution
Control Revenue, Series D,
5.65%, 6/01/13......................... 700
2,600 City of Midlothian, Texas, Industrial
Development Corp., Pollution Control
Revenue, Box-Crow Cement Co. Project,
5.40%, 12/01/09........................ 2,600
7,900 Clark County, Nevada, Airport Revenue
Bonds, Series 93A, 4.95%, 7/01/12...... 7,900
$ 1,530 Clear Creek County, Colorado, Revenue
Bonds, Colorado Finance Pool Program,
5.00%, 6/01/98......................... $ 1,530
600 Colorado Student Obligation Bond
Authority, Student Loan Revenue,
Series 91C1, 4.90%, 8/01/00............ 600
7,300 Dade County, Florida, Water & Sewer
Revenue Bonds, 4.95%, 10/05/22......... 7,300
1,200 Delaware County, Pennsylvania, Industrial
Development Authority, Scott Paper
Series D, 5.65%, 12/01/18.............. 1,200
500 Delaware County, Pennsylvania, Industrial
Development Authority, Scott Paper
Series E, 5.65%, 12/01/18.............. 500
1,000 Emmaus, Pennsylvania, General Authority,
Series D5, 5.65%, 3/01/24.............. 1,000
2,500 Emmaus, Pennsylvania, General Authority,
Series E5, 5.65%, 3/01/24.............. 2,500
300 Illinois Development Finance Authority,
A.E. Staley Manufacturing Series 85,
4.90%, 12/01/05........................ 300
1,000 Lehigh County, Pennsylvania, Allegheny
Electric Cooperative, 5.40%, 12/01/15.. 1,000
600 Louisiana Public Facilities Authority,
Hospital Revenue, Series 85,
5.50%, 12/01/00........................ 600
1,000 Massachusetts Health & Education
Facilities Authority, Series G-1,
4.50%, 1/01/19......................... 1,000
1,100 Mobile, Alabama, Industrial Development
Board, Scott Paper Series A,
5.65%, 12/01/19........................ 1,100
1,500 Mobile, Alabama, Industrial Development
Board, Scott Paper Series B,
5.65%, 12/01/19........................ 1,500
3,900 Nueces County, Texas, Health Facilities,
Driscoll Childrens' Foundation,
5.55%, 7/01/15......................... 3,900
1,500 Person County, North Carolina, Carolina
Power& Light, 5.55%, 11/01/19.......... 1,500
235 Pinellas County, Florida, Health
Facilities, Bayfront Medical Center,
Series 89, 4.95%, 6/01/98.............. 235
540 Polk County, Iowa, Hospital Equipment &
Improvement Authority,
5.50%, 12/01/05........................ 540
800 Port Development Corporation Marine
Terminal, Texas, Series 89,
4.95%, 1/15/14......................... 800
1,500 Port of Corpus Christi, Texas, Marine
Terminal, R.J. Reynolds Metals Series,
5.40%, 9/01/14......................... 1,500
650 Putnam County, Florida, Development
Authority, Seminole Electric
Series 84H1, 5.55%, 3/15/14............ 650
1,000 Rapides Parish, Louisiana, Central
Louisiana Electric Series,
5.40%, 7/01/18......................... 1,000
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
94
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
THE MUNICPAL MONEY MARKET PORTFOLIO (CONT.)
- ------------------------------------------------------------------------------
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
WEEKLY VARIABLE RATE BONDS (CONT.)
$ 700 Sheboygan, Wisconsin, Wisconsin Power &
Light Series , 5.40%, 8/01/14.......... $ 700
----------
64,355
----------
TOTAL VARIABLE/FLOATING RATE INSTRUMENTS.............. 171,955
----------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $353,575).......... 353,575
----------
TAXABLE INSTRUMENTS (1.2%)
US GOVERNMENT & AGENCY OBLIGATIONS (1.2%)
Federal Farm Credit Bank
2,045 Discount Note, 5.75%, 1/20/95............ 2,039
Federal Home Loan Bank
700 Discount Note, 5.77%, 1/17/95............ 698
1,550 Discount Note, 5.96%, 2/06/95............ 1,541
----------
TOTAL TAXABLE INSTRUMENTS (Cost $4,278)............... 4,278
----------
TOTAL INVESTMENTS (99.6%) (Cost $357,853)............. 357,853
----------
VALUE
(000)
- ---------------------------------------------------------------------
OTHER ASSETS (0.7%)
Cash......................................... $ 97
Interest Receivable.......................... 2,485
Other........................................ 34 $ 2,616
------
LIABILITIES (-0.3%)
Distributions Payable........................ (613)
Investment Advisory Fees Payable............. (252)
Administrative Fees Payable.................. (66)
Custodian Fees Payable....................... (27)
Director's Fees & Expenses................... (1)
Other Liabilities............................ (66) (1,025)
------ --------
NET ASSETS (100%)......................................... $359,444
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 359,426,006 outstanding $.001
par value shares (authorized 1,000,000,000
shares)...................................... $1.00
-----
-----
- --------------------------------------------------------------------------------
TANS -- Tax Anticipation Notes
TRANS -- Tax & Revenue Anticipation Notes
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 US Government & Agency Obligations represent
effective yields.
At December31, 1994, approximately 15% of the net assets were invested in
Texas municipal securities. Economic changes affecting the state and certain
of its 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.
- ------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
95
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE
COUNTRY ASIAN EMERGING EUROPEAN GLOBAL
ALLOCATION EQUITY MARKETS EQUITY EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1994 1994 1994 1994
(000) (000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 4,271 $ 3,652 $ 10,163 $ 301 $ 955
Interest 312 801 3,744 82 97
Less Foreign Taxes Withheld (454) (348) (719) (42) (87)
------------ ------------ ------------- ------------ ------------
Total Income 4,129 4,105 13,188 341 965
------------ ------------ ------------- ------------ ------------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,202 2,168 11,082 146 414
Less: Fees Waived (367) (535) -- (112) (126)
------------ ------------ ------------- ------------ ------------
Investment Advisory Fees -- Net 835 1,633 11,082 34 288
Administrative Fees 346 433 1,388 45 90
Sub - Administrative Fees -- -- 158 -- --
Custodian Fees 168 519 1,752 45 43
Filing and Registration Fees 31 31 123 21 35
Insurance 8 9 24 -- 1
Directors' Fees and Expenses 4 4 4 4 4
Legal Fees 16 14 40 1 2
Audit Fees 31 35 59 24 32
Shareholder Reports 35 27 82 7 19
Brazilian Tax Expense -- -- 632 -- --
Other Expenses 3 3 146 1 1
------------ ------------ ------------- ------------ ------------
Total Expenses 1,477 2,708 15,490 182 515
------------ ------------ ------------- ------------ ------------
NET INVESTMENT INCOME (LOSS) 2,652 1,397 (2,302) 159 450
------------ ------------ ------------- ------------ ------------
NET REALIZED GAIN (LOSS):
Investments Sold 12,714 32,350 68,650 2,757 1,568
Foreign Currency Transactions (4,567) 498 (1,826) (151) (75)
------------ ------------ ------------- ------------ ------------
Total Net Realized Gain 8,147 32,848 66,824 2,606 1,493
------------ ------------ ------------- ------------ ------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (12,455) (80,975) (168,042) (1,886) (1,816)
------------ ------------ ------------- ------------ ------------
TOTAL NET REALIZED GAIN AND CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) (4,308) (48,127) (101,218) 720 (323)
------------ ------------ ------------- ------------ ------------
Net Increase (Decrease) in Net Assets Resulting
from Operations $ (1,656) $ (46,730) $ (103,520) $ 879 $ 127
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
96
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JAPANESE
GOLD INTERNATIONAL INTERNATIONAL EQUITY
PORTFOLIO EQUITY SMALL CAP PORTFOLIO
FEBRUARY 1, PORTFOLIO PORTFOLIO APRIL 25,
1994* TO YEAR ENDED YEAR ENDED 1994* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1994 1994 1994
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 199 $ 25,000 $ 2,775 $ 161
Interest 118 3,310 336 138
Less Foreign Taxes Withheld (2) (2,929) (321) (24)
------------ ------------ ------------- ------------
Total Income 315 25,381 2,790 275
------------ ------------ ------------- ------------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 114 9,581 1,139 244
Basic Fees -- Sub Adviser 76 -- -- --
Less: Fees Waived -- Adviser (55) (344) (174) (80)
Fees Waived -- Sub Adviser (36) -- -- --
------------ ------------ ------------- ------------
Investment Advisory Fees -- Net 99 9,237 965 164
Administrative Fees 32 1,888 192 50
Custodian Fees 12 496 114 22
Filing and Registration Fees 26 88 51 26
Insurance -- 51 3 1
Directors' Fees and Expenses 4 4 4 3
Legal Fees 4 56 5 6
Audit Fees 25 46 28 27
Shareholder Reports 34 85 14 7
Other Expenses 2 24 1 --
------------ ------------ ------------- ------------
Total Expenses 238 11,975 1,377 306
------------ ------------ ------------- ------------
NET INVESTMENT INCOME (LOSS) 77 13,406 1,413 (31)
------------ ------------ ------------- ------------
NET REALIZED GAIN (LOSS):
Investments Sold 974 70,494 (1,638) 4
Foreign Currency Transactions (3) (5,962) (704) (531)
------------ ------------ ------------- ------------
Total Net Realized Gain (Loss) 971 64,532 (2,342) (527)
------------ ------------ ------------- ------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (2,809) 46,399 (5,180) (215)
------------ ------------ ------------- ------------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) (1,838) 110,931 (7,522) (742)
------------ ------------ ------------- ------------
Net Increase (Decrease) in Net Assets Resulting from Operations $ (1,761) $ 124,337 $ (6,109) $ (773)
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
<FN>
- ---------------
*Commencement of operations
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
97
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING EQUITY SMALL CAP VALUE
GROWTH GROWTH VALUE EQUITY EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1994 1994 1994 1994
(000) (000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 300 $ 1,566 $ 1,221 $ 2,785 $ 467
Interest 411 445 85 84 688
------ ------------ ------------- ------------ ------------
Total Income 711 2,011 1,306 2,869 1,155
------ ------------ ------------- ------------ ------------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,110 538 302 352 120
Less: Fees Waived (16) (83) (94) (73) (60)
------ ------------ ------------- ------------ ------------
Investment Advisory Fees -- Net 1,094 455 208 279 60
Administrative Fees 179 147 67 115 43
Custodian Fees 28 35 25 29 16
Filing and Registration Fees 22 25 18 24 16
Insurance 5 3 2 3 2
Directors' Fees and Expenses 4 4 4 4 4
Legal Fees 6 5 2 3 2
Audit Fees 17 17 17 17 17
Shareholder Reports 21 25 11 17 6
Other Expenses 8 2 1 2 2
------ ------------ ------------- ------------ ------------
Total Expenses 1,384 718 355 493 168
------ ------------ ------------- ------------ ------------
NET INVESTMENT INCOME (LOSS) (673) 1,293 951 2,376 987
------ ------------ ------------- ------------ ------------
NET REALIZED GAIN:
Investments Sold 1,331 3,710 1,484 2,378 496
------ ------------ ------------- ------------ ------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (891) (2,690) (1,598) (6,089) (1,998)
------ ------------ ------------- ------------ ------------
TOTAL NET REALIZED GAIN AND CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) 440 1,020 (114) (3,711) (1,502)
------ ------------ ------------- ------------ ------------
Net Increase (Decrease) in Net Assets Resulting
from Operations $ (233) $ 2,313 $ 837 $ (1,335) $ (515)
------ ------------ ------------- ------------ ------------
------ ------------ ------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
98
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
MARKETS GLOBAL MUNICIPAL
DEBT FIXED FIXED HIGH MONEY MONEY
PORTFOLIO INCOME INCOME YIELD MARKET MARKET
FEBRUARY 1, PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
1994* TO YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1994 1994 1994 1994 1994
(000) (000) (000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ -- $ -- $ -- $ 171 $ -- $ --
Interest 9,786 13,397 10,192 9,914 30,383 9,915
Less Foreign Taxes Withheld -- -- (168) -- -- --
------------ ------------ ------------- ------------ ------------ ------
Total Income 9,786 13,397 10,024 10,085 30,383 9,915
------------ ------------ ------------- ------------ ------------ ------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 853 758 586 496 2,127 1,006
Less: Fees Waived -- (276) (238) (7) -- --
------------ ------------ ------------- ------------ ------------ ------
Investment Advisory Fees -- Net 853 482 348 489 2,127 1,006
Administrative Fees 135 372 234 169 1,111 534
Custodian Fees 139 48 71 23 73 62
Filing and Registration Fees 63 17 14 29 43 49
Insurance 2 12 7 2 26 11
Directors' Fees and Expenses 4 4 4 4 4 4
Legal Fees 6 11 8 5 42 19
Audit Fees 42 17 24 22 18 16
Shareholder Reports 13 7 17 -- 34 18
Other Expenses 18 6 6 1 25 10
------------ ------------ ------------- ------------ ------------ ------
Total Expenses 1,275 976 733 744 3,503 1,729
------------ ------------ ------------- ------------ ------------ ------
NET INVESTMENT INCOME 8,511 12,421 9,291 9,341 26,880 8,186
------------ ------------ ------------- ------------ ------------ ------
NET REALIZED GAIN (LOSS):
Investments Sold (2,514) (14,132) (5,933) (1,581) (26) (6)
Foreign Currency Transactions (189) (747) (3,142) -- -- --
Securities Sold Short 187 -- -- -- -- --
------------ ------------ ------------- ------------ ------------ ------
Total Net Realized Loss (2,516) (14,879) (9,075) (1,581) (26) (6)
------------ ------------ ------------- ------------ ------------ ------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) (9,457) (5,219) (10,682) (12,785) -- --
------------ ------------ ------------- ------------ ------------ ------
TOTAL NET REALIZED LOSS AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) (11,973) (20,098) (19,757) (14,366) (26) (6)
------------ ------------ ------------- ------------ ------------ ------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ (3,462) $ (7,677) $ (10,466) $ (5,025) $ 26,854 $ 8,180
------------ ------------ ------------- ------------ ------------ ------
------------ ------------ ------------- ------------ ------------ ------
<FN>
- ---------------
* Commencement of operations
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
99
<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,
1993 1994
(000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,356 $ 2,652
Net Realized Gain 4,501 8,147
Change in Unrealized Appreciation (Depreciation) 19,159 (12,455)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations 25,016 (1,656)
------------ ------------
DISTRIBUTIONS:
Net Investment Income (644) (1,773)
In Excess of Net Investment Income (585) --
Net Realized Gain -- (4,419)
In Excess of Net Realized Gain (472) --
------------ ------------
Total Distributions (1,701) (6,192)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 109,834 169,994
Distributions Reinvested 1,360 5,395
Redeemed (33,889) (135,418)
------------ ------------
Net Increase from Capital Share Transactions 77,305 39,971
------------ ------------
Total Increase in Net Assets 100,620 32,123
NET ASSETS:
Beginning of Period 50,234 150,854
------------ ------------
End of Period (2) $ 150,854 $ 182,977
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 9,943 14,259
Shares Issued on Distributions Reinvested 137 458
Shares Redeemed (2,968) (11,357)
------------ ------------
Net Increase in Capital Shares Outstanding 7,112 3,360
------------ ------------
------------ ------------
(2) Net Assets were comprised of:
Paid in Capital $ 128,911 $ 168,882
Undistributed Net Investment Income 660 1,418
Accumulated Net Realized Gain 4,140 7,989
Unrealized Appreciation 17,143 4,688
------------ ------------
$ 150,854 $ 182,977
------------ ------------
------------ ------------
</TABLE>
- -------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1993 1994
(000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,046 $ 1,397
Net Realized Gain 5,788 32,848
Change in Unrealized Appreciation (Depreciation) 111,553 (80,975)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations 118,387 (46,730)
------------ ------------
DISTRIBUTIONS:
Net Investment Income (42) (972)
In Excess of Net Investment Income (422) --
Net Realized Gain (593) (5,840)
In Excess of Net Realized Gain (631) --
------------ ------------
Total Distributions (1,688) (6,812)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 177,134 213,200
Distributions Reinvested 1,532 6,036
Redeemed (50,207) (175,924)
------------ ------------
Net Increase from Capital Share Transactions 128,459 43,312
------------ ------------
Total Increase (Decrease) in Net Assets 245,158 (10,230)
NET ASSETS:
Beginning of Period 41,978 287,136
------------ ------------
End of Period (2) $ 287,136 $ 276,906
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 10,206 9,345
Shares Issued on Distributions Reinvested 102 233
Shares Redeemed (2,549) (7,685)
------------ ------------
Net Increase in Capital Shares Outstanding 7,759 1,893
------------ ------------
------------ ------------
(2) Net Assets were comprised of:
Paid in Capital $ 164,282 $ 207,594
Undistributed Net Investment Income 940 1,886
Accumulated Net Realized Gain 5,863 32,350
Unrealized Appreciation 116,051 35,076
------------ ------------
$ 287,136 $ 276,906
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
100
<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,
1993 1994
(000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Loss $ (194) $ (2,302)
Net Realized Gain (Net of India tax of $1,159 on net realized gains for the Year Ended
December 31, 1994.) 37,580 66,824
Change in Unrealized Appreciation (Depreciation) 212,433 (168,042)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations 249,819 (103,520)
------------ ------------
DISTRIBUTIONS:
Net Realized Gain -- (37,393)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 430,127 579,390
Distributions Reinvested -- 35,730
Redeemed (18,813) (279,921)
------------ ------------
Net Increase from Capital Share Transactions 411,314 335,199
------------ ------------
Total Increase in Net Assets 661,133 194,286
NET ASSETS:
Beginning of Period 74,219 735,352
------------ ------------
End of Period (2) $ 735,352 $ 929,638
------------ ------------
------------ ------------
<FN>
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 32,725 32,685
Shares Issued on Distributions Reinvested -- 1,974
Shares Redeemed (1,289) (16,342)
------------ ------------
Net Increase in Capital Shares Outstanding 31,436 18,317
------------ ------------
------------ ------------
(2) Net Assets were comprised of:
Paid in Capital $ 483,068 $ 818,267
Accumulated Net Investment Loss -- (785)
Accumulated Net Realized Gain 37,339 65,253
Unrealized Appreciation (Net of India tax of $4,779 on unrealized appreciation on
investments at December 31, 1994.) 214,945 46,903
------------ ------------
$ 735,352 $ 929,638
------------ ------------
------------ ------------
</TABLE>
- ------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 2, 1993* TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1993 1994
(000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 75 $ 159
Net Realized Gain 260 2,606
Change in Unrealized Appreciation (Depreciation) 1,687 (1,886)
------- ------------
Net Increase in Net Assets Resulting from Operations 2,022 879
------- ------------
DISTRIBUTIONS:
Net Investment Income -- (87)
Net Realized Gain -- (251)
------- ------------
Total Distributions -- (338)
------- ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 12,366 39,425
Distributions Reinvested -- 337
Redeemed (1,707) (25,350)
------- ------------
Net Increase from Capital Share Transactions 10,659 14,412
------- ------------
Total Increase in Net Assets 12,681 14,953
NET ASSETS:
Beginning of Period -- 12,681
------- ------------
End of Period (2) $ 12,681 $ 27,634
------- ------------
------- ------------
<FN>
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,122 2,791
Shares Issued on Distributions Reinvested -- 27
Shares Redeemed (140) (1,818)
------- ------------
Net Increase in Capital Shares Outstanding 982 1,000
------- ------------
------- ------------
(2) Net Assets were comprised of:
Paid in Capital $ 10,659 $ 25,071
Undistributed Net Investment Income 84 31
Accumulated Net Realized Gain 251 2,731
Unrealized Appreciation (Depreciation) 1,687 (199)
------- ------------
$ 12,681 $ 27,634
------- ------------
------- ------------
- -----------------
* Commencement of operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
101
<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,
1993 1994
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 128 $ 450
Net Realized Gain 1,796 1,493
Change in Unrealized Appreciation (Depreciation) 3,624 (1,816)
------------ ------------
Net Increase in Net Assets Resulting from Operations 5,548 127
------------ ------------
DISTRIBUTIONS:
Net Investment Income (36) (170)
In Excess of Net Investment Income (40) --
Net Realized Gain (111) (1,756)
------------ ------------
Total Distributions (187) (1,926)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 3,441 72,166
Distributions Reinvested 188 1,926
Redeemed (811) (13,276)
------------ ------------
Net Increase from Capital Share Transactions 2,818 60,816
------------ ------------
Total Increase in Net Assets 8,179 59,017
NET ASSETS:
Beginning of Period 11,739 19,918
------------ ------------
End of Period (2) $ 19,918 $ 78,935
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 281 5,281
Shares Issued on Distributions Reinvested 17 154
Shares Redeemed (66) (982)
------------ ------------
Net Increase in Capital Shares Outstanding 232 4,453
------------ ------------
------------ ------------
(2) Net Assets were comprised of:
Paid in Capital $ 14,619 $ 75,435
Undistributed Net Investment Income 168 373
Accumulated Net Realized Gain 1,756 1,568
Unrealized Appreciation 3,375 1,559
------------ ------------
$ 19,918 $ 78,935
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1, 1994* TO
DECEMBER 31, 1994
(000)
- --------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 77
Net Realized Gain 971
Change in Unrealized Depreciation (2,809)
--------
Net Decrease in Net Assets Resulting from Operations (1,761)
--------
DISTRIBUTIONS:
Net Investment Income (38)
--------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 40,892
Distributions Reinvested 32
Redeemed (8,882)
--------
Net Increase from Capital Share Transactions 32,042
--------
Total Increase in Net Assets 30,243
NET ASSETS:
Beginning of Period --
--------
End of Period (2) $ 30,243
--------
--------
<FN>
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 4,264
Shares Issued on Distributions Reinvested 3
Shares Redeemed (954)
--------
Net Increase in Capital Shares Outstanding 3,313
--------
--------
(2) Net Assets were comprised of:
Paid in Capital $ 32,042
Undistributed Net Investment Income 36
Accumulated Net Realized Gain 974
Unrealized Depreciation (2,809)
--------
$ 30,243
--------
--------
- --------------------
*Commencement of operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
102
<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,
1993 1994
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,833 $ 13,406
Net Realized Gain 27,684 64,532
Change in Unrealized Appreciation (Depreciation) 221,419 46,399
------------ ------------
Net Increase in Net Assets Resulting from Operations 257,936 124,337
------------ ------------
DISTRIBUTIONS:
Net Investment Income (571) (11,956)
In Excess of Net Investment Income (6,863) --
Net Realized Gain (15,370) (18,019)
------------ ------------
Total Distributions (22,804) (29,975)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 251,210 330,843
Distributions Reinvested 19,481 25,762
Redeemed (69,505) (93,242)
------------ ------------
Net Increase from Capital Share Transactions 201,186 263,363
------------ ------------
Total Increase in Net Assets 436,318 357,725
NET ASSETS:
Beginning of Period 510,727 947,045
------------ ------------
End of Period (2) $ 947,045 $ 1,304,770
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 20,089 22,148
Shares Issued on Distributions Reinvested 1,763 1,872
Shares Redeemed (5,819) (6,156)
------------ ------------
Net Increase in Capital Shares Outstanding 16,033 17,864
------------ ------------
------------ ------------
(2) Net Assets were comprised of:
Paid in Capital $ 737,361 $ 1,001,514
Undistributed Net Investment Income 11,557 7,083
Accumulated Net Realized Gain 18,688 70,335
Unrealized Appreciation 179,439 225,838
------------ ------------
$ 947,045 $ 1,304,770
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1993 1994
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 142 $ 1,413
Net Realized Gain (Loss) 775 (2,342)
Change in Unrealized Appreciation (Depreciation) 3,647 (5,180)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations 4,564 (6,109)
------------ ------------
------------ ------------
DISTRIBUTIONS:
Net Investment Income (4) (96)
In Excess of Net Investment Income (35) --
Net Realized Gain -- (794)
------------ ------------
Total Distributions (39) (890)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 45,462 132,287
Distributions Reinvested 34 763
Redeemed (1,011) (18,784)
------------ ------------
Net Increase from Capital Share Transactions 44,485 114,266
------------ ------------
Total Increase in Net Assets 49,010 107,267
NET ASSETS:
Beginning of Period 3,824 52,834
------------ ------------
End of Period (2) $ 52,834 $ 160,101
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 3,336 8,068
Shares Issued on Distributions Reinvested 3 52
Shares Redeemed (108) (1,164)
------------ ------------
Net Increase in Capital Shares Outstanding 3,231 6,956
------------ ------------
------------ ------------
(2) Net Assets were comprised of:
Paid in Capital $ 48,311 $ 162,928
Undistributed Net Investment Income 90 703
Accumulated Net Realized Gain (Loss) 794 (1,989)
Unrealized Appreciation (Depreciation) 3,639 (1,541)
------------ ------------
$ 52,834 $ 160,101
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
103
<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
DECEMBER 31, 1994
(000)
- --------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Loss $ (31)
Net Realized Loss (527)
Change in Unrealized Depreciation (215)
--------
Net Decrease in Net Assets Resulting from Operations (773)
--------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 69,015
Redeemed (17,910)
--------
Net Increase from Capital Share Transactions 51,105
--------
Total Increase in Net Assets 50,332
NET ASSETS:
Beginning of Period --
--------
End of Period (2) $ 50,332
--------
--------
<FN>
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 6,910
Shares Redeemed (1,789)
--------
Net Increase in Capital Shares Outstanding 5,121
--------
--------
(2) Net Assets were comprised of:
Paid in Capital $ 50,808
Accumulated Net Investment Loss (261)
Unrealized Depreciation (215)
--------
$ 50,332
--------
--------
- -----------------
*Commencement of operations.
</TABLE>
- ------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1993 1994
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Loss $ (703) $ (673)
Net Realized Gain (Loss) (8,842) 1,331
Change in Unrealized Appreciation (Depreciation) 11,279 (891)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations 1,734 (233)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 50,836 85,970
Redeemed (43,110) (71,689)
------------ ------------
Net Increase from Capital Share Transactions 7,726 14,281
------------ ------------
Total Increase in Net Assets 9,460 14,048
NET ASSETS:
Beginning of Period 94,161 103,621
------------ ------------
End of Period (2) $ 103,621 $ 117,669
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 3,441 5,433
Shares Redeemed (2,856) (4,522)
------------ ------------
Net Increase in Capital Shares Outstanding 585 911
------------ ------------
------------ ------------
(2) Net Assets were comprised of:
Paid in Capital $ 89,990 $ 103,598
Accumulated Net Realized Loss (12,256) (10,925)
Unrealized Appreciation 25,887 24,996
------------ ------------
$ 103,621 $ 117,669
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
104
<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,
1993 1994
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 864 $ 1,293
Net Realized Gain 2,813 3,710
Change in Unrealized Appreciation (Depreciation) (190) (2,690)
------------ ------------
Net Increase in Net Assets Resulting from Operations 3,487 2,313
------------ ------------
DISTRIBUTIONS:
Net Investment Income (864) (952)
In Excess of Net Investment Income (47) --
Net Realized Gain -- (2,220)
------------ ------------
Total Distributions (911) (3,172)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 69,561 47,456
Distributions Reinvested 880 3,096
Redeemed (45,213) (26,223)
------------ ------------
Net Increase from Capital Share Transactions 25,228 24,329
------------ ------------
Total Increase in Net Assets 27,804 23,470
NET ASSETS:
Beginning of Period 45,985 73,789
------------ ------------
End of Period (2) $ 73,789 $ 97,259
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 6,049 3,964
Shares Issued on Distributions Reinvested 76 267
Shares Redeemed (3,918) (2,218)
------------ ------------
Net Increase in Capital Shares Outstanding 2,207 2,013
------------ ------------
------------ ------------
(2) Net Assets were comprised of:
Paid in Capital $ 68,255 $ 92,584
Undistributed Net Investment Income 120 461
Accumulated Net Realized Gain 1,969 3,459
Unrealized Appreciation 3,445 755
------------ ------------
$ 73,789 $ 97,259
------------ ------------
------------ ------------
</TABLE>
- ------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1993 1994
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 467 $ 951
Net Realized Gain 720 1,484
Change in Unrealized Appreciation (Depreciation) 603 (1,598)
------------ ------------
Net Increase in Net Assets Resulting from Operations 1,790 837
------------ ------------
DISTRIBUTIONS:
Net Investment Income (309) (831)
Net Realized Gain -- (720)
------------ ------------
Total Distributions (309) (1,551)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 26,738 25,447
Distributions Reinvested 301 1,464
Redeemed (7,719) (12,939)
------------ ------------
Net Increase from Capital Share Transactions 19,320 13,972
------------ ------------
Total Increase in Net Assets 20,801 13,258
NET ASSETS:
Beginning of Period 5,974 26,775
------------ ------------
End of Period (2) $ 26,775 $ 40,033
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,513 2,358
Shares Issued on Distributions Reinvested 28 137
Shares Redeemed (718) (1,200)
------------ ------------
Net Increase in Capital Shares Outstanding 1,823 1,295
------------ ------------
------------ ------------
(2) Net Assets were comprised of:
Paid in Capital $ 25,222 $ 39,194
Undistributed Net Investment Income 161 281
Accumulated Net Realized Gain 720 1,484
Unrealized Appreciation (Depreciation) 672 (926)
------------ ------------
$ 26,775 $ 40,033
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
105
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1993 1994
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,381 $ 2,376
Net Realized Gain 2,718 2,378
Change in Unrealized Appreciation (Depreciation) 1,999 (6,089)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations 6,098 (1,335)
------------ ------------
DISTRIBUTIONS:
Net Investment Income (1,169) (2,189)
Net Realized Gain -- (2,504)
------------ ------------
Total Distributions (1,169) (4,693)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 44,906 45,372
Distributions Reinvested 1,049 4,395
Redeemed (23,827) (24,931)
------------ ------------
Net Increase from Capital Share Transactions 22,128 24,836
------------ ------------
Total Increase in Net Assets 27,057 18,808
NET ASSETS:
Beginning of Period 27,541 54,598
------------ ------------
End of Period (2) $ 54,598 $ 73,406
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 3,767 3,798
Shares Issued on Distributions Reinvested 89 372
Shares Redeemed (1,969) (2,109)
------------ ------------
Net Increase in Capital Shares Outstanding 1,887 2,061
------------ ------------
------------ ------------
(2) Net Assets were comprised of:
Paid in Capital $ 47,884 $ 72,751
Undistributed Net Investment Income 442 643
Accumulated Net Realized Gain 2,478 2,307
Unrealized Appreciation (Depreciation) 3,794 (2,295)
------------ ------------
$ 54,598 $ 73,406
------------ ------------
------------ ------------
</TABLE>
- ------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1993 1994
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,390 $ 987
Net Realized Gain 3,879 496
Change in Unrealized (Depreciation) (1,029) (1,998)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations 4,240 (515)
------------ ------------
DISTRIBUTIONS:
Net Investment Income (1,390) (1,257)
In Excess of Net Investment Income (258) --
Net Realized Gain (201) (3,880)
In Excess of Net Realized Gain (3,044) --
------------ ------------
Total Distributions (4,893) (5,137)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 3,110 4,396
Distributions Reinvested 4,366 4,725
Redeemed (17,033) (14,661)
------------ ------------
Net Decrease from Capital Share Transactions (9,557) (5,540)
------------ ------------
Total Decrease in Net Assets (10,210) (11,192)
NET ASSETS:
Beginning of Period 39,894 29,684
------------ ------------
End of Period (2) $ 29,684 $ 18,492
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 290 470
Shares Issued on Distributions Reinvested 420 502
Shares Redeemed (1,571) (1,574)
------------ ------------
Net Decrease in Capital Shares Outstanding (861) (602)
------------ ------------
------------ ------------
(2) Net Assets were comprised of:
Paid in Capital $ 23,819 $ 18,279
Undistributed Net Investment Income 505 214
Accumulated Net Realized Gain 3,858 495
Unrealized Appreciation (Depreciation) 1,502 (496)
------------ ------------
$ 29,684 $ 18,492
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
106
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1, 1994* TO
DECEMBER 31,
1994
(000)
- --------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,511
Net Realized Loss (2,516)
Change in Unrealized Depreciation (9,457)
--------
Net Decrease in Net Assets Resulting from Operations (3,462)
--------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 190,661
Redeemed (42,250)
--------
Net Increase from Capital Share Transactions 148,411
--------
Total Increase in Net Assets 144,949
NET ASSETS:
Beginning of Period --
--------
End of Period (2) $ 144,949
--------
--------
<FN>
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 21,753
Shares Redeemed (4,872)
--------
Net Increase in Capital Shares Outstanding 16,881
--------
--------
(2) Net Assets were comprised of:
Paid in Capital $ 148,411
Undistributed Net Investment Income 8,322
Accumulated Net Realized Loss (2,327)
Unrealized Depreciation (9,457)
--------
$ 144,949
--------
--------
- -----------------
*Commencement of operations.
</TABLE>
- ------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1993 1994
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSSETS
OPERATIONS:
Net Investment Income $ 10,095 $ 12,421
Net Realized Gain (Loss) 8,090 (14,879)
Change in Unrealized Appreciation (Depreciation) (2,112) (5,219)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations 16,073 (7,677)
------------ ------------
DISTRIBUTIONS:
Net Investment Income (10,095) (11,181)
In Excess of Net Investment Income (146) --
Net Realized Gain (3,669) (8,092)
In Excess of Net Realized Gain -- (22)
------------ ------------
Total Distributions (13,910) (19,295)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 135,882 91,618
Distributions Reinvested 12,353 16,756
Redeemed (63,940) (112,739)
------------ ------------
Net Increase (Decrease) from Capital Share Transactions 84,295 (4,365)
------------ ------------
Total Increase (Decrease) in Net Assets 86,458 (31,337)
NET ASSETS:
Beginning of Period 154,210 240,668
------------ ------------
End of Period (2) $ 240,668 $ 209,331
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 12,327 9,049
Shares Issued on Distributions Reinvested 1,135 1,625
Shares Redeemed (5,784) (11,150)
------------ ------------
Net Increase (Decrease) in Capital Shares Outstanding 7,678 (476)
------------ ------------
------------ ------------
(2) Net Assets were comprised of:
Paid in Capital $ 231,416 $ 227,051
Undistributed Net Investment Income 781 1,274
Accumulated Net Realized Gain (Loss) 8,092 (14,154)
Unrealized Appreciation (Depreciation) 379 (4,840)
------------ ------------
$ 240,668 $ 209,331
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
107
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1993 1994
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 7,832 $ 9,291
Net Realized Gain (Loss) 4,506 (9,075)
Change in Unrealized Appreciation (Depreciation) 5,277 (10,682)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations 17,615 (10,466)
------------ ------------
DISTRIBUTIONS:
Net Investment Income (7,831) (5,595)
In Excess of Net Investment Income (2,164) --
Net Realized Gain (1,320) (4,564)
------------ ------------
Total Distributions (11,315) (10,159)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 113,012 96,510
Distributions Reinvested 9,424 9,111
Redeemed (49,165) (126,789)
------------ ------------
Net Increase (Decrease) from Capital Share Transactions 73,271 (21,168)
------------ ------------
Total Increase (Decrease) in Net Assets 79,571 (41,793)
NET ASSETS:
Beginning of Period 92,897 172,468
------------ ------------
End of Period (2) $ 172,468 $ 130,675
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 9,941 8,912
Shares Issued on Distributions Reinvested 869 833
Shares Redeemed (4,300) (11,801)
------------ ------------
Net Increase (Decrease) in Capital Shares Outstanding 6,510 (2,056)
------------ ------------
------------ ------------
(2) Net Assets were comprised of:
Paid in Capital $ 162,825 $ 141,657
Undistributed Net Investment Income 1,060 1,613
Accumulated Net Realized Gain (Loss) 4,563 (5,933)
Unrealized Appreciation (Depreciation) 4,020 (6,662)
------------ ------------
$ 172,468 $ 130,675
------------ ------------
------------ ------------
</TABLE>
- ------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1993 1994
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 3,465 $ 9,341
Net Realized Gain (Loss) 1,550 (1,581)
Change in Unrealized Appreciation (Depreciation) 2,151 (12,785)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations 7,166 (5,025)
------------ ------------
DISTRIBUTIONS:
Net Investment Income (3,128) (9,097)
Net Realized Gain -- (1,413)
------------ ------------
Total Distributions (3,128) (10,510)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 56,684 72,764
Distributions Reinvested 3,050 8,869
Redeemed (9,466) (43,375)
------------ ------------
Net Increase from Capital Share Transactions 50,268 38,258
------------ ------------
Total Increase in Net Assets 54,306 22,723
NET ASSETS:
Beginning of Period 20,194 74,500
------------ ------------
End of Period (2) $ 74,500 $ 97,223
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 5,224 6,882
Shares Issued on Distributions Reinvested 286 858
Shares Redeemed (863) (4,235)
------------ ------------
Net Increase in Capital Shares Outstanding 4,647 3,505
------------ ------------
------------ ------------
(2) Net Assets were comprised of:
Paid in Capital $ 70,468 $ 108,726
Undistributed Net Investment Income 487 731
Accumulated Net Realized Gain (Loss) 1,413 (1,581)
Unrealized Appreciation (Depreciation) 2,132 (10,653)
------------ ------------
$ 74,500 $ 97,223
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
108
<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,
1993 1994
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 18,116 $ 26,880
Net Realized Gain (Loss) 16 (26)
------------ ------------
Net Increase in Net Assets Resulting from Operations 18,132 26,854
------------ ------------
DISTRIBUTIONS:
Net Investment Income (18,116) (26,888)
In Excess of Net Investment Income (35) --
------------ ------------
Total Distributions (18,151) (26,888)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 4,443,610 4,547,025
Distributions Reinvested 16,202 24,451
Redeemed (4,401,802) (4,538,102)
------------ ------------
Net Increase from Capital Share Transactions 58,010 33,374
------------ ------------
Total Increase in Net Assets 57,991 33,340
NET ASSETS:
Beginning of Period 599,172 657,163
------------ ------------
End of Period (2) $ 657,163 $ 690,503
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 4,443,610 4,547,025
Shares Issued on Distributions Reinvested 16,202 24,451
Shares Redeemed (4,401,802) (4,538,102)
------------ ------------
Net Increase in Capital Shares Outstanding 58,010 33,374
------------ ------------
------------ ------------
(2) Net Assets were comprised of:
Paid in Capital $ 657,221 $ 690,595
Undistributed Net Investment Income 8 --
Accumulated Net Realized Loss (66) (92)
------------ ------------
$ 657,163 $ 690,503
------------ ------------
------------ ------------
</TABLE>
- ------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1993 1994
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSSETS
OPERATIONS:
Net Investment Income $ 4,402 $ 8,186
Net Realized Loss (2) (6)
------------ ------------
Net Increase in Net Assets Resulting from Operations 4,400 8,180
------------ ------------
DISTRIBUTIONS:
Net Investment Income (4,402) (8,186)
In Excess of Net Realized Gain (27) --
------------ ------------
Total Distributions (4,429) (8,186)
------------ ------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 1,780,153 2,267,352
Distributions Reinvested 3,955 7,587
Redeemed (1,726,421) (2,182,013)
------------ ------------
Net Increase from Capital Share Transactions 57,687 92,926
------------ ------------
Total Increase in Net Assets 57,658 92,920
NET ASSETS:
Beginning of Period 208,866 266,524
------------ ------------
End of Period (2) $ 266,524 $ 359,444
------------ ------------
------------ ------------
<FN>
- --------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,780,153 2,267,352
Shares Issued on Distributions Reinvested 3,955 7,587
Shares Redeemed (1,726,421) (2,182,013)
------------ ------------
Net Increase in Capital Shares Outstanding 57,687 92,926
------------ ------------
------------ ------------
(2) Net Assets were comprised of:
Paid in Capital $ 266,524 $ 359,452
Accumulated Net Realized Loss -- (8)
------------ ------------
$ 266,524 $ 359,444
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
109
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- ------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM TWO MONTHS
JANUARY 17, ENDED YEAR ENDED
1992* TO DECEMBER YEAR ENDED DECEMBER
OCTOBER 31, 31, DECEMBER 31,
1992 1992 31, 1993 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.37 $ 9.59 $ 12.21
----------- ----- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.11 0.02 0.13 0.19
Net Realized and Unrealized Gain (Loss) on Investments (0.74) 0.20 2.75 (0.25)
----------- ----- ----------- -----------
Total from Investment Operations (0.63) 0.22 2.88 (.06)
----------- ----- ----------- -----------
DISTRIBUTIONS
Net Investment Income -- -- (0.09) (0.14)
In Excess of Net Investment Income -- -- (0.08) --
Net Realized Gain -- -- -- (0.36)
In Excess of Net Realized Gain -- -- (0.09) --
----------- ----- ----------- -----------
Total Distributions -- -- (0.26) (0.50)
----------- ----- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.37 $ 9.59 $ 12.21 $ 11.65
----------- ----- ----------- -----------
----------- ----- ----------- -----------
TOTAL RETURN (6.30)% 2.35% 30.72% (0.52)%
----------- ----- ----------- -----------
----------- ----- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $47,534 $50,234 $150,854 $182,977
Ratio of Expenses to Average Net Assets (1) 0.88%** 0.80%** 0.80% 0.80%
Ratio of Net Investment Income to Average Net Assets (1) 2.32%** 1.22%** 1.29% 1.43%
Portfolio Turnover Rate %62 % 2 %53 %51
<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
Ratios before expense limitation:
Expenses to Average Net Assets 1.58%** 1.70%** 1.33% 1.00%
Net Investment Income to Average Net Assets 1.62%** 0.32%** 0.76% 1.23%
*Commencement of operations.
**Annualized
</TABLE>
- ------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1991* TO YEAR ENDED TWO MONTHS ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1992 1993 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.67 $ 13.63 $ 13.11 $ 26.20
---------------- ----------- ---------------- ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.03 0.14 0.01 0.10 0.11
Net Realized and Unrealized Gain (Loss) on
Investments (0.36) 3.86 (0.53) 13.38 (4.15)
---------------- ----------- ---------------- ------------ ------------
Total from Investment Operations (0.33) 4.00 (0.52) 13.48 (4.04)
---------------- ----------- ---------------- ------------ ------------
DISTRIBUTIONS
Net Investment Income -- (0.04) -- (0.01) (0.09)
In Excess of Net Investment Income -- -- -- (0.13) --
Net Realized Gain -- -- -- (0.12) (0.53)
In Excess of Net Realized Gain -- -- -- (0.13) --
---------------- ----------- ---------------- ------------ ------------
Total Distributions -- (0.04) -- (0.39) (0.62)
---------------- ----------- ---------------- ------------ ------------
NET ASSET VALUE, END OF PERIOD $ 9.67 $ 13.63 $ 13.11 $ 26.20 $ 21.54
---------------- ----------- ---------------- ------------ ------------
---------------- ----------- ---------------- ------------ ------------
TOTAL RETURN (3.30)% 41.50% (3.82)% 105.71% (15.81)%
---------------- ----------- ---------------- ------------ ------------
---------------- ----------- ---------------- ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $10,719 $41,017 $41,978 $287,136 $276,906
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) 1.13%** 1.53% 0.61%** 0.83% 0.52%
Portfolio Turnover Rate 2% 33% 10% 18% 47%
<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
Ratios before expense limitation:
Expenses to Average Net Assets 2.52%** 1.63% 2.02%** 1.38% 1.20%
Net Investment Income (Loss) to Average Net
Assets (0.39 %** 0.90% (0.41 %** 0.45% 0.32%
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
110
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- ------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER TWO MONTHS
25, 1992* ENDED YEAR ENDED YEAR ENDED
TO OCTOBER DECEMBER DECEMBER DECEMBER
31, 31, 31, 31,
1992 1992 1993 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.11 $ 10.22 $ 19.00
----------- ----- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (1) -- -- (0.01) (0.04)
Net Realized and Unrealized Gain (Loss) on
Investments 0.11 0.11 8.79 (2.56)
----------- ----- ----------- -----------
Total from Investment Operations 0.11 0.11 8.78 (2.60)
----------- ----- ----------- -----------
DISTRIBUTIONS
Net Realized Gain -- -- -- (0.10)
----------- ----- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 10.11 $ 10.22 $ 19.00 $ 16.30
----------- ----- ----------- -----------
----------- ----- ----------- -----------
TOTAL RETURN 1.10% 1.09% 85.91% (9.63)%
----------- ----- ----------- -----------
----------- ----- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $28,806 $74,219 $735,352 $929,638
Ratio of Expenses to Average Net Assets (1) 1.75%** 1.75%** 1.75% 1.75%
Ratio of Net Investment Loss to Average Net Assets (1) (0.53)%** (0.33)%** (0.06)% (0.26)%
Portfolio Turnover Rate 0% 2% 52% 32%
<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
Ratios before expense limitation:
Expenses to Average Net Assets 4.82%** 2.48%** 1.79% N/A
Net Investment Loss to Average Net Assets (3.60)%** (1.06)%** (0.10)% N/A
*Commencement of operations.
**Annualized.
</TABLE>
- ------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 2, 1993* YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1993 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 12.91
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.08 0.08
Net Realized and Unrealized Gain on Investments 2.83 1.29
------- -------
Total from Investment Operations 2.91 1.37
------- -------
DISTRIBUTIONS
Net Investment Income -- (0.09)
Net Realized Gain -- (0.25)
------- -------
Total Distributions -- (0.34)
------- -------
NET ASSET VALUE, END OF PERIOD $ 12.91 $ 13.94
------- -------
------- -------
TOTAL RETURN 29.10% 10.88%
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $12,681 $27,634
Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00%
Ratio of Net Investment Income to Average Net Assets (1) 1.23%** 0.87%
Portfolio Turnover Rate 15% 79%
<FN>
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $ 0.09 $ 0.06
Ratios before expense limitation:
Expenses to Average Net Assets 2.43%** 1.62%
Net Investment Income (Loss) to Average Net Assets (0.21)%** 0.25%
*Commencement of operations.
**Annualized.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
111
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JULY 15, 1992* TWO MONTHS ENDED YEAR ENDED YEAR ENDED
TO OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1992 1993 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.35 $ 9.75 $ 13.87
------ ----- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.02 0.01 0.08 0.08
Net Realized and Unrealized Gain (Loss) on Investments (0.67) 0.39 4.18 0.79
------ ----- ------ ------
Total from Investment Operations (0.65) 0.40 4.26 0.87
------ ----- ------ ------
DISTRIBUTIONS
Net Investment Income -- -- (0.02) (0.12)
In Excess of Net Investment Income -- -- (0.03) --
Net Realized Gain -- -- (0.09) (1.22)
------ ----- ------ ------
Total Distributions -- -- (0.14) (1.34)
------ ----- ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.35 $ 9.75 $ 13.87 $ 13.40
------ ----- ------ ------
------ ----- ------ ------
TOTAL RETURN (6.50)% 4.28% 44.24% 6.95%
------ ----- ------ ------
------ ----- ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $11,257 $11,739 $19,918 $78,935
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) 1.00%** 0.69%** 0.84% 0.87%
Portfolio Turnover Rate 10% 5% 42% 12%
</TABLE>
- ---------------
<TABLE>
<S> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment income $ 0.08 $ 0.02 $ 0.01 $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets 5.22%** 2.49%** 1.66% 1.24%
Net Investment Income (Loss) to Average Net Assets (3.22)%** (0.80)%** 0.18% 0.63%
</TABLE>
*Commencement of operations.
**Annualized
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1,
1994*
TO DECEMBER
31,
1994
- ----------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.03
Net Realized and Unrealized Loss on Investments (0.88)
------
Total from Investment Operations (0.85)
------
DISTRIBUTIONS
Net Investment Income (0.02)
------
NET ASSET VALUE, END OF PERIOD $ 9.13
------
------
TOTAL RETURN (8.49)%
------
------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $30,243
Ratio of Expenses to Average Net Assets (1) 1.25%**
Ratio of Net Investment Income to Average Net Assets (1) 0.41%**
Portfolio Turnover Rate 56%
</TABLE>
- ---------------
<TABLE>
<S> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $ 0.04
Ratios before expense limitation:
Expenses to Average Net Assets 1.72%**
Net Investment Loss to Average Net Assets (0.06)%**
</TABLE>
*Commencement of operations.
**Annualized
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
112
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1990 1991 1992 1992 1993 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.72 $ 10.05 $ 10.52 $ 9.83 $ 9.98 $ 14.09
------ ------ ------ ----- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.19 0.12 0.12 0.01 0.15 0.16
Net Realized and Unrealized Gain (Loss) on
Investments 0.20 0.58 (0.59) 0.14 4.36 1.54
------ ------ ------ ----- ------ ------
Total from Investment Operations 0.39 0.70 (0.47) 0.15 4.51 1.70
------ ------ ------ ----- ------ ------
DISTRIBUTIONS
Net Investment Income (0.06) (0.15) (0.17) -- (0.01) (0.18)
In Excess of Net Investment Income -- -- -- -- (0.13) --
Net Realized Gain -- (0.08) (0.05) -- (0.26) (0.27)
------ ------ ------ ----- ------ ------
Total Distributions (0.06) (0.23) (0.22) -- (0.40) (0.45)
------ ------ ------ ----- ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.05 $ 10.52 $ 9.83 $ 9.98 $ 14.09 $ 15.34
------ ------ ------ ----- ------ ------
------ ------ ------ ----- ------ ------
TOTAL RETURN 3.99% 7.17% (4.56)% 1.53% 46.50% 12.39%
------ ------ ------ ----- ------ ------
------ ------ ------ ----- ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $110,716 $283,776 $486,836 $510,727 $947,045 $1,304,770
Ratio of Expenses to Average Net Assets (1) 1.03% 1.00% 1.00% 1.00%** 1.00% 1.00%
Ratio of Net Investment Income to Average Net
Assets (1) 3.51% 2.27% 1.46% 0.68%** 1.25% 1.12%
Portfolio Turnover Rate 38% 22% 12% 5% 23% 16%
</TABLE>
- ---------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment income $ 0.01 $ 0.01 $ 0.00 $ 0.00 $ 0.01 $ 0.004
Ratios before expense limitation:
Expenses to Average Net Assets 1.24% 1.09% 1.02% 1.14%** 1.06% 1.03%
Net Investment Income to Average Net
Assets 3.30% 2.18% 1.44% 0.54%** 1.19% 1.09%
</TABLE>
**Annualized
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 15,
1992*
TO DECEMBER YEAR ENDED YEAR ENDED
31, DECEMBER 31, DECEMBER 31,
1992 1993+ 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.09 $ 14.64
------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.01 0.09 0.14
Net Realized and Unrealized Gain on Investments (2) 0.08 4.48 0.62
------ ------------ ------------
Total from Investment Operations 0.09 4.57 0.76
------ ------------ ------------
DISTRIBUTIONS
Net Investment Income -- 0.00 (0.03)
In Excess of Net Investment Income -- (0.02) --
Net Realized Gain -- -- (0.22)
------ ------------ ------------
Total Distributions -- (0.02) (0.25)
------ ------------ ------------
NET ASSET VALUE, END OF PERIOD $ 10.09 $ 14.64 $ 15.15
------ ------------ ------------
------ ------------ ------------
TOTAL RETURN 0.90% 45.34% 5.25%
------ ------------ ------------
------ ------------ ------------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $3,824 $52,834 $160,101
Ratio of Expenses to Average Net Assets (1) 1.15%** 1.15% 1.15%
Ratio of Net Investment Income to Average Net Assets (1) 1.37%** 0.66% 1.18%
Portfolio Turnover Rate 0% 14% 8%
</TABLE>
- ---------------
<TABLE>
<S> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $ 0.16 $ 0.10 $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets 21.67%** 1.86% 1.29%
Net Investment Income (Loss) to Average Net Assets (19.15)%** (0.05)% 1.04%
</TABLE>
(2) Reflects 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
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
113
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
S Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 25, 1994*
TO DECEMBER 31,
1994
- ---------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (1) (0.01)
Net Realized and Unrealized Loss on Investments (0.16)
------
Total from Investment Operations (0.17)
------
NET ASSET VALUE, END OF PERIOD $ 9.83
------
------
TOTAL RETURN (1.70)%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $50,332
Ratio of Expenses to Average Net Assets (1) 1.00%**
Ratio of Net Investment Loss to Average Net Assets (1) (0.10)%**
Portfolio Turnover Rate 1%
</TABLE>
- ---------------
<TABLE>
<S> <C>
(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 1.27%**
Net Investment Loss to Average Net Assets (0.37)%**
</TABLE>
*Commencement of operations.
**Annualized
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1, 1989* YEAR ENDED YEAR ENDED TWO MONTHS ENDED YEAR ENDED YEAR ENDED
TO OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1990 1991+ 1992 1992 1993 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 10.00 $ 9.03 $ 16.18 $ 14.97 $ 16.22 $ 16.22
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (1) 0.08 -- (0.09) (0.01) (0.11) (0.09)
Net Realized and
Unrealized Gain (Loss) on
Investments (1.00) 7.19 (1.12) 1.26 0.11 (0.01)
------ ------ ------ ------ ------ ------
Total from Investment
Operations (0.92) 7.19 (1.21) 1.25 0.00 (0.10)
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.05) (0.04) -- -- -- --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 9.03 $ 16.18 $ 14.97 $ 16.22 $ 16.22 $ 16.12
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN (9.27)% 79.84% (7.48)% 8.35% 0.00% (0.62)%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $11,261 $54,364 $80,156 $94,161 $103,621 $117,669
Ratio of Expenses to Average
Net Assets (1) 1.26%** 1.25% 1.25% 1.25%** 1.25% 1.25%
Ratio of Net Investment
Income (Loss) to Average
Net Assets (1) 0.64%** 0.00% (0.66)% (0.68)%** (0.77)% (0.61)%
Portfolio Turnover Rate 19% 2% 17% 1% 25% 24%
</TABLE>
- ---------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment income $ 0.01 $ 0.02 $ 0.01 $ 0.00 $ 0.01 $ 0.002
Ratios before expense
limitation:
Expenses to Average
Net Assets 1.64% 1.39% 1.29% 1.36%** 1.31% 1.26%
Net Investment Income
(Loss) to
Average Net Assets 0.24% (0.14)% (0.71)% (0.79)%** (0.83)% (0.62)%
</TABLE>
+Per share amounts for the year ended October 31, 1991 are based on average
outstanding shares.
*Commencement of operations.
**Annualized
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
114
<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* YEAR ENDED TWO MONTHS ENDED YEAR ENDED YEAR ENDED
TO OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1992 1993 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.66 $11.44 $11.88 $12.14
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.05 0.16 0.03 0.22 0.17
Net Realized and Unrealized Gain on Investments 0.61 0.82 0.41 0.28 0.21
------- ------- ------- ------- -------
Total from Investment Operations 0.66 0.98 0.44 0.50 0.38
------- ------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income -- (0.20) -- (0.23) (0.13)
In Excess of Net Investment Income -- -- -- (0.01) --
Net Realized Gain -- -- -- -- (0.37)
------- ------- ------- ------- -------
Total Distributions -- (0.20) -- (0.24) (0.50)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.66 $11.44 $11.88 $12.14 $12.02
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN 6.60% 9.26% 3.85% 4.33% 3.26%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 18,139 $ 36,558 $ 45,985 $ 73,789 $ 97,259
Ratio of Expenses to Average Net Assets (1) 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%
Portfolio Turnover Rate 3% 38% 1% 172% 146%
</TABLE>
- -----------------
<TABLE>
<S> <C> <C> <C> <C> <C>
(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
Ratios before expense limitation:
Expenses to Average Net Assets 1.37%** 1.01% 1.11%** 0.93% 0.89%
Net Investment Income to Average Net Assets 1.77%** 1.52% 1.62%** 1.46% 1.35%
</TABLE>
*Commencement of operations.
**Annualized
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 17, 1992* YEAR ENDED YEAR ENDED
TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.14 $11.10
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.01 0.24 0.28
Net Realized and Unrealized Gain (Loss) on Investments 0.13 0.90 (0.01)
------- ------- -------
Total from Investment Operations 0.14 1.14 0.27
------- ------- -------
DISTRIBUTIONS
Net Investment Income -- (0.18) (0.27)
Net Realized Gain -- -- (0.30)
------- ------- -------
Total Distributions -- (0.18) (0.57)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.14 $11.10 $10.80
------- ------- -------
------- ------- -------
TOTAL RETURN 1.40% 11.33% 2.53%
------- ------- -------
------- ------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 5,974 $ 26,775 $ 40,033
Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets (1) 1.64%** 2.56% 2.67%
Portfolio Turnover Rate 0% 29% 22%
</TABLE>
- -----------------
<TABLE>
<S> <C> <C> <C>
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment income $ 0.13 $ 0.06 $ 0.03
Ratios before expense limitation:
Expenses to Average Net Assets 23.14%** 1.68% 1.26%
Net Investment Income (Loss) to Average Net Assets (20.50)%** 1.88% 2.41%
</TABLE>
*Commencement of operations.
**Annualized
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
115
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 31, 1990* YEAR ENDED YEAR ENDED TWO MONTHS ENDED YEAR ENDED YEAR ENDED
TO OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1990 1991 1992 1992 1993 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 8.59 $ 10.24 $ 10.71 $ 11.31 $ 12.63
------ ------ ----------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.37 0.46 0.38 0.08 0.37 0.40
Net Realized and Unrealized
Gain (Loss) on Investments (1.45) 1.67 0.48 0.52 1.31 (0.55)
------ ------ ----------- ------ ------ ------
Total from Investment
Operations (1.08) 2.13 0.86 0.60 1.68 (0.15)
------ ------ ----------- ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.33) (0.48) (0.39) -- (0.36) (0.40)
Net Realized Gain -- -- -- -- -- (0.58)
------ ------ ----------- ------ ------ ------
Total Distributions (0.33) (0.48) (0.39) -- (0.36) (0.98)
------ ------ ----------- ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 8.59 $ 10.24 $ 10.71 $ 11.31 $ 12.63 $ 11.50
------ ------ ----------- ------ ------ ------
------ ------ ----------- ------ ------ ------
TOTAL RETURN (11.05)% 25.34% 8.51% 5.60% 15.14% (1.29)%
------ ------ ----------- ------ ------ ------
------ ------ ----------- ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $18,178 $16,304 $25,013 $27,541 $54,598 $73,406
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) 5.46%** 4.57% 3.72% 4.41%** 3.23% 3.37%
Portfolio Turnover Rate 70% 90% 56% 9% 51% 33%
</TABLE>
- -----------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary
expense
limitation during the
period:
Per share benefit to
net investment income $ 0.01 $ 0.02 $ 0.01 $ 0.01 $ 0.03 $ 0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.88%** 0.87% 0.84% 1.20%** 0.95% 0.80%
Net Investment Income
to Average Net Assets 5.28%** 4.40% 3.58% 3.91%** 2.98% 3.27%
</TABLE>
*Commencement of operations.
**Annualized
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 20, 1990* YEAR ENDED YEAR ENDED TWO MONTHS ENDED YEAR ENDED YEAR ENDED
TO OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1990 1991 1992 1992 1993 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.00 $ 9.62 $ 10.61 $ 11.00 $ 11.31 $ 11.13
------ ----------- ----------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.40 0.59 0.58 0.10 0.44 0.42
Net Realized
and
Unrealized
Gain (Loss)
on
Investments (0.46) 1.03 0.42 0.21 0.79 (0.64)
------ ----------- ----------- ------ ------ ------
Total from
Investment
Operations (0.06) 1.62 1.00 0.31 1.23 (0.22)
------ ----------- ----------- ------ ------ ------
DISTRIBUTIONS
Net Investment
Income (0.32) (0.63) (0.58) -- (0.41) (0.49)
In Excess of
Net
Investment
Income -- -- -- -- (0.08) --
Net Realized
Gain -- -- (0.03) -- (0.06) (1.46)
In Excess of
Net Realized
Gain -- -- -- -- (0.86) --
------ ----------- ----------- ------ ------ ------
Total
Distributions (0.32) (0.63) (0.61) -- (1.41) (1.95)
------ ----------- ----------- ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $ 9.62 $ 10.61 $ 11.00 $ 11.31 $ 11.13 $ 8.96
------ ----------- ----------- ------ ------ ------
------ ----------- ----------- ------ ------ ------
TOTAL RETURN (0.63)% 17.31% 9.57% 2.82% 12.09% (2.32)%
------ ----------- ----------- ------ ------ ------
------ ----------- ----------- ------ ------ ------
RATIOS AND
SUPPLEMENTAL
DATA:
Net Assets, End
of Period
(Thousands) $37,444 $51,334 $40,332 $39,984 $29,684 $18,492
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) 6.81%** 5.99% 5.21% 5.29%** 3.88% 4.13%
Portfolio
Turnover Rate 19% 67% 40% 4% 136% 44%
</TABLE>
- -----------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(1) Effect of
voluntary
expense
limitation
during the
period:
Per share
benefit to
net
investment
income $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.04 $ 0.03
Ratios before
expense
limitation:
Expenses
to Average
Net Assets 0.90%** 0.78% 0.79% 1.00%** 1.02% 0.95%
Net
Investment
Income to
Average
Net Assets 6.61%** 5.91% 5.12% 4.99%** 3.56% 3.88%
</TABLE>
*Commencement of operations.
**Annualized
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
116
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1, 1994*
TO DECEMBER 31,
1994
- --------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.50
Net Realized and Unrealized Loss on Investments (1.91)
------
Total from Investment Operations (1.41)
------
NET ASSET VALUE, END OF PERIOD $ 8.59
------
------
TOTAL RETURN (14.10)%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $144,949
Ratio of Expenses to Average Net Assets 1.49%**
Ratio of Net Investment Income to Average Net Assets 9.97%**
Portfolio Turnover Rate 273%
</TABLE>
- ---------------
*Commencement of operations.
**Annualized
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MAY 15, 1991* YEAR ENDED TWO MONTHS ENDED YEAR ENDED YEAR ENDED
TO OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1992 1993 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.55 $ 10.92 $ 10.93 $ 11.05
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.22 0.69 0.10 0.54 0.59
Net Realized and Unrealized Gain (Loss) on
Investments 0.49 0.39 0.01 0.41 (0.92)
------ ------ ------ ------ ------
Total from Investment Operations 0.71 1.08 0.11 0.95 (0.33)
------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.16) (0.69) (0.10) (0.56) (0.53)
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)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.55 $ 10.92 $ 10.93 $ 11.05 $ 9.82
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN 7.12% 10.61% 1.02% 9.07% (3.10)%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $72,326 $146,546 $154,210 $240,668 $209,331
Ratio of Expenses to Average Net Assets (1) 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%
Portfolio Turnover Rate 48% 105% 15% 240% 388%
</TABLE>
- ---------------
<TABLE>
<S> <C> <C> <C> <C> <C>
(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
Ratios before expense limitation:
Expenses to Average Net Assets 0.81%** 0.59% 0.75%** 0.60% 0.58%
Net Investment Income to Average Net
Assets 6.93%** 6.45% 5.26%** 4.82% 5.60%
</TABLE>
*Commencement of operations.
**Annualized
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
117
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1991* YEAR ENDED TWO MONTHS ENDED YEAR ENDED YEAR ENDED
TO OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1992 1992 1993 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.61 $11.41 $11.26 $11.68
------- ------------- ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.16 0.53 0.14 0.69 0.70
Net Realized and Unrealized Gain (Loss) on
Investments 0.45 0.55 (0.29) 0.90 (1.38)
------- ------------- ------- ------ ------
Total from Investment Operations 0.61 1.08 (0.15) 1.59 (0.68)
------- ------------- ------- ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.27) -- (0.79) (0.40)
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)
------- ------------- ------- ------ ------
NET ASSET VALUE, END OF PERIOD $10.61 $11.41 $11.26 $11.68 $10.29
------- ------------- ------- ------ ------
------- ------------- ------- ------ ------
TOTAL RETURN 6.10% 10.29% (1.31)% 15.34% (6.08)%
------- ------------- ------- ------ ------
------- ------------- ------- ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $28,236 $94,847 $92,897 $172,468 $130,675
Ratio of Expenses to Average Net Assets (1) 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%
Portfolio Turnover Rate 20% 144% 9% 108% 171%
</TABLE>
- ---------------
<TABLE>
<S> <C> <C> <C> <C> <C>
(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
Ratios before expense limitation:
Expenses to Average Net Assets 1.62%** 0.86% 0.90%** 0.70% 0.66%
Net Investment Income to Average Net
Assets 6.12%** 6.56% 6.59%** 5.79% 6.18%
</TABLE>
*Commencement of operations.
**Annualized
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 28, 1992* TWO MONTHS ENDED YEAR ENDED YEAR ENDED
TO OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1992 1993 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $9.77 $9.95 $11.16
------ ------ ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.08 0.14 0.90 0.97
Net Realized and Unrealized Gain (Loss) on
Investments (0.31) 0.19 1.21 (1.40)
------ ------ ------------- -------------
Total from Investment Operations (0.23) 0.33 2.11 (0.43)
------ ------ ------------- -------------
DISTRIBUTIONS
Net Investment Income -- (0.15) (0.90) (0.97)
Net Realized Gain -- -- -- (0.21)
------ ------ ------------- -------------
Total Distributions -- (0.15) (0.90) (1.18)
------ ------ ------------- -------------
NET ASSET VALUE, END OF PERIOD $9.77 $9.95 $11.16 $9.55
------ ------ ------------- -------------
------ ------ ------------- -------------
TOTAL RETURN (2.30)% 3.41% 22.11% (4.18)%
------ ------ ------------- -------------
------ ------ ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $16,950 $20,194 $74,500 $97,223
Ratio of Expenses to Average Net Assets (1) 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%
Portfolio Turnover Rate 9% 24% 104% 74%
</TABLE>
- ---------------
<TABLE>
<S> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income $ 0.01 $ 0.01 $ 0.02 $ 0.001
Ratios before expense limitation:
Expenses to Average Net Assets 1.23%** 1.62%** 0.96% 0.76%
Net Investment Income to Average Net
Assets 9.41%** 8.09%** 8.49% 9.41%
</TABLE>
*Commencement of operations.
**Annualized
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
118
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1990 1991 1992 1992 1993 1994
- --------------------------------------------------------------------------------
<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) 0.079 0.062 0.039 0.005 0.027 0.040
------------- ------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income (0.079) (0.062) (0.039) (0.005) (0.027) (0.040)
In Excess of Net Investment
Income -- -- -- -- (0.000) --
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions (0.079) (0.062) (0.039) (0.005) (0.027) (0.040)
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
TOTAL RETURN 8.16% 6.37% 3.77% 0.50% 2.76% 3.84%
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $516,182 $607,087 $612,968 $599,172 $657,163 $690,503
Ratio of Expenses to Average Net
Assets (1) 0.55% 0.53% 0.52% 0.55%** 0.53% 0.49%
Ratio of Net Investment Income to
Average Net Assets (1) 7.87% 6.11% 3.74% 3.11%** 2.71% 3.77%
</TABLE>
- ---------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense
limitation
during the period:
Per share benefit to net
investment
income $ 0.000 N/A N/A $ 0.000 $ 0.000 N/A
Ratios before expense
limitation:
Expenses to Average Net Assets 0.58% N/A N/A 0.59%** 0.54% N/A
Net Investment Income to
Average
Net Assets 7.85% N/A N/A 3.07%** 2.70% N/A
</TABLE>
**Annualized
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1990 1991 1992 1992 1993 1994
- --------------------------------------------------------------------------------
<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) 0.054 0.043 0.026 0.004 0.019 0.020
------------- ------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income (0.054) (0.043) (0.026) (0.004) (0.019) (0.020)
In Excess of Net Investment
Income -- -- -- -- (0.000) --
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions (0.054) (0.043) (0.026) (0.004) (0.019) (0.020)
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
TOTAL RETURN 5.51% 4.35% 2.74% 0.37% 1.91% 2.44%
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $102,195 $166,953 $206,691 $208,866 $266,524 $359,444
Ratio of Expenses to Average Net
Assets (1) 0.51% 0.56% 0.55% 0.57%** 0.54% 0.51%
Ratio of Net Investment Income to
Average Net Assets (1) 5.38% 4.18% 2.66% 2.31%** 1.89% 2.42%
</TABLE>
- ---------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense
limitation
during the period:
Per share benefit to net
investment
income $ 0.001 N/A N/A $ 0.000 $ 0.000 N/A
Ratios before expense
limitation:
Expenses to Average Net Assets 0.63% N/A N/A 0.67%** 0.56% N/A
Net Investment Income to
Average
Net Assets 5.26% N/A N/A 2.21%** 1.87% N/A
</TABLE>
**Annualized
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------
119
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as an open-end investment company. As of
December 31, 1994 the Fund was comprised of 20 separate active, diversified
and non-diversified portfolios (each referred to as the "Portfolio"). During
the year ended December 31, 1994, the Fund commenced operations of the Gold
and Emerging Markets Debt Portfolios on February 1, 1994, and the Japanese
Equity Portfolio on April 25, 1994, respectively. Additionally, effective
August 19, 1994, the Fund ceased offering shares of the Real Yield Portfolio.
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.
1. SECURITY VALUATION: Equity securities listed on an 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. Money market and municipal money market securities 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.
Each 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 Indian securities a capital gains tax is accrued
based on the relative amounts of net realized gains and net unrealized
appreciation of such securities. Effective January 1, 1994 the Brazilian
Government announced a 0.25% tax on banking transaction debits (withdrawals).
This tax was subsequently repealed on January 1, 1995. The Brazilian
government also assesses a 1% tax on all settlements of foreign currency used
to purchase listed equity securities.
Paid in capital, undistributed net investment income (loss) and accumulated
gain (loss) are adjusted for permanent book tax differences.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, the value of which exceeds the principal amount of the
repurchase transaction, including 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. 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 US dollars at the mean of the bid and asked
prices of such currencies against US dollars last quoted by a major US 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 and
balances. However, pursuant to US Federal income tax regulations, gains and
losses from certain foreign currency transactions are treated as ordinary
income for US Federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from forward foreign currency contracts,
disposition of
- ------------------------------------------------------------------------------
120
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
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 US dollar equivalent amounts actually
received or paid and certain currency related amounts of realized gains or
losses from the sale of foreign denominated debt securities.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of US 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.
5. FORWARD FOREIGN CURRENCY CONTRACTS: Each Portfolio, except the Money
Market Portfolio and Municipal Money Market Portfolio, may enter into forward
currency contracts to attempt to protect securities and related receivables
and payables against changes in future foreign exchange rates. A forward
currency 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 US
dollar.
6. 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 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.
At December 31, 1994, the Republic of Ecuador was in the process of
restructuring its loans under its Brady Plan debt restructuring. As a result,
the Emerging Markets Debt Portfolio has recorded the value of the underlying
loan participations based on the amount of Brady Bonds the Adviser has
estimated the Portfolio will receive and the market value of such Brady Bonds
trading on a "when-issued" basis at December 31, 1994. A portion of the
"when-issued" Brady Bonds expected to be received as a result of the
restructuring have been sold on a delayed delivery basis and are noted on the
portfolio of investments.
7. 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.
8. SHORT SALES: The Emerging Markets Debt Portfolio may sell securities
short. A short sale is a transaction in which the Portfolio sells securities
it does not own,
- ------------------------------------------------------------------------------
121
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
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.
9. PURCHASED AND WRITTEN OPTIONS: The Active Country Allocation, Gold, Equity
Growth and Emerging Markets Debt Portfolios may write covered call options.
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 call option,
each 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. Possible losses from written options may be
unlimited.
The Active Country Allocation, Gold, and Equity Growth Portfolios may also
purchase call options on their portfolio securities. Each portfolio may
purchase call options to close out covered call positions or to protect
against an increase in the price of the security it anticipates purchasing.
Possible losses from purchased options cannot exceed the total amount
invested.
10. 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 the Portfolios based upon relative net assets. Dividends
from 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 tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for mortgage-backed securities, foreign currency transactions, net
operating losses, deferral of wash sales and post October losses and
realization of gains and losses on certain investments including forward
foreign currency contracts, options and futures contracts.
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, 1994, such transaction fees totaled approximately
$1,463,000.
B. Morgan Stanley Asset Management Inc. ("MSAM") 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
- ------------------------------------------------------------------------------
122
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
necessary, if the annual operating expenses, expressed as a percentage of
average daily net assets, exceed the maximum ratios indicated below:
MAXIMUM
ADVISORY EXPENSE
PORTFOLIO FEE RATIO
----------- ------------
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
Emerging Growth...................... 1.00 1.25
Equity Growth........................ .60 .80
Small Cap Value Equity............... .85 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
Money Market......................... .30 .55
Municipal Money Market............... .30 .57
Sun Valley Gold Company is the sub-adviser ("Sub-Adviser") of the Gold
Portfolio. The Sub-Adviser is entitled to receive from MSAM 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 United States
Trust Company of New York ("US Trust"), Mutual Funds Service Company
("MFSC"), a wholly owned subsidiary of US Trust, provides certain
administrative services to the Fund. For such services, MSAM pays US Trust a
portion of the fee MSAM receives from the Fund.
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.
Effective March 22, 1994, US Trust replaced Morgan Guaranty Trust Company as
custodian for the Fund's assets held inside the United States.
- ------------------------------------------------------------------------------
Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
During the year ended December 31, 1994, the following Portfolios incurred
custody fees and had amounts payable to MSTC at December 31, 1994 totaling:
MSTC CUSTODY
FEES FEES PAYABLE TO
INCURRED MSTC
(000) (000)
--------------- -----------------
Active Country
Allocation............. $ 162 $ 30
Asian Equity............ 495 221
Emerging Markets........ 1,741 536
European Equity......... 40 7
Global Equity........... 35 6
Gold.................... 3 1
International Equity.... 484 81
International Small
Cap.................... 106 19
Japanese Equity......... 17 4
Emerging Markets Debt... 131 115
Global Fixed Income..... 60 10
E. During the year ended December 31, 1994, purchases and sales of investment
securities other than long-term US Government securities and short-term
investments were:
(000)
----------------------
PORTFOLIO PURCHASES SALES
----------- ---------
Active Country Allocation............ $ 127,784 $ 90,248
Asian Equity......................... 155,981 117,321
Emerging Markets..................... 610,738 265,585
European Equity...................... 27,766 13,398
Global Equity........................ 64,979 5,746
Gold................................. 41,035 11,058
International Equity................. 373,602 180,373
International Small Cap.............. 120,630 9,130
Japanese Equity...................... 50,134 545
Emerging Growth...................... 35,945 24,123
Equity Growth........................ 133,517 116,543
Small Cap Value Equity............... 20,127 7,265
Value Equity......................... 44,425 22,714
Balanced............................. 4,258 8,196
Emerging Markets Debt................ 368,381 247,457
Fixed Income......................... 185,167 185,079
Global Fixed Income.................. 147,827 174,818
High Yield........................... 98,022 66,421
Purchases and sales during the year ended December 31, 1994 of long-term US
Government securities occurred only in the Balanced, Fixed Income and Global
Fixed Income Portfolios and amounted to:
(000)
----------------------
PORTFOLIO PURCHASES SALES
----------- ---------
Balanced...................... $ 5,922 $ 11,056
Fixed Income.................. 565,162 569,388
Global Fixed Income........... 82,393 88,979
- ------------------------------------------------------------------------------
123
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
During the year ended December 31, 1994, the following Portfolios incurred
brokerage commissions to Morgan Stanley & Co., Incorporated, an affiliated
broker/dealer, of approximately:
(000)
---------------
BROKERAGE
PORTFOLIO COMMISSION
---------------
Active Country Allocation......................... $ 87
Asian Equity...................................... 397
Emerging Markets.................................. 115
Global Equity..................................... 13
Gold.............................................. 15
Japanese Equity................................... 165
Equity Growth..................................... 4
During the year ended December 31, 1994, the Gold Portfolio incurred
brokerage commissions to Sun Valley Gold Company, an affiliated
broker/dealer, of approximately $8,425.
F. At December 31, 1994, cost and unrealized appreciation (depreciation) for
Federal income tax purposes of the investments of each Portfolio were:
(000) NET
------------------------------- APPREC.
PORTFOLIO COST APPREC. DEPREC. (DEPREC.)
--------- --------- --------- -----------
Active Country Allocation.. $ 182,640 $ 13,080 $ (7,778) $ 5,302
Asian Equity............... 238,789 48,446 (13,808) 34,638
Emerging Markets........... 873,136 163,816 (113,660) 50,156
European Equity............ 27,838 1,033 (1,275) (242)
Global Equity.............. 79,046 6,324 (4,756) 1,568
Gold....................... 33,540 135 (3,001) (2,866)
International Equity....... 1,079,618 252,688 (24,107) 228,581
International Small Cap.... 161,857 11,311 (12,717) (1,406)
Japanese Equity............ 50,712 1,638 (2,114) (476)
Emerging Growth............ 92,186 29,775 (4,842) 24,933
Equity Growth.............. 97,708 4,522 (4,305) 217
Small Cap Value Equity..... 40,872 2,377 (3,305) (928)
Value Equity............... 74,832 3,430 (5,851) (2,421)
Balanced................... 18,309 747 (1,265) (518)
Emerging Markets Debt...... 158,715 1,820 (13,335) (11,515)
Fixed Income............... 220,486 390 (5,290) (4,900)
Global Fixed Income........ 139,143 660 (7,295) (6,635)
High Yield................. 107,112 768 (11,421) (10,653)
Money Market............... 690,455 -- -- --
Municipal Money Market..... 357,853 -- -- --
At December 31, 1994, the following Portfolios had available capital loss
carryforwards to offset future net capital gains, to the extent provided by
regulation, through the indicated expiration dates:
EXPIRATION DATE
DECEMBER 31,
(000)
------------------------------------------
PORTFOLIO 1998 1999 2000 2001 2002 TOTAL
- ------------------------- ------- ------- -------- ------- ------- -------
International Small Cap.. $ -- $ -- $ -- $ -- $ 1,764 $ 1,764
Emerging Growth.......... 441 360 1,838 7,476 746 10,861
Emerging Markets Debt.... -- -- -- -- 531 531
Fixed Income............. -- -- -- -- 13,870 13,870
High Yield............... -- -- -- -- 497 497
Global Fixed............. -- -- -- -- 5,293 5,293
Money Market............. -- 66 -- -- 26 92
Municipal Money Market... -- -- -- 1 7 8
To the extent that capital loss carryovers are used to offset any future net
capital gains realized during the carryover period as provided by 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 because such
distributions may be taxable to Portfolio shareholders as ordinary income.
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, 1994 to December 31, 1994
the Portfolio's incurred and elected to defer to January 1, 1995 for Federal
income tax purposes net capital and net currency losses of approximately:
CAPITAL CURRENCY
LOSSES LOSSES
PORTFOLIO (000) (000)
- ----------------------------- ----------- -----------
Emerging Markets............. $ -- $ 393
Global Equity................ -- 5
Gold......................... -- 1
European Equity.............. -- 4
International Small Cap...... 225 --
Balanced..................... 12 --
Emerging Markets Debt........ -- 7
Fixed Income................. 269 --
Global Fixed Income.......... 429 897
High Yield................... 1,084 --
G. During the year ended December 31, 1994, the written options outstanding
at December 31, 1993 for the Equity Growth Portfolio expired unexercised and
the Portfolio realized a gain of $101,000.
At December 31, 1994, the Emerging Markets Debt Portfolio had 15 written
covered call option contracts outstanding with a premium of $105,000.
- ------------------------------------------------------------------------------
124
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
H. OTHER. At December 31, 1994, the net assets of certain Portfolios were
substantially comprised of foreign denominated securities and currency.
Changes in currency exchange rates will affect the US dollar value of and
investment income from such securities.
During the year ended December 31, 1994, the International Small Cap
Portfolio realized gains from in-kind redemptions of approximately $350,000.
- ------------------------------------------------------------------------------
Morgan Stanley
Institutional Fund, Inc.
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1994
- ------------------------------------------------------------------------------
Portfolio securities and foreign currency holdings were translated at the
following exchange rates as of December 31, 1994:
Argentine Peso......................... 1.00005 = $1.00
Australian Dollar...................... 1.28941 = 1.00
Belgian Franc.......................... 31.81000 = 1.00
Brazilian Real......................... 0.84700 = 1.00
British Pound.......................... 0.63837 = 1.00
Canadian Dollar........................ 1.40245 = 1.00
Colombian Peso......................... 831.60000 = 1.00
Danish Krone........................... 6.08100 = 1.00
Deutsche Mark.......................... 1.54890 = 1.00
Finnish Markka......................... 4.73565 = 1.00
French Franc........................... 5.33750 = 1.00
Hong Kong Dollar....................... 7.73750 = 1.00
Indian Rupee........................... 31.36875 = 1.00
Indonesian Rupiah...................... 2,198.00000 = 1.00
Irish Punts............................ 0.64687 = 1.00
Italian Lira........................... 1,621.00000 = 1.00
Japanese Yen........................... 99.60000 = 1.00
Korean Won............................. 788.50000 = 1.00
Malaysian Ringgit...................... 2.55350 = 1.00
Mexican Peso........................... 4.97500 = 1.00
Moroccan Dhiram........................ 8.91795 = 1.00
Netherlands Guilder.................... 1.73480 = 1.00
New Zealand Dollar..................... 1.56213 = 1.00
Norwegian Krone........................ 6.75950 = 1.00
Pakistani Rupee........................ 30.76920 = 1.00
Peruvian Sol........................... 2.18400 = 1.00
Polish Zloty........................... 23,200.00000 = 1.00
Portuguese Escudo...................... 159.05000 = 1.00
Singapore Dollar....................... 1.45750 = 1.00
South African Commercial Rand.......... 3.54000 = 1.00
South African Financial Rand........... 4.07200 = 1.00
Spanish Peseta......................... 131.62500 = 1.00
Sri Lankan Rupee....................... 49.62000 = 1.00
Swedish Krona.......................... 7.43080 = 1.00
Swiss Franc............................ 1.30850 = 1.00
Taiwan Dollar.......................... 26.28800 = 1.00
Thai Baht.............................. 25.10500 = 1.00
Turkish Lira........................... 38,700.00000 = 1.00
During December 1994, the Board of Directors of the Fund declared dividends
and capital gain distributions payable on January 6, 1995 to shareholders of
record on December 30, 1994 as follows:
NET SHORT-TERM LONG-TERM
INVESTMENT REALIZED REALIZED
PORTFOLIO INCOME GAINS GAINS
- -------------------------------- ------------- ------------ -------------
Active Country Allocation....... $ -- $ -- $ 0.44
Asian Equity.................... 0.15 1.03 1.23
Emerging Markets................ -- 0.44 0.48
European Equity................. -- 1.09 0.14
Global Equity................... 0.06 0.09 0.10
Gold............................ 0.01 0.24 --
International Equity............ -- 0.09 0.71
International Small Cap......... 0.03 -- --
Equity Growth................... 0.06 0.39 0.03
Small Cap Value Equity.......... 0.08 0.20 0.13
Value Equity.................... 0.10 0.10 0.28
Balanced........................ 0.10 -- 0.26
Emerging Markets Debt........... 0.48 -- --
Fixed Income.................... 0.06 -- --
Global Fixed Income............. 0.19 -- --
High Yield...................... 0.10 -- --
I. SUBSEQUENT EVENT. On January 18, 1995 the Fund commenced operations of the
Latin American and Municipal Bond Portfolios.
- ------------------------------------------------------------------------------
125
<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, Emerging Growth Portfolio, Equity Growth
Portfolio, Small Cap Value Equity Portfolio, Value Equity Portfolio, Balanced
Portfolio, Emerging Markets Debt Portfolio, Fixed Income Portfolio, Global
Fixed Income Portfolio, High Yield 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, 1994, and 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, 1994, by correspondence with the
custodians and brokers and the application of alternative auditing procedures
where confirmations from brokers 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 17, 1995
- ------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
126
<PAGE>
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
- -------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- -------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
- -------------------------------------------------------------
VALUE
SHARES (000)
- -------------------------------------------------------------
COMMON STOCK (91.8%)
CAPITAL GOODS/CONSTRUCTION (14.3%)
AEROSPACE & DEFENSE (14.3%)
+7,200 Litton Industries, Inc. $ 266
15,800 Lockheed Martin Corp. 997
9,200 McDonnell Douglas Corp. 706
8,200 United Technologies Corp. 641
--------------
TOTAL CAPITAL GOODS/CONSTRUCTION 2,610
--------------
CONSUMER CYCLICAL (9.2%)
FOOD SERVICE & LODGING (1.7%)
8,900 Hospitality Franchise Systems, Inc. 308
--------------
LEISURE RELATED (1.4%)
4,300 Eastman Kodak Co. 261
--------------
PUBLISHING (1.6%)
5,300 Gannett Co., Inc. 288
--------------
RETAIL - GENERAL (4.5%)
+6,500 Autozone, Inc. 163
+12,300 General Nutrition Cos., Inc. 432
5,500 Home Depot, Inc. 223
--------------
818
--------------
TOTAL CONSUMER CYCLICAL 1,675
--------------
CONSUMER STAPLES (32.7%)
BEVERAGES & TOBACCO (24.8%)
8,400 Coca Cola Co. 536
4,200 PepsiCo, Inc. 192
51,000 Philip Morris Cos., Inc. 3,793
--------------
4,521
--------------
FOOD (2.1%)
5,400 Kellogg Co. 385
--------------
HEALTH CARE SUPPLIES & SERVICES (5.8%)
5,200 American Home Products Corp. 402
6,300 Columbia/HCA Healthcare Corp. 272
9,400 United Healthcare Corp. 389
--------------
1,063
--------------
TOTAL CONSUMER STAPLES 5,969
--------------
ENERGY (0.5%)
COAL, GAS, & OIL (0.5%)
3,900 Occidental Petroleum Corp. 89
--------------
FINANCE (23.6%)
BANKING (5.2%)
9,900 Citicorp 573
13,900 H.F. Ahmanson & Co. 306
300 Wells Fargo & Co. 54
--------------
933
--------------
The accompanying notes are an integral part of the financial statements.
127
<PAGE>
VALUE
SHARES (000)
- -------------------------------------------------------------
FINANCIAL SERVICES (10.8%)
16,700 American Express Co. $ 586
7,600 Federal Home Loan Mortgage Corp. 522
5,000 Federal National Mortgage Association 472
8,800 Franklin Resources, Inc. 392
--------------
1,972
--------------
INSURANCE (7.6%)
15,400 Ace, Ltd. 447
15,500 Exel Ltd. 806
5,400 PartnerRe Holdings, Ltd. 141
--------------
1,394
--------------
TOTAL FINANCE 4,299
--------------
MATERIALS (2.9%)
FOREST PRODUCTS & PAPER (2.9%)
6,700 Champion International Corp. 349
+8,400 Stone Container Corp. 179
--------------
TOTAL MATERIALS 528
--------------
TECHNOLOGY (8.6%)
COMPUTERS (5.3%)
7,300 International Business Machines Corp. 701
+3,000 Microsoft, Inc. 271
--------------
972
--------------
ELECTRONICS (3.3%)
+2,000 Applied Material, Inc. 173
3,000 Intel Corp. 190
1,800 Texas Instruments, Inc. 241
--------------
604
--------------
TOTAL TECHNOLOGY 1,576
--------------
TOTAL COMMON STOCK (Cost $15,576) 16,746
--------------
- --------------------------------------------------------------
PURCHASED OPTION (0.0%)
CONSUMER STAPLES (0.0%)
BEVERAGES & TOBACCO (0.0%)
+20,000 Philip Morris Cos., Inc. (Cost $8) 4
--------------
FACE
AMOUNT
(000)
- --------
SHORT - TERM INVESTMENTS (6.2%)
US GOVERNMENT OBLIGATION (2.7%)
$ 500 U.S. Treasury Bill, 8/17/95 497
--------------
REPURCHASE AGREEMENT (3.5%)
642 U.S. Trust, 5.90%, dated 6/30/95, due
7/3/95, to be repurchased at $642,
collateralized by $675 United States
Treasury Bills, due 7/27/95, valued
at $672 (Cost $642) 642
--------------
TOTAL SHORT-TERM INVESTMENTS (Cost $1,138) 1,139
--------------
TOTAL INVESTMENTS (98.0%) (Cost $16,722) 17,889
--------------
The accompanying notes are an integral part of the financial statements.
128
<PAGE>
OTHER ASSETS (5.2%)
Receivable for Investments Sold $829
Receivable for Portfolio Shares
Sold 63
Dividends Receivable 37
Expense Reimbursement Receivable 17 $946
--------
LIABILITIES (-3.2%)
Payable for Investments Purchased (531)
Written Options at Market Value (22)
Custodian Fees Payable (2)
Administrative Fees Payable (2)
Directors' Fees & Expenses (1)
Other Liabilities (22) (580)
-------- ---------
NET ASSETS (100%) $18,255
---------
---------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 1,546,129 outstanding
$.001 par value shares (authorized
500,000,000 shares) $11.81
OPEN WRITTEN COVERED CALL OPTIONS:
The following is a schedule of open written covered call
options which comprise the balance outstanding at
June 30, 1995
NO. OF EXERCISE EXPIRATION VALUE
DESCRIPTION CONTRACTS PRICE DATE (000)
- ----------------------------------------------------------------
McDonnell Douglas Corp. 40 $125 7/31/95 $12
Coca Cola Co. 15 88 8/30/95 3
Coca Cola Co. 37 88 8/30/95 7
--------
$22
________________________________________________________________
+ - Non-income producing securities.
The accompanying notes are an integral part of the financial statements.
129
<PAGE>
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
- ----------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
- ----------------------------------------------------------
AGGRESSIVE
EQUITY
PORTFOLIO
MARCH 8,
1995* TO
JUNE 30,
1995
(000)
- ----------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 79
Interest 36
----------------
Total Income 115
----------------
EXPENSES:
Investment Advisory Fees:
Basic Fees - Adviser 29
Less: Fees Waived (29)
----------------
Investment Advisory Service Fees - Net -
Administrative Fees: 6
Custodian Fees 5
Filing and Registration Fees 15
Directors' Fees and Expenses 2
Legal Fees 11
Audit Fees 8
Shareholder Reports 7
Other Expenses 1
Expenses Reimbursed by Adviser (18)
----------------
Total Expenses 37
----------------
NET INVESTMENT INCOME 78
----------------
NET REALIZED GAIN (LOSS):
Investments Sold 716
Written Options (3)
Securities Sold Short (2)
----------------
Total Net Realized Gain 711
----------------
CHANGE IN UNREALIZED APPRECIATION 1,154
----------------
TOTAL NET REALIZED GAIN AND CHANGE
IN UNREALIZED APPRECIATION 1,865
----------------
Net Increase in Net Assets Resulting
from Operations $ 1,943
----------------
----------------
_______________
* Commencement of Operations.
The accompanying notes are an integral part of the financial statements.
130
<PAGE>
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
- --------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------
PERIOD FROM
MARCH 8, 1995*
TO JUNE 30 1995
(UNAUDITED)
(000)
- --------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 78
Net Realized Gain 711
Change in Unrealized Appreciation 1,154
----------
Net Increase in Net Assets Resulting
from Operations 1,943
----------
DISTRIBUTIONS:
Net Investment Income (16)
----------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 16,751
Distributions Reinvested 15
Redeemed (438)
----------
Net Increase from Capital Share Transactions 16,328
----------
Total Increase in Net Assets 18,255
NET ASSETS:
Beginning of Period -
----------
End of Period (2) $ 18,255
----------
----------
____________________________________________________________
(1) Capital Share Transactions:
Shares Subscribed 1,584
Shares Issued on Distributions Reinvested 1
Shares Redeemed (39)
----------
Net Increase in Capital Shares Outstanding 1,546
----------
----------
(2) Net Assets were Comprised of:
Paid in Capital $ 16,328
Undistributed Net Investment Income 62
Accumulated Net Realized Gain 711
Unrealized Appreciation 1,154
----------
$ 18,255
----------
----------
_________________
* Commencement of operations.
The accompanying notes are an integral part of the financial statements.
131
<PAGE>
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- -------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
- -------------------------------------------------------------
PERIOD FROM
MARCH 8, 1995* TO
JUNE 30, 1995
(UNAUDITED)
- -------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
-------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.06
Net Realized and Unrealized Gain on
Investments 1.77
-------------
Total from Investment Operations 1.83
-------------
DISTRIBUTIONS
Net Investment Income (0.02)
-------------
NET ASSET VALUE, END OF PERIOD $11.81
-------------
-------------
TOTAL RETURN
18.3%
-------------
-------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $18,255
Ratio of Expenses to Average Net Assets (1) 1.00%**
Ratio of Net Investment Income to Average
Net Assets (1) 2.10%**
Portfolio Turnover Rate 80%
__________________________
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment income $0.04
Ratios before expense limitation:
Expenses to Average Net Assets 2.26%**
Net Investment Income to Average Net Assets 0.83%**
__________________________
* Commencement of operations.
** Annualized.
The accompanying notes are an integral part of the financial statements.
132
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 1995
Morgan Stanley Institutional Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as an open-end management
investment company which offers redeemable shares of twenty-four diversified
and non-diversified investment portfolios. These notes pertain only to the
unaudited financial statements dated June 30, 1995 for one such investment
portfolio, the Aggressive Equity Portfolio (the "Portfolio").
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Portfolio in the preparation of the
financial statements.
1. SECURITY VALUATION: Equity securities listed on an exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales 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 are 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. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. Money
market securities 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 the Portfolio's intention to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly, no
provision for Federal income taxes is required in the financial statements.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as a custodian for the Portfolio takes possession of the
underlying securities, the value of which is at least equal to the principal
amount of the repurchase transaction, including 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 Portfolio 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 other party to the agreement, realization and/or retention
of the collateral or proceeds may be subject to legal proceedings.
133
<PAGE>
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and
records of the Portfolio are maintained in United States dollars. Foreign
currency amounts are translated into U.S. dollars at the bid prices of such
currencies against U.S. dollars last quoted by a major U.S. or foreign bank.
Although the net assets of the Portfolio are presented at the foreign
exchange rates and market values at the close of the period, the Portfolio
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 Portfolio 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 and
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 contracts,
disposition of foreign currencies, currency gains or losses realized between
the trade and settlement dates on securities transactions, the difference
between the amount of investment income and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent amount actually
received or paid, and certain currency related amounts of realized gains or
losses from the sale of foreign denominated debt securities.
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 possibly
lower level of governmental supervision and regulation of foreign securities
markets and the possibility of political or economic instability.
5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Portfolio may enter into
forward foreign currency contracts to attempt to protect securities and
related receivables and payables against changes in future foreign exchange
rates. A forward currency 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 Portfolio as unrealized gain or loss. The
Portfolio 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. Risks 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
arise from unanticipated movements in the value of a foreign currency
relative to the U.S. dollar.
6. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The
Portfolio may make forward commitments to purchase or sell securities.
Payment and delivery
134
<PAGE>
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, the Portfolio 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 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.
7. PURCHASED AND WRITTEN OPTIONS: The Portfolio may write covered call
options. 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 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 call
option, the 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. Possible losses from written options may be
unlimited.
The Portfolio may also purchase call options on it's portfolio securities.
The Portfolio may purchase call options to close out covered call positions
or to protect against an increase in the price of the security it anticipates
purchasing. Possible losses from purchased options cannot exceed the total
amount invested.
8. 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 are amortized according to the
effective yield method over their respective lives. Distributions are
recorded on the ex-distribution date. Most expenses of the Fund can be
directly attributed to a particular Portfolio. Expenses which cannot be
directly attributed are apportioned among the Portfolios based upon relative
net assets.
Income distributions and capital gain distributions are determined in
accordance with tax regulations which may differ from generally accepted
accounting principles.
B. Morgan Stanley Asset Management Inc. ("MSAM") provides the Portfolio with
investment advisory services at a fee calculated at the annual rate of
average daily net assets indicated below. MSAM has agreed to reduce fees
payable to it and to reimburse the
135
<PAGE>
Portfolio, if necessary, if the annual operating expenses, expressed as a
percentage of average daily net assets, exceed the maximum ratio indicated
below.
MAXIMUM
ADVISORY EXPENSE
FEE RATIO
-------- ---------
Aggressive Equity Portfolio .......................... 0.80% 1.00%
C. MSAM also provides the Portfolio 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 U.S. Trust
Company of New York ("U.S. Trust"), Mutual Funds Service Company ("MFSC"), a
subsidiary of U.S. Trust, provides certain administrative services to the
Fund. For such services, MSAM pays U.S. Trust a portion of the fee MSAM
receives from the Fund.
D. CUSTODIANS: Morgan Stanley Trust Company ("MSTC") acts as custodian for
the Portfolio's assets held outside the United States in accordance with a
Custodian Agreement. U.S. Trust acts as custodian for the Fund's domestic
assets in accordance with a Custodian Agreement. Custodian fees are computed
and payable monthly based on investment purchases and sales activity, an
account maintenance fee, plus reimbursement for certain out-of-pocket
expenses. MSTC and MSAM are wholly-owned subsidiaries of Morgan Stanley
Group, Inc.
E. PURCHASES AND SALES: During the period March 8, 1995 through June 30,
1995, purchases and sales of investment securities other than U.S. Government
securities and short-term investments were:
PURCHASES SALES
--------- ------
(000) (000)
$24,134 $9,273
F. At June 30, 1995, the Portfolio's cost for Federal income tax purposes was
$16,722,000. Net unrealized appreciation for Federal income tax purposes
aggregated $1,167,000 of which $1,222,000 related to appreciated securities
and $55,000 related to depreciated securities.
136
<PAGE>
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
- -------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- -------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
- -------------------------------------------------------------------------------
VALUE
SHARES (000)
- -------------------------------------------------------------
COMMON STOCKS (59.3%)
ARGENTINA (8.6%)
2,150 Banco del Sud Argentina, Class B $ 13
+133,372 Banco del Suquia, Class B 193
+3,500 Buenos Aires Embotelladora ADR 88
32,970 Capex S.A. ADR 507
25,000 CIADEA (Renault) S.A. 121
14,424 Quilmes Industrial S.A. 281
-------
1,203
-------
BRAZIL (19.0%)
22,850,000 Cia Acos Especiais Itabira 148
1,584 Cia Energetica de Minas Gerias ADR 31
7,422 Cia Energetica de Minas Gerias GDR 145
3,637,000 Cia Energetica de Sao Paulo 119
1,446,000 Cia Paulista de Forca E Luz 72
9,580,000 Cia Siderurgica Nacional 219
1,440,000 Eletrobras 375
+30,700 Eletrobras ADR 415
20,000 Rhodia-Ster GDR 280
375,000 Servicos de Eletricdade 118
11,400 Telecomunicacoes Brasileiras ADR 376
1,604,500 Telecomunicacoes de Sao Paulo 204
13,420 Usinas Siderurgicas de Minas Gerias ADR 149
-------
2,651
-------
CHILE (2.7%)
9,310 Empresa Nacional de electridad S.A. ADR 247
6,350 Maderas y Sinteticos S.A. ADR 119
-------
366
-------
MEXICO (26.5%)
10,950 ALFA S.A. de C.V., Class A 133
+72,000 Apasco S.A. 286
198,880 Banacci, Class B 305
34,829 Banacci, Class L 53
38,970 Cemex CPO ADR 265
17,060 Empresas ICA S.A. ADR 175
186,000 FEMSA, Class B 434
+5,000 Grupo Carso S.A. ADR 55
67,970 Grupo Financiero Bancomer ADR 408
+33,831 Grupo Financiero Bancomer, Class L 9
91,500 Grupo Financiero Banorte, Class C 119
+11,770 Grupo Mexicano Desarrollo ADR, Class B 46
+47,750 Grupo Sidek S.A., Class B 43
6,450 Grupo Simec S.A. ADR, Class B 64
+1,350 Grupo Tribasa S.A. ADR 11
15,800 Hylsamex S.A. ADR 288
The accompanying notes are an integral part of the financial statements.
137
<PAGE>
9,615 Panamerican Beverages, Inc., Class A $ 288
10,620 Telefonos de Mexico S.A. ADR, Class L 313
102,400 Tolmex S.A., Class B2 400
-------
3,695
-------
PERU (2.5%)
44,200 Banco de Credito del Peru 77
158,600 Telefonica del Peru S.A., Class B 271
-------
348
-------
TOTAL COMMON STOCKS (Cost $8,044) 8,263
-------
PREFERRED STOCKS (31.7%)
BRAZIL (31.7%)
61,870,000 Banco Bradesco 524
3,550,000 Banco Nacional S.A. 69
14,770,000 Banco do Brasil 177
4,820,000 Banco do Estado Sao Paulo 27
1,158,173 Brahma 380
360,000 Brasmotor 67
+230,000 Centrais Eletricas de Santa Catarina,
Class B 186
6,600 Cia Energetica de Sao Paulo ADR 75
1,540,000 Cia Energetica de Sao Paulo 61
5,760,000 Cia Paulista de Forca E Luz 189
4,000,000 Continental 2001 87
550,000 Coteminas 173
169,000 Dixie Laleka S.A. 132
583,000 Eletrobras 155
1,590,400 Itaubanco 484
99,000 Multibras S.A. 82
4,550,000 Petrobras 386
58,300,000 Refrigeracao Parana 113
8,650,000 Lojas Renner 147
6,232,000 Telecomunicacoes Brasileiras 205
3,149,000 Telecomunicacoes de Sao Paulo 390
1,142,000 Vale Do Rio Doce 173
320,000 WEG S.A. 146
-------
TOTAL PREFERRED STOCKS (Cost $4,560) 4,428
-------
FACE
AMOUNT
- ----------------------
CONVERTIBLE DEBENTURES
COLOMBIA (2.3%)
$ 430 Banco de Columbia 5.20%, 2/01/99
(Cost $389) 327
-------
NO. OF
RIGHTS
------
RIGHTS (0.0%)
BRAZIL
+1,117,250 Banco Bradesco (Cost $0) 1
-------
The accompanying notes are an integral part of the financial statements.
138
<PAGE>
FACE VALUE
AMOUNT (000)
- ---------------- -------
SHORT - TERM INVESTMENT (4.4%)
REPURCHASE AGREEMENT (4.4%)
$ 613 U.S. Trust 5.90% dated 6/30/95,
due 7/03/95 to be repurchased at
$613, collateralized by $645
United States Treasury Bills,
due 7/27/95, valued at $642
(Cost $613) $ 613
-------
FOREIGN CURRENCY (2.3%)
APS 33 Argentine Peso 33
BLR 62 Brazilian Real 67
MP 1,400 Mexican New Peso 224
PS 3 Peruvian Sol 1
-------
TOTAL FOREIGN CURRENCY (Cost $327) 325
-------
TOTAL INVESTMENTS (100%) (Cost $13,933) 13,957
-------
OTHER ASSETS (4.1%)
Cash $ 1
Receivable for Portfolio Shares
Sold 355
Receivable for Investments Sold 161
Dividends Receivable 18
Interest Receivable 10
Expense Reimbursement
Receivable 23 568
--------
LIABILITIES (-4.1%)
Payable for Investments Purchased (510)
Custodian Fees Payable (22)
Administrative Fees Payable (2)
Sub-Administrative Fees Payable (2)
Directors' Fees & Expenses (2)
Other Liabilties (34) (572)
-------- -------
NET ASSETS (100%) $13,953
-------
-------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 1,586,250 outstanding $.001
par value shares (authorized 500,000,000
shares) $8.80
-------
-------
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of forward foreign currency contracts open at
June 30, 1995, the Portfolio is obligated to receive foreign currency
in exchange for US dollars as indicated below:
IN
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE LOSS
(000) (000) DATE (000) (000) (000)
- ---------- ----- ---------- -------- ----- ----------
US$ 8 $ 8 7/3/95 BLR 7 $ 8 -
----- ----- ----------
___________________________________________________________________________
+ - Non-income producing securities.
ADR - American Depositary Receipt.
ADS - American Depositary Shares.
GDR - Global Depositary Receipt.
The accompanying notes are an integral part of the financial statements.
139
<PAGE>
___________________________________________________________________________
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
VALUE PERCENTAGE OF
INDUSTRY (000) NET ASSETS
- -------------------------------------------------------------------
Capital Equipment $ 558 4.0%
Consumer Goods 2,339 16.8
Energy 3,227 23.1
Finance 2,668 19.1
Materials 2,564 18.4
Multi-Industry 175 1.2
Services 1,488 10.7
------- ----
$13,019 93.3%
------- ----
------- ----
The accompanying notes are an integral part of the financial statements.
140
<PAGE>
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------------------------
LATIN
AMERICAN
PORTFOLIO
JANUARY 18,
1995* TO
JUNE 30,
1995
(000)
- ----------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 132
Interest 33
Less Foreign Taxes Withheld (12)
-------------
Total Income 153
-------------
EXPENSES:
Investment Advisory Fees:
Basic Fees - Adviser 57
Less: Fees Waived (57)
-------------
Investment Advisory Service Fees - Net -
Administrative Fees 10
Sub-Administrative Fees 4
Custodian Fees 39
Filing and Registration Fees 21
Directors' Fees and Expenses 2
Audit Fees 19
Brazilian Tax Expense 45
Other Expenses 8
Expenses Reimbursed by Adviser (16)
-------------
Total Expenses 132
-------------
NET INVESTMENT INCOME 21
-------------
NET REALIZED LOSS:
Investments Sold (747)
Foreign Currency Transactions (7)
-------------
Total Net Realized Loss (754)
-------------
CHANGE IN UNREALIZED APPRECIATION 24
-------------
TOTAL NET REALIZED LOSS AND CHANGE
IN UNREALIZED APPRECIATION (730)
-------------
Net Decrease in Net Assets Resulting
from Operations $ (709)
-------------
-------------
______________________________
* Commencement of Operations.
The accompanying notes are an integral part of the financial statements.
_______________________________________________________________________________
141
<PAGE>
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
- -------------------------------------------------------------------------------
PERIOD FROM
JANUARY 18, 1995*
TO JUNE 30 1995
(UNAUDITED)
(000)
- -----------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 21
Net Realized Loss (754)
Change in Unrealized Appreciation 24
---------
Net Decrease in Net Assets Resulting from
Operations (709)
---------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 17,894
Distributions Reinvested -
Redeemed (3,232)
---------
Net Increase from Capital Share Transactions 14,662
---------
Total Increase in Net Assets 13,953
NET ASSETS:
Beginning of Period -
---------
End of Period (2) $ 13,953
---------
---------
________________________________________________________________
(1) Capital Share Transactions:
Shares Subscribed 1,956
Shares Issued on Distributions Reinvested -
Shares Redeemed (370)
---------
Net Increase in Capital Shares Outstanding 1,586
---------
---------
(2) Net Assets were Comprised of:
Paid in Capital $ 14,662
Undistributed Net Investment Income 21
Accumulated Net Realized Loss (754)
Unrealized Appreciation 24
---------
$ 13,953
---------
---------
_________________
* Commencement of operations.
The accompanying notes are an integral part of the financial statements.
142
<PAGE>
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS :
- -------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
- -------------------------------------------------------------------------------
PERIOD FROM
JANUARY 18, 1995*
TO JUNE 30, 1995
(UNAUDITED)
- -------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
--------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.01
Net Realized and Unrealized Loss on Investment (1.21)
--------
Total from Investment Operations (1.20)
--------
NET ASSET VALUE, END OF PERIOD $8.80
--------
--------
TOTAL RETURN (12.00)%
--------
--------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $13,953
Ratio of Expenses to Average Net Assets (1) 2.54%**+
Ratio of Net Investment Income to Average Net Assets (1) 0.40%**
Portfolio Turnover Rate 62%
__________________________
(1)Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 3.95 %**
Net Investment Loss to Average Net Assets (1.00)%**
__________________________
* Commencement of operations.
** Annualized.
+ The ratio of expenses to average net assets includes Brazilian tax expense.
Without the effect of the Brazilian tax expense, the ratio of expenses to
average net assets would have been 1.68%**.
The accompanying notes are an integral part of the financial statements.
143
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
June 30, 1995
Morgan Stanley Institutional Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company which offers redeemable shares of twenty-four diversified
and non-diversified investment portfolios. These notes pertain only to the
unaudited financial statements dated June 30, 1995 for one such investment
portfolio, the Latin American Portfolio (the "Portfolio").
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Portfolio in the preparation of the
financial statements.
1. SECURITY VALUATION: Equity securities listed on an 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 are 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. Securities not priced in this manner are valued at the most
recently quoted bid price, or, when securities exchange valuations are used,
at the latest quoted sale price on the day of valuation. If there is no such
reported sale, the latest quoted bid price will be used. Securities
purchased with remaining maturities of 60 days or less are valued at
amortized cost, if it approximates market value. Money market and municipal
money market securities 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 the Portfolio's intention to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly, no
provision for Federal income taxes is required in the financial statements.
The Portfolio may be subject to taxes imposed by countries in which it
invests. Such taxes are generally based on either income earned or
repatriated. The Portfolio accrues such taxes when the related income is
earned.
The Brazilian government assesses a 1% tax on all settlements of foreign
currency used to purchase listed equity securities.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as a custodian for the Portfolio takes possession of the
underlying securities, the value of
144
<PAGE>
which exceeds the principal amount of the repurchase transaction, including
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 Portfolio has the right to liquidate the
collateral and apply the proceeds in satisfaction of the obligation. In the
event of default or bankruptcy by counter-party to the agreement, realization
and/or retention of the collateral or proceeds may be subject to legal
proceedings.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and
records of the Portfolio 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 Portfolio are presented
at the foreign exchange rates and market values at the close of the period,
the Portfolio 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 Portfolio 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 and 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 contracts,
disposition of foreign currencies, currency gains or losses realized between
the trade and settlement dates on securities transactions, the difference
between the amount of investment income and foreign withholding taxes
recorded on the Portfolio's books and the U.S. dollar equivalent amount
actually received or paid, and certain currency related amounts of realized
gains or losses from the sale of foreign denominated debt securities.
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 possibly lower level of
governmental supervision and regulation of foreign securities markets and the
possibility of political or economic instability.
5. FORWARD FOREIGN CURRENCY CONTRACTS: The Portfolio may enter into forward
foreign currency contracts to attempt to protect securities and related
receivables and payables against changes in future foreign exchange rates. A
forward currency 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 Portfolio as unrealized gain or loss. The Portfolio
records realized gains or losses when the contract is closed equal to the
difference between the value of the contract at the time it
145
<PAGE>
was opened and the value at the time it was closed. Risks 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 arise from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar.
6. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The
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, the Portfolio 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 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.
7. SHORT SALES: The Portfolio 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 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) ant 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.
8. PURCHASED AND WRITTEN OPTIONS: The Portfolio may write covered call
options. 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 canceled in
closing purchase transactions are offset against the proceeds or amount paid
on the transaction
146
<PAGE>
to determine the realized gain or loss. By writing a call option, the
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. Possible losses from written options may be
unlimited.
The Portfolio may also purchase call options on It's portfolio securities.
The Portfolio may purchase call options to close out covered call positions
or to protect against an increase in the price of the security it anticipates
purchasing. Possible losses from purchased options cannot exceed the total
amount invested.
9. 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 are amortized
according to the effective yield method over their respective lives.
Distributions are recorded on the ex-distribution date. Most expenses of the
Fund can be directly attributed to a particular Portfolio. Expenses which
cannot be directly attributed are apportioned among the Portfolios based upon
relative net assets.
Income distributions and capital gain distributions are determined in
accordance with tax regulations which may differ from generally accepted
accounting principles.
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 Portfolio
Valuation) may be created and offered for investment. The "local" and
"foreign" shares' market values may vary.
B. Morgan Stanley Asset Management Inc. ("MSAM") provides the Portfolio with
investment advisory services at a fee calculated at the annual rate of
average daily net assets indicated below. MSAM has agreed to reduce fees
payable to it and to reimburse the Portfolio, if necessary, if the annual
operating expenses, expressed as a percentage of average daily net assets,
exceed the maximum ratio indicated below.
Maximum
Advisory Expense
Fee Ratio
-------- -------
Latin American Portfolio . . . . . . . . . . . 1.10% 1.70%
147
<PAGE>
C. MSAM also provides the Portfolio 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 U.S. Trust
Company of New York ("U.S. Trust"), Mutual Funds Service Company ("MFSC"), a
subsidiary of U.S. Trust, provides certain administrative services to the
Portfolio. For such services, MSAM pays U.S. Trust a portion of the fee MSAM
receives from the Portfolio.
Bice Chileconsult Agente de Valores S.A. (the "Chilean Administrator") acts
as the Portfolios' legal representative in Chile pursuant to an
administrative agreement (the "Chilean Administrative Agreement"). The
Chilean Administrator provides various services to the Portfolio for a
monthly fee which on an annual basis is equal to the greater of 0.125% of the
Portfolios' average weekly net assets invested in Chile or $20,000.
Unibanco-Uniao (the "Brazilian Administrator") provides the Portfolio with
administrative services pursuant to an Administrative Agreement (the
"Brazilian Administration Agreement") for a monthly fee which on an annual
basis equals 0.125% of the Portfolio's average weekly net assets invested in
Brazil.
D. Morgan Stanley Trust Company ("MSTC") acts as custodian for the
Portfolio's assets held outside the United States in accordance with a
Custodian Agreement. U.S. Trust acts as custodian for the Portfolio's
domestic assets 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 MSAM are wholly-owned subsidiaries
of Morgan Stanley Group, Inc..
During the period January 18, 1995 through June 30, 1995 the Portfolio
incurred custody fees and had amounts payable to MSTC at June 30, 1995 of:
MSTC
Custody Fees Fees Payable to
Incurred MSTC
-------- ----
(000) (000)
$36 $21
E. During the period January 18, 1995 through June 30, 1995, purchases and
sales of investment securities other than U.S. Government securities and
short-term investments were:
Purchases Sales
--------- -----
(000) (000)
$20,744 $6,992
148
<PAGE>
F. At June 30, 1995, the Portfolio's cost for Federal income tax purposes
was $13,606,000. Net unrealized appreciation for Federal income tax purposes
aggregated $26,000 of which $1,004,000 related to appreciated securities and
$978,000 related to depreciated securities.
149
<PAGE>
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (99.2%)
DAILY VARIABLE RATE BONDS (11.2%)
$900 Hapeville, Georgia, Industrial
Development Authority, Series 85,
4.35%, 11/01/15 $ 900
1,500 Jackson County, Mississippi, Port
Facility, Chevron Project, Series 93,
4.20%, 6/01/23 1,500
500 Lincoln County, Wyoming, Pollution
Control Revenue, Exxon Project Series 84A,
4.25%, 11/01/14 500
300 New York City, New York, Water Finance
Authority, Water and Sewer System Revenue,
Series 94C, 4.25%, 6/15/22 300
1,000 Platte County, Wyoming, Pollution
Control Revenue, Series A, 4.35%,
7/01/14 1,000
700 Valdez, Alaska, Marine Terminal
Authority, Exxon, Series 85, 4.20%,
10/01/25 700
----------
TOTAL DAILY VARIABLE RATE BONDS 4,900
----------
FIXED RATE INSTRUMENTS (88.0%)
1,000 Columbus, Ohio, General Obligation
Bonds, 5.80%, 1/01/00 1,053
1,000 Connecticut State Special Obligation,
Tax Revenue Bonds, Transportation,
6.50%, 7/01/09, Prerefunded 7/01/99 at 102 1,090
1,000 De Kalb County, Georgia, General
Obligation Bonds, 7.30%, 1/01/00,
Prerefunded 1/01/97 at 102 1,066
1,000 De Kalb County, Georgia, Water & Sewer
Revenue Bonds 7.00%, 10/01/06 1,068
1,000 Georgia State, General Obligation Bonds,
Series E, 6.75%, 12/01/02 1,129
500 Hawaii State, General Obligation Bonds,
Series BS, 6.70%, 9/01/97 527
1,000 Hawaii State, General Obligation Bonds,
Series CJ, 6.20%, 1/01/12 1,022
1,000 Howard County, Maryland, Consolidated
Public Improvement General Obligation
Bonds, Series A, 7.20%, 8/01/03,
Prerefunded 8/01/96 at 102 1,054
1,500 Intermountain Power Agency, Utah, Power
Supply Revenue Bonds, Series D, 8.38%,
7/01/12 1,636
1,000 Kentucky State Housing Corp. Revenue
Bonds, Series A, 6.00%, 7/01/10 1,012
1,155 Maryland State Department of
Transportation, Construction Revenue Bonds,
Second Issue, 6.80%, 11/01/05,
Prerefunded 11/01/99 at 102 1,278
1,000 Massachusetts State, Consolidated Loan,
Series A, 7.50%, 3/01/03, Prerefunded
3/01/00 at 102 1,133
500 Massachusetts State Consolidated Loan,
Series A, 7.63%, 6/01/08,
Prerefunded 6/01/01 at 102 582
1,625 Michigan State Housing Development
Authority Revenue Bonds, Series A, 6.75%,
12/01/14 1,698
1,500 Minnesota State General Obligation
Bonds, 7.00%, 8/01/99,
Prerefunded 8/01/96 at 100 1,550
1,400 Mississippi State General Obligation
Bonds, 6.00%, 2/01/09 1,440
1,000 Mobile Alabama, Water & Sewer Revenue
Bonds, Series B, 7.25%, 1/01/06 1,036
1,475 Montana State General Obligation Bonds,
Long Range Building Program, Series C,
6.00%, 8/01/13 1,498
The accompanying notes are an integral part of the financial statements.
150
<PAGE>
$1,500 Municipal Assistance Corp. for City of
New York, New York, Refunding
Revenue Bonds, Series 56, 7.90%,
7/01/98, Prerefunded 7/01/96 at 102 $ 1,589
1,000 New Castle County, Delaware, General
Obligation Bonds, 6.25%, 10/15/01 1,078
1,500 North Little Rock, Arkansas, Electric
Revenue Refunding Bonds, Murray Lock & Dam
Hydro, 7.40%, 7/01/15, Prerefunded 7/01/96
at 102 1,581
500 Ohio State General Obligation Bonds,
6.20%, 8/01/12 521
1,000 Ohio State Housing Finance Agency,
Residential Mortgage Revenue Bonds,
Series A-1, 6.20%, 9/01/14 1,011
1,000 Pennsylvania State Higher Educational
Facilities Authority, Colleges & Universities
Revenue Bonds, 6.50%, 9/01/02 1,095
1,000 Reedy Creek Improvement District,
Florida, District Florida Utility
Revenue Bonds, Series 91-1, 6.50%,
10/01/16, Prerefunded 10/01/01 at 101 1,108
1,000 Redmond, Washington, General Obligation 1,038
Bonds, 5.75%, 12/01/05
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 1,477
1,350 San Antonio, Texas General Obligation
Bonds, 6.50%, 8/01/14 1,408
1,000 Tulsa, Oklahoma, General Obligation
Bonds, 6.38%, 2/01/02 1,084
1,000 Virginia Beach, Virginia General
Obligation Bonds, 6.00%, 9/01/10 1,022
500 Virginia State Housing Development
Authority, Commonwealth Mortgage Revenue
Bonds, Series B, 6.60%, 1/01/12 519
1,000 Virginia State Housing Development
Authority, Commonwealth Mortgage Revenue
Bonds, Series B, 6.65%, 1/01/13 1,038
1,500 Washington State General Obligation
Bonds, Series 86-D, 8.00%, 9/01/09,
Prerefunded 9/01/96 at 100 1,571
500 Washington Suburban Sanitary District,
General Obligation Revenue Bonds, 6.50%,
11/01/05, Prerefunded 11/01/01 at 102 555
----------
TOTAL FIXED RATE INSTRUMENTS 38,567
----------
TOTAL TAX-EXEMPT INSTRUMENTS (99.2%)
(Cost $42,728) 43,467
----------
TOTAL INVESTMENTS (99.2%) (Cost $42,728) 43,467
----------
OTHER ASSETS (2.2%)
Cash $44
Interest Receivable 928 972
-----------
LIABILITIES (-1.4%)
Payable for Investments
Purchased (562)
Administrative Fees Payable (5)
Investment Advisory Fees Payable (4)
Custodian Fees Payable (2)
Directors Fees and Expense
Payable (2)
Other Liabilities (34) (609)
----------- ----------
NET ASSETS (100%) $43,830
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 4,723,159 outstanding
$.001 par value shares (authorized
500,000,000 shares) $10.26
----------
----------
- ------------------------------------------------------------
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.
The accompanying notes are an integral part of the financial statements.
151
<PAGE>
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 U.S. Treasury escrow.
The accompanying notes are an integral part of the financial statements.
152
<PAGE>
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
MUNICIPAL
BOND
PORTFOLIO
JANUARY 18,
1995* TO
JUNE 30,
1995
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 990
--------------
Total Income 990
--------------
EXPENSES:
Investment Advisory Fees:
Basic Fees - Adviser 69
Less: Fees Waived (62)
--------------
Investment Advisory Service Fees - Net 7
Administrative Fees: 32
Custodian Fees 5
Filing and Registration Fees 20
Directors' Fees and Expenses 2
Legal Fees 1
Audit Fees 10
Shareholder Reports 11
Other Expenses 1
--------------
Total Expenses 89
--------------
NET INVESTMENT INCOME 901
--------------
NET REALIZED GAIN:
Investments Sold 178
--------------
Total Net Realized Gain 178
--------------
CHANGE IN UNREALIZED APPRECIATION 739
--------------
TOTAL NET REALIZED GAIN AND CHANGE
IN UNREALIZED APPRECIATION 917
--------------
Net Increase in Net Assets Resulting
from Operations $ 1,818
--------------
--------------
* Commencement of Operations.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
153
<PAGE>
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
PERIOD FROM
JANUARY 18, 1995*
TO JUNE 30 1995
(UNAUDITED)
(000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 901
Net Realized Gain 178
Change in Unrealized Appreciation 739
----------
Net Increase in Net Assets Resulting from
Operations 1,818
----------
DISTRIBUTIONS:
Net Investment Income (705)
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 55,060
Distributions Reinvested 672
Redeemed (13,015)
----------
Net Increase from Capital Share
Transactions 42,717
----------
Total Increase in Net Assets 43,830
NET ASSETS:
Beginning of Period --
----------
End of Period (2) $ 43,830
----------
----------
________________________________________________________
(1) Capital Share Transactions:
Shares Subscribed 5,480
Shares Issued on Distributions Reinvested 66
Shares Redeemed (1,273)
----------
Net Increase in Capital Shares Outstanding 4,273
----------
----------
(2) Net Assets were Comprised of:
Paid in Capital $ 42,717
Undistributed Net Investment Income 196
Accumulated Net Realized Gain 178
Unrealized Appreciation 739
----------
$ 43,830
----------
----------
- --------------
* Commencement of operations.
The accompanying notes are an integral part of the financial statements.
154
<PAGE>
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS :
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
PERIOD FROM
JANUARY 18, 1995*
TO JUNE 30, 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
-------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.21
Net Realized and Unrealized Gain on Invest 0.21
-------------
Total from Investment Operations 0.42
-------------
DISTRIBUTIONS
Net Investment Income (0.16)
-------------
NET ASSET VALUE, END OF PERIOD $10.26
-------------
-------------
TOTAL RETURN 4.2%
-------------
-------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $43,830
Ratio of Expenses to Average Net Assets (1) 0.45%**
Ratio of Net Investment Income to Average Net Assets (1) 4.55%**
Portfolio Turnover Rate 124%
- -------------------
(1)Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 0.76%**
Net Investment Income (Loss) to Average Net Assets 4.24%**
- ----------------
* Commencement of operations.
** Annualized.
155
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1995
Morgan Stanley Institutional Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company which offers redeemable shares of twenty-four diversified
and non-diversified investment portfolios. These Notes pertain only to the
unaudited financial statements dated June 30, 1995 for one such investment
portfolio, the Municipal Bond Portfolio (the "Portfolio").
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Portfolio in the preparation of the
financial statements.
1. SECURITY VALUATION: Bonds and other fixed income securities are 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. Securities not priced in this
manner are valued at the most recently quoted bid price, or, when securities
exchange valuations are used, at the latest quoted sale price on the day of
valuation. If there is no such reported sale, the latest quoted bid price
will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value.
Municipal money market securities 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 the Portfolio's intention to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly, no
provision for Federal income taxes is required in the financial statements.
The Portfolio may be subject to taxes imposed by countries in which it
invests. Such taxes are generally based on either income earned or
repatriated. The Portfolio accrues such taxes when the related income is
earned.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as a custodian for the Portfolio takes possession of the
underlying securities, the value of which exceeds the principal amount of the
repurchase transaction, including 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
Portfolio 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
other party to the agreement, realization and/or retention of the collateral
or proceeds may be subject to legal proceedings.
156
<PAGE>
4. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The
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 transaction. Additionally, the Portfolio 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 date.
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 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.
5. 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 are amortized
according to the effective yield method over their respective lives.
Distributions are recorded on the ex-distribution date. Most expenses of the
Fund can be directly attributed to a particular Portfolio. Expenses which
cannot be directly attributed are apportioned among the Portfolios based upon
relative net assets.
Income distributions and capital gain distributions are determined in
accordance with tax regulations which may differ from generally accepted
accounting principles.
B. Morgan Stanley Asset Management Inc. ("MSAM") provides the Portfolio with
investment advisory services at a fee calculated at the annual rate of
average daily net assets indicated below. MSAM has agreed to reduce fees
payable to it and to reimburse the Portfolio, if necessary, if the annual
operating expenses, expressed as a percentage of average daily net assets,
exceed the maximum ratio indicated below.
Advisory Maximum Expense
Fee Ratio
-------- ---------------
Municipal Bond Portfolio 0.35% 0.45%
C. MSAM also provides the Portfolio 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.
157
<PAGE>
Under an agreement between MSAM and U.S. Trust Company of New York ("U.S.
Trust"), Mutual Funds Service Company ("MFSC"), a subsidiary of U.S. Trust,
provides certain administrative services to the Fund. For such services,
MSAM pays U.S. Trust a portion of the fee MSAM receives from the Fund. MSAM
is a wholly-owned subsidiary of Morgan Stanley Group, Inc..
D. U.S. Trust acts as custodian for the Portfolio's assets 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.
E. During the period January 18, 1995 through June 30, 1995, purchases and
sales of investment securities other than U.S. Government securities and
short-term investments were:
Purchases Sales
--------- ------
(000) (000)
$99,205 $56,492
F. At June 30, 1995, the Portfolio's cost for Federal income tax purposes
was $42,728,000. Net realized appreciation for Federal income tax purposes
aggregated $739,000 of which $763,000 related to appreciated securities and
$24,000 related to depreciated securities.
158
<PAGE>
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
- -------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- -------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------
VALUE
SHARES (000)
- --------------------------------------------------------------------------
COMMON STOCKS (97.1%)
APARTMENT (28.4%)
44,200 Associated Estates Realty Corp. $ 934
45,700 Avalon Properties, Inc. 908
82,600 Bay Apartment Communities, Inc. 1,611
66,500 Equity Residential Properties Trust 1,854
56,600 Evans Withycombe Residential, Inc. 1,153
53,100 Home Properties of New York, Inc. 936
63,400 Irvine Apartment Communities, Inc. 1,094
60,000 Walden Residential Properties, Inc. 1,102
76,000 Wellsford Residential Property Trust 1,729
-----------
11,321
-----------
LODGING/LEISURE (4.7%)
+98,600 Host Marriot Corp. 1,048
+36,000 Starwood Lodging Trust 846
-----------
1,894
-----------
MANUFACTURED HOME (7.7%)
66,500 Atlantic Gulf Communities Corp. 432
20,000 Chateau Properties, Inc. 418
60,300 ROC Communities, Inc. 1,334
36,200 Sun Communities, Inc. 905
-----------
3,089
-----------
OFFICE (9.9%)
64,400 Beacon Properties Corp. 1,280
44,400 Cali Realty Corp. 860
73,100 Carr Realty Corp. 1,261
+64,900 Koger Equity, Inc. 568
-----------
3,969
-----------
OFFICE AND INDUSTRIAL (16.0%)
75,700 Bedford Property Investors, Inc. 435
60,100 Duke Realty Investments, Inc. 1,698
7,500 First Industrial Realty Trust, Inc. 154
71,400 Liberty Property Trust 1,401
31,500 Reckson Associates Realty Corp. 764
86,400 Spieker Properties, Inc. 1,933
-----------
6,385
-----------
SELF STORAGE (4.2%)
102,00 Storage Equities, Inc. 1,670
-----------
SHOPPING CENTER (26.2%)
FACTORY OUTLET CENTER (1.4%)
20,800 Chelsea GCA Realty, Inc. 561
-----------
REGIONAL MALL (19.8%)
98,200 Alexander Haagen Properties, Inc. 1,129
50,000 CBL & Associates Properties, Inc. 994
99,700 Crown American Realty Trust 1,259
93,400 DeBartolo Realty Corp. 1,366
76,200 Glimcher Realty Trust 1,581
The accompanying notes are an integral part of the financial statements.
159
<PAGE>
79,500 Macerich Co. $ 1,560
-----------
7,889
-----------
STRIP CENTER (5.0%)
29,800 Developers Diversified Realty Corp. 857
37,900 Price REIT, Inc., Series B 1,132
-----------
1,989
-----------
TOTAL SHOPPING CENTER 10,439
-----------
TOTAL COMMON STOCKS (Cost $37,467) 38,767
-----------
FACE
AMOUNT
(000)
- --------
SHORT-TERM INVESTMENT (4.4%)
REPURCHASE AGREEMENT (4.4%)
$1,749 U.S. Trust, 5.90%, dated 6/30/95,
due 7/03/95, to be repurchased at $1,750,
collateralized by $1,820 United States
Treasury Bills, due 7/27/95, valued at
$1,813 (Cost $1,749) 1,749
-----------
TOTAL INVESTMENTS (101.5%) (Cost $39,216) 40,516
-----------
OTHER ASSETS (4.1%)
Receivable for Portfolio Shares Sold $1,000
Receivable for Investments Sold 347
Dividends Receivable 285
Other 1 1,633
-----------
LIABILITIES (-5.6%)
Payable for Investments Purchased (2,185)
Investment Advisory Fees Payable (11)
Administrative Fees Payable (4)
Custodian Fees Payable (3)
Directors' Fees & Expenses (1)
Other Liabilities (25) (2,229)
----------- -----------
NET ASSETS (100%) $39,920
-----------
-----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 3,684,831 outstanding $.001
par value shares (authorized 500,000,000
shares) $10.83
-----------
-----------
_______________________________________________________________________________
+ - Non-income producing securities.
The accompanying notes are an integral part of the financial statements.
160
<PAGE>
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------------------------
U.S. REAL
ESTATE
PORTFOLIO
FEBRUARY 24,
1995* TO
JUNE 30,
1995
(000)
- -------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 742
Interest 59
------------
Total Income 801
------------
EXPENSES:
Investment Advisory Fees:
Basic Fees - Adviser 68
Less: Fees Waived (58)
------------
Investment Advisory Fees - Net 10
Administrative Fees: 13
Custodian Fees 9
Filing and Registration Fees 23
Directors' Fees and Expenses 2
Legal Fees 11
Audit Fees 8
Shareholder Reports 9
Other Expenses 1
------------
Total Expenses 86
------------
NET INVESTMENT INCOME 715
------------
NET REALIZED GAIN:
Investments Sold 310
------------
CHANGE IN UNREALIZED APPRECIATION 1,300
------------
TOTAL NET REALIZED GAIN AND CHANGE
IN UNREALIZED APPRECIATION 1,610
------------
Net Increase in Net Assets Resulting
from Operations $ 2,325
------------
------------
_____________
* Commencement of Operations
The accompanying notes are an integral part of the financial statements.
161
<PAGE>
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
PERIOD FROM
FEBRUARY 24, 1995*
TO JUNE 30 1995
(UNAUDITED)
(000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 715
Net Realized Gain 310
Change in Unrealized Appreciation 1,300
---------
Net Increase in Net Assets Resulting from Operations 2,325
---------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 39,627
Distributions Reinvested -
Redeemed (2,032)
---------
Net Increase from Capital Share Transactions 37,595
---------
Total Increase in Net Assets 39,920
NET ASSETS:
Beginning of Period -
---------
End of Period (2) $ 39,920
---------
---------
_______________________________________________________________________________
(1) Capital Share Transactions:
Shares Subscribed 3,882
Shares Issued on Distributions Reinvested -
Shares Redeemed (197)
---------
Net Increase in Capital Shares Outstanding 3,685
---------
---------
(2) Net Assets were Comprised of:
Paid in Capital $ 37,595
Undistributed Net Investment Income 715
Accumulated Net Realized Gain 310
Unrealized Appreciation 1,300
---------
$ 39,920
---------
---------
_________________
* Commencement of operations.
The accompanying notes are an integral part of the financial statements.
162
<PAGE>
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS :
- -------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
- -------------------------------------------------------------------------------
PERIOD FROM
FEBRUARY 24, 1995*
TO JUNE 30, 1995
(UNAUDITED)
- -------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.19
Net Realized and Unrealized Gain on Investments 0.64
----------
Total from Investment Operations 0.83
----------
NET ASSET VALUE, END OF PERIOD $10.83
----------
----------
TOTAL RETURN 8.3%
----------
----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $39,920
Ratio of Expenses to Average Net Assets (1) 0.97%**
Ratio of Net Investment Income to Average Net Assets (1) 8.08%**
Portfolio Turnover Rate 41%
_________________________
(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 1.63 %**
Net Investment Income to Average Net Assets 7.42 %**
_________________________
* Commencement of operations.
** Annualized.
The accompanying notes are an integral part of the financial statements.
163
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1995
Morgan Stanley Institutional Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as an open-end management
investment company which offers redeemable shares of twenty-four diversified
and non-diversified investment portfolios. These Notes pertain only to the
unaudited financial statements dated June 30, 1995 for one such investment
portfolio, the U.S. Real Estate Portfolio (the "Portfolio").
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Portfolio in the preparation of the
financial statements.
1. SECURITY VALUATION: Equity securities listed on an exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales 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 are 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. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. Money
market securities 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 the Portfolio's intention to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly, no
provision for Federal income taxes is required in the financial statements.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as a custodian for the Portfolio takes possession of the
underlying securities, the value of which is at least equal to the principal
amount of the repurchase transaction, including 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 Portfolio 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 other party to the agreement, realization and/or retention
of the collateral or proceeds may be subject to legal proceedings.
164
<PAGE>
4. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The
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, the Portfolio 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 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.
5. 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. Distributions are recorded on the
ex-distribution date. Most expenses of the Fund can be directly attributed to
a particular Portfolio. Expenses which cannot be directly attributed are
apportioned among the Portfolios based upon relative net assets.
Income distributions and capital gain distributions are determined in
accordance with tax regulations which may differ from generally accepted
accounting principles.
B. Morgan Stanley Asset Management Inc. ("MSAM") provides the Portfolio
with investment advisory services at a fee calculated at the annual rate of
average daily net assets indicated below. MSAM has agreed to reduce fees
payable to it and to reimburse the Portfolio, if necessary, if the annual
operating expenses, expressed as a percentage of average daily net assets,
exceed the maximum ratio indicated below.
Maximum
Advisory Expense
Fee Ratio
-------- -------
U.S. Real Estate Portfolio . . . . . . . . 0.80% 1.00%
C. MSAM also provides the Portfolio 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.
165
<PAGE>
Under an agreement between MSAM and U.S. Trust Company of New York ("U.S.
Trust"), Mutual Funds Service Company ("MFSC"), a subsidiary of U.S. Trust,
provides certain administrative services to the Portfolio. For such
services, MSAM pays U.S. Trust a portion of the fee MSAM receives from the
Portfolio. MSAM is a wholly-owned subsidiary of Morgan Stanley Group, Inc.
D. CUSTODIANS: U.S. Trust acts as custodian for the Portfolio's assets in
accordance with a Custodian Agreement. Custodian fees are computed and
payable monthly based on investment purchases and sales activity, an account
maintenance fee, plus reimbursement for certain out-of-pocket expenses.
E. PURCHASES AND SALES: During the period February 24, 1995 through June
30, 1995, purchases and sales of investment securities other than U.S.
Government securities and short-term investments were:
Purchases Sales
--------- -----
(000) (000)
$48,607 $11,450
F. At June 30, 1995, the Portfolio's cost for Federal income tax purposes
was $39,216,000. Net realized appreciation for Federal income tax purposes
aggregated $1,300,000 of which $1,373,000 related to appreciated securities
and $73,000 related to depreciated securities.
166
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
SHARES VALUE
(000)
- ------------------------------------------------------
COMMON STOCKS (92.9%)
AUSTRALIA (1.9%)
16,200 Amcor Ltd..................... $ 120
9,200 Ampolex Ltd................... 21
15,200 Australian National Industries
Ltd......................... 13
26,000 Boral Ltd. (Bon Shares
Plan)....................... 65
6,400 Brambles Industries Ltd....... 61
49,348 Broken Hill Proprietary Co.,
Ltd......................... 607
16,800 Burns, Philip & Co., Ltd...... 35
8,725 Coca-Cola Amatil Ltd.......... 54
33,300 Coles Myer Ltd................ 104
16,700 CRA Ltd....................... 227
26,200 CSR Ltd....................... 82
82,400 Fosters Brewing Corp.......... 73
21,763 General Property Trust........ 37
34,700 Goodman Fielder Ltd........... 29
9,200 ICI Australia Ltd............. 60
7,349 Lend Lease Corp., Ltd......... 94
44,590 MIM Holdings Ltd.............. 55
37,018 National Australia Bank
Ltd......................... 292
+8,500 Newcrest Mining Ltd........... 36
50,132 News Corp., Ltd............... 280
22,100 North Broken Hill Peko Ltd.... 53
30,200 Pacific Dunlop Ltd............ 64
25,200 Pioneer International Ltd..... 63
8,342 Renison Goldfields
Consolidated Ltd............ 26
4,278 Renison Goldfields
Consolidated Ltd. (New)..... 10
16,100 Santos Ltd.................... 39
19,200 Southcorp Holdings Ltd........ 38
+12,400 TNT Ltd....................... 16
27,100 Western Mining Corp. Holdings
Ltd......................... 149
17,057 Westfield Trust............... 10
45,800 Westpac Banking Corp.......... 166
--------
2,979
--------
BELGIUM (4.0%)
260 Baekaert S.A.................. 206
450 Cimenteries CBR
Cementbedrijven............. 184
5,900 Delhaize Freres et Cie, 'Le
Lion', S.A.................. 265
5,050 Electrabel S.A................ 1,066
1,100 Electrabel S.A. (New) -
VVPR........................ 235
3,900 Fortis AG..................... 412
108 Fortis AG - VVPR.............. 12
1,670 Generale de Banque S.A........ 536
2,900 Gevaert Photo-Producten
S.A......................... 159
586 Glaverbel S.A................. 77
+36 Glaverbel S.A. - VVPR......... --
2,650 Groupe Bruxelles Lambert
S.A......................... 355
1,550 Kredietbank S.A............... 367
2,620 Petrofina S.A................. 791
1,450 Reunies Electrobel & Tractebel
S.A......................... 526
1,500 Royale Belge.................. 283
950 Solvay et Cie S.A............. 526
+2,850 Union Miniere S.A............. 186
--------
6,186
--------
SHARES
VALUE
(000)
- ------------------------------------------------------
BRAZIL (0.4%)
550,000 Cia Paulista de Forca E Luz... $ 27
1,300,000 Cia Siderurgica Nacional...... 30
1,600,000 Eletrobras.................... 417
250,000 Servicos de Eletricdade....... 79
--------
553
--------
FRANCE (7.8%)
1,200 Accor S.A..................... 160
6,700 Alcatel Alsthom............... 603
7,000 AXA S.A....................... 378
8,300 Banque Nationale de Paris..... 400
350 BIC Corp...................... 58
1,200 Bouygues...................... 144
1,150 Carrefour Supermarch S.A...... 589
290 Chargeurs S.A................. 57
916 Cie Bancaire S.A.............. 110
3,700 Cie de Saint Gobain........... 447
7,100 Cie de Suez S.A............... 395
5,279 Cie Financiere de Paribas,
Class A..................... 317
4,900 Cie Generale des Eaux......... 545
11,000 Elf Aquitaine................. 813
3,700 Elf Sanofi.................... 205
1,400 Eridania Beghin-Say S.A....... 216
3,400 Etablissements Economiques du
Casino...................... 99
3,400 Groupe Danone................. 572
2,500 Havas S.A..................... 198
4,000 Lafarge Coppee S.A............ 311
3,200 L'Air Liquide................. 511
1,400 Legrand....................... 222
2,700 L'Oreal....................... 677
3,400 LVMH Moet Hennessy Louis
Vuitton..................... 612
3,100 Lyonnaise des Eaux Demez...... 293
+4,900 Michelin CGDE, Class B........ 217
2,300 Pernod-Ricard................. 151
+800 Pinault-Printemps S.A......... 172
900 Promodes...................... 205
+2,200 PSA Peugeot Citrogen S.A...... 305
11,100 Rhone-Poulenc S.A., Class A... 250
250 SAGEM......................... 144
450 Saint Louis S.A............... 139
2,400 Schneider S.A................. 190
1,250 Simco S.A..................... 109
200 Societe Eurafrance S.A........ 66
3,700 Societe Generale.............. 433
+6,300 Thomson CSF................... 141
9,100 Total S.A., Class B........... 548
--------
12,002
--------
GERMANY (3.8%)
90 AGIV AG....................... 29
390 Allianz AG Holdi.............. 695
70 AMB Aachener & Muenchener
Beteiligungs AG............. 49
70 Asko Deutsche Kaufhaus AG..... 44
1,200 BASF AG....................... 256
1,325 Bayer AG...................... 329
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
6
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<C> <S> <C>
SHARES
VALUE
(000)
- ------------------------------------------------------
GERMANY (CONT.)
450 Bayerische Hypotheken und
Wechsel Bank AG............. $ 123
470 Bayerische Vereinsbank AG..... 142
90 Beiersdorf AG................. 71
80 Brau Und Brunnen AG........... 15
980 Daimler Benz AG............... 451
180 Degussa AG.................... 56
8,950 Deutsche Bank AG.............. 435
+670 Deutsche Lufthansa AG......... 97
8,200 Dresdner Bank AG.............. 237
80 Heidelberger Zement AG........ 69
210 Hochtief AG................... 118
170 Karstadt AG................... 74
120 Kaufhof Holding AG............ 43
+310 Kloeckner-Humboldt-Deutz AG... 10
180 Linde AG...................... 107
250 MAN AG........................ 64
780 Mannesmann AG................. 238
130 Muenchener Rueckver AG........ 285
290 Preussag AG................... 87
660 RWE AG........................ 229
110 SAP AG........................ 146
1,300 Schering AG................... 91
1,050 Siemens AG.................... 520
+640 Thyssen AG.................... 119
930 Veba AG....................... 365
390 Viag AG....................... 153
550 Volkswagen AG................. 158
--------
5,905
--------
HONG KONG (5.0%)
32,000 Applied International
Holdings.................... 3
40,592 Bank of East Asia Ltd......... 122
152,000 Cathay Pacific Airways Ltd.... 222
114,000 Cheung Kong Holdings Ltd...... 564
103,000 China Light & Power Co.,
Ltd......................... 530
82,000 Chinese Estates Holdings...... 59
41,000 Dickson Concepts International
Ltd......................... 25
32,000 Giordano Holdings Ltd......... 24
65,000 Hang Lung Development Co...... 103
99,500 Hang Seng Bank Ltd............ 759
10,000 Hong Kong Aircraft Engineering
Co., Ltd.................... 26
100,800 Hong Kong & China Gas Co.,
Ltd......................... 161
66,000 Hong Kong & Shanghai Hotel
Ltd......................... 81
562,000 Hong Kong Telecommunications
Ltd......................... 1,111
222,486 Hopewell Holdings Ltd......... 188
187,000 Hutchison Whampoa Ltd......... 904
55,000 Hysan Development Ltd......... 126
20,000 Johnson Electric Holdings
Ltd......................... 40
30,000 Miramar Hotel & Investment
Ltd......................... 61
79,656 New World Development Co.,
Ltd......................... 265
74,000 Oriental Press Group Ltd...... 30
20,500 Peregrine Investment Holdings
Ltd......................... 29
56,340 Shangri-La Asia Ltd........... 67
86,000 Shun Tak Holdings Ltd......... 68
SHARES
VALUE
(000)
- ------------------------------------------------------
96,000 South China Morning Post
Holdings.................... $ 58
54,000 Stelux Holdings Ltd........... 16
119,000 Sun Hung Kai Properties
Ltd......................... 881
83,500 Swire Pacific Ltd., Class A... 637
22,000 Television Broadcasts Ltd..... 77
18,000 Winsor Industrial Corp.
Ltd......................... 24
113,000 Wharf Holdings Ltd............ 369
7,900 Wing Lung Bank Ltd............ 45
--------
7,675
--------
INDONESIA (4.4%)
**218,000 Bank Dagang Nasional
(Foreign)................... 382
**1,248,000 Barito Pacific Timber
(Foreign)................... 1,793
**353,000 Gadjah Tunggal (Foreign)...... 507
**401,000 Hanajaya Mandala Sampoerna
(Foreign)................... 3,151
**344,000 Jakarta International Hotel &
Development (Foreign)....... 433
**37,000 Matahari Putra Prima
(Foreign)................... 59
**+34,000 Panbrothers Tex (Foreign)..... 11
**+187,000 Sinar Mas Agro (Foreign)...... 197
**123,000 United Tractors (Foreign)..... 262
--------
6,795
--------
ITALY (2.0%)
+20,000 Alitalia S.p.A................ 10
24,270 Assicurazioni Generali
S.p.A....................... 571
50,000 Banca Commerciale Italiana.... 113
+10,000 Banca Nazionaia Deli.......... 8
16,000 Banco Ambrosiano Ven.......... 53
5,500 Benetton Group S.p.A.......... 54
3,000 Cartiere Burgo................ 20
70,500 Credito Italiano.............. 82
19,000 Edison S.p.A.................. 85
+2,000 Falck Italian................. 3
+96,000 Fiat S.p.A.................... 339
+23,000 Fiat S.p.A. Di Risp (NCS)..... 49
7,500 Fidis Italian................. 16
20,900 Gilardini..................... 40
+5,000 Impregilo S.p.A............... 5
22,000 Istituto Bancario San Paolo... 119
+2,750 Italcementi................... 8
+6,250 Italcementi Di Risp........... 43
21,000 Italgas....................... 55
14,500 Mediobanca S.p.A.............. 105
+160,000 Montedison S.p.A.............. 114
+25,000 Montedison S.p.A Di Risp
(NCS)....................... 16
+37,500 Olivetti S.A.................. 37
35,500 Parmalat Finanziaria S.p.A.... 32
+50,000 Pirelli S.p.A................. 66
8,150 R.A.S. S.p.A.................. 86
3,350 R.A.S. S.p.A Di Risp (NCS).... 21
5,000 Rinascente.................... 28
600 Risanamento Di Napoli......... 8
+2,000 Saffa......................... 7
3,000 SAI........................... 32
12,500 Saipan........................ 25
3,000 Sasib......................... 14
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
7
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<C> <S> <C>
SHARES
VALUE
(000)
- ------------------------------------------------------
ITALY (CONT.)
7,000 Sirti S.p.A................... $ 52
12,000 SME Meridonale................ 30
+20,000 SNIA BPO S.p.A................ 23
190,000 Telecom Italia S.p.A.......... 515
50,000 Telecom Italia S.p.A. Di Risp
(NCS)....................... 106
--------
2,990
--------
JAPAN (28.3%)
3,000 Advantest Corp................ 113
27,000 Ajinomoto Co.................. 277
14,000 Aoki Corp..................... 51
2,000 Aoyama Trading Co............. 33
55,000 Asahi Bank Ltd................ 587
14,000 Asahi Breweries Ltd........... 161
41,000 Asahi Chemical Industry Co.,
Ltd......................... 269
41,000 Asahi Glass Co., Ltd.......... 452
41,000 Bank of Tokyo................. 657
14,000 Bridgestone Co................ 206
47,000 Canon, Inc.................... 765
28,000 Casio Computer Co............. 253
27,000 Chiba Bank.................... 245
5,000 Chiyoda Corp.................. 42
14,000 Chugai Pharmaceuticals Co..... 142
34,000 Citizen Watch Co., Ltd........ 210
63,000 Dai-Ichi Kangyo Bank.......... 1,136
14,000 Daikin Industries Ltd......... 113
27,000 Dai Nippon Printing Co.,
Ltd......................... 430
+6,000 Daishowa Paper Manufacturing
Co., Ltd.................... 27
14,000 Daiwa House Industry.......... 215
27,000 Daiwa Securities Co., Ltd..... 285
9,000 Ebara......................... 109
8,000 Fanuc......................... 345
62,000 Fuji Bank..................... 1,250
24,000 Fuji Photo Film Ltd........... 569
95,000 Fujitso Ltd................... 946
22,000 Furukawa Electric Co.......... 104
27,000 Hankyu Corp................... 162
14,000 Hazama Corp................... 58
124,000 Hitachi Ltd................... 1,235
43,000 Honda Motor Co................ 659
47,000 Industrial Bank of Japan...... 1,225
10,000 Ito-Yokado Co., Ltd........... 527
+55,000 Japan Airlines Co............. 365
34,000 Japan Energy Corp............. 110
15,000 Joyo Bank..................... 127
14,000 Jusco Co., Ltd................ 291
27,000 Kajima Corp................... 268
8,900 Kansai Electric Power Co...... 239
27,000 Kao Corp...................... 325
+70,000 Kawasaki Steel Corp........... 229
41,000 Kinki Nippon Railway.......... 360
27,000 Kirin Brewery Co., Ltd........ 286
+82,000 Kobe Steel Ltd................ 195
77,000 Komatsu Ltd................... 587
41,000 Kubota Corp................... 261
SHARES
VALUE
(000)
- ------------------------------------------------------
27,000 Kumagai Gumi Co............... $ 113
7,000 Kyocera Ltd................... 576
14,000 Kyowa Hakko Kogyo............. 135
12,000 Kyushu Matsushita Electric.... 208
17,000 Makita Corp................... 232
41,000 Marubeni Corp................. 208
14,000 Marui Co., Ltd................ 223
65,000 Matsushita Electric Industries
Ltd......................... 1,012
41,000 Mitsubishi Chemical Corp...... 175
38,000 Mitsubishi Corp............... 432
49,000 Mitsubishi Electric Co........ 344
30,000 Mitsubishi Estate Co., Ltd.... 338
110,000 Mitsubishi Heavy Industries
Ltd......................... 747
28,000 Mitsubishi Materials Corp..... 125
26,000 Mitsubishi Trust & Banking
Co.......................... 368
41,000 Mitsui & Co................... 320
+27,000 Mitsui Engineering &
Shipbuilding................ 59
23,000 Mitsui Fudosan Co............. 263
27,000 Mitsukoshi Ltd................ 193
2,800 Mochida Pharmaceutical........ 43
13,000 Murata Manufacturing Co.,
Ltd......................... 492
79,000 NEC Corp...................... 865
27,000 New Oji Paper Co., Ltd........ 259
14,000 NGK Insulators................ 127
14,000 Nippon Denso Co., Ltd......... 254
27,000 Nippon Express Co., Ltd....... 248
14,000 Nippon Fire & Marine Insurance
Co.......................... 88
13,000 Nippon Light Metal............ 59
14,000 Nippon Meat Packers, Inc...... 205
41,000 Nippon Oil Co................. 258
27,000 Nippon Paper Industries Co.... 175
103,000 Nippon Steel Co............... 335
41,000 Nippon Yusen.................. 230
52,000 Nissan Motor Co............... 332
+80,000 NKK Corp...................... 188
41,000 Nomura Securities Co.......... 715
27,000 Obayashi Corp................. 208
27,000 Odakyu Electric Railway Co.... 196
30,000 Olympus Optical Co., Ltd...... 247
82,000 Osaka Gas Co.................. 303
14,000 Penta-Ocean Construction...... 89
9,000 Pioneer Electric Corp......... 153
3,000 Rohm Co....................... 155
68,000 Sakura Bank................... 709
13,900 Sankyo Co., Ltd............... 323
41,000 Sanyo Electric Co., Ltd....... 202
3,000 Secom Co., Ltd................ 189
3,300 Sega Enterprises.............. 117
14,000 Sekisui House Co., Ltd........ 173
7,000 Seven-Eleven Japan............ 501
56,000 Sharp Corp.................... 739
14,000 Shin-Etsu Chemical Co......... 246
20,000 Shinizu Corp.................. 193
6,000 Shiseido Co., Ltd............. 68
27,000 Shizuoka Bank................. 337
+27,000 Showa Denko................... 80
13,000 Sony Corp..................... 624
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
8
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<C> <S> <C>
SHARES
VALUE
(000)
- ------------------------------------------------------
JAPAN (CONT.)
69,000 Sumitomo Bank................. $ 1,196
14,000 Sumitomo Cement............... 51
55,000 Sumitomo Chemical Co.......... 215
27,000 Sumitomo Corp. Ind............ 246
18,000 Sumitomo Electric Ind......... 214
6,000 Sumitomo Forestry Co., Ltd.... 100
96,000 Sumitomo Metal Ind............ 250
13,000 Sumitomo Metal & Mining....... 96
27,000 Taisei Corp., Ltd............. 159
27,000 Takeda Chemical............... 356
7,000 TDK Corp...................... 319
27,000 Teijin Ltd.................... 129
27,000 Tobu Railway Co............... 168
43,000 Tokai Bank.................... 477
41,000 Tokio Marine & Fire Insurance
Co.......................... 470
6,000 Tokyo Dome Corp............... 92
30,200 Tokyo Electric Power Co....... 926
5,000 Tokyo Electron Ltd............ 171
82,000 Tokyo Gas Co.................. 323
27,000 Tokyu Corp.................... 173
19,000 Toppan Printing Co., Ltd...... 249
41,000 Toray Industries Inc.......... 255
73,000 Toshiba Corp.................. 462
14,000 Toto Ltd...................... 200
27,000 Toyoba Co..................... 89
64,000 Toyota Motor Corp............. 1,268
+27,000 Ube Industries Ltd............ 94
27,000 Yamaichi Securities Co........ 145
14,000 Yamanouchi Pharmaceutical
Co.......................... 315
27,000 Yasuda Trust & Banking Co..... 177
--------
43,682
--------
MALAYSIA (1.9%)
6,000 AMMB Holdings Bhd............. 71
20,000 Amsteel Corp. Bhd............. 30
6,000 Aokam Perdana Bhd............. 15
20,000 Berjaya Group Bhd............. 18
7,000 Commerce Asset Holding Bhd.... 36
22,000 DCB Holdings Bhd.............. 64
6,000 Edaran Otomobil Nasional
Bhd......................... 59
32,000 Faber Group Bhd............... 31
28,000 Golden Hope Plantations Bhd... 51
+5,000 Golden Plus Holdings Bhd...... 11
10,000 Guinness Anchor Bhd........... 18
19,000 Highlands & Lowlands Bhd...... 36
4,000 Hong Leong Industries Bhd..... 25
24,000 Hong Leong Properties Bhd..... 32
7,000 Hume Industries (Malaysia)
Bhd......................... 38
+21,000 Idris Hydraulic (Malaysia)
Bhd......................... 29
21,000 IGB Corp. Bhd................. 20
27,000 IOI Corp. Bhd................. 35
15,000 Kedah Cement Bhd.............. 24
5,000 Kian Joo Can Factory Bhd...... 20
13,000 Land & General Bhd............ 43
12,000 Leader Universal Holdings
Bhd......................... 43
29,000 Magnum Corp. Bhd.............. 68
SHARES
VALUE
(000)
- ------------------------------------------------------
30,000 Malayan Banking Bhd........... $ 237
20,000 Malayan United Industries
Bhd......................... 34
18,000 Malaysian Airline System
Bhd......................... 61
24,000 Malaysian International
Shipping Bhd (Foreign)...... 70
15,000 Malaysian Mining Corp. Bhd.... 27
3,000 Malaysian Oxygen Bhd.......... 12
19,000 Malaysian Resources Corp.
Bhd......................... 33
26,000 Metroplex Bhd................. 25
19,000 Mulpha International Bhd...... 23
22,000 Multi-Purpose Holdings Bhd.... 39
5,000 Nestle (Malaysia) Bhd......... 38
5,000 Oriental Holdings Bhd......... 27
8,000 Perlis Plantations Bhd........ 27
14,000 Perusahaan Otomobil Nasional
Bhd......................... 51
9,000 Petaling Garden Bhd........... 12
26,000 Public Bank Bhd............... 58
9,000 Rashid Hussein Bhd............ 29
29,000 Resorts World Bhd............. 170
8,000 R.J. Reynolds Bhd............. 15
7,000 Rothmans of Pall Mall
(Malaysia) Bhd.............. 55
11,000 Selangor Properties Bhd....... 12
8,000 Shell Refining Co. (Malaysia)
Bhd......................... 27
55,000 Sime Darby Bhd................ 153
22,000 Tan Chong Motor Holdings
Bhd......................... 25
+18,000 Technology Resources
Industries Bhd.............. 52
52,000 Telekom Malaysia Bhd.......... 395
78,000 Tenaga Nasional Bhd........... 318
9,000 UMW Holdings Bhd.............. 26
15,000 United Engineers Ltd.
(Malaysia).................. 95
--------
2,963
--------
NETHERLANDS (5.0%)
12,500 ABN Amro Holdings N.V......... 482
3,200 Akzo Nobel N.V................ 382
26,700 Elsevier N.V.................. 315
2,350 Heineken N.V.................. 356
11,200 Internationale Nederlanden
Groep N.V................... 620
+3,400 KLM Royal Dutch Airlines
N.V......................... 110
5,144 Koninklijke Ahold N.V......... 184
4,200 Koninklijke KNP BT N.V........ 126
1,150 Koninklijke Nederlandsche
Hoogovens N.V............... 46
20,868 Koninklijke PTT Nederland
N.V......................... 750
950 Nedlloyd Groep N.V............ 32
13,500 Philips Electronics N.V....... 572
21,600 Royal Dutch Petroleum Co...... 2,638
1,200 Stork N.V..................... 33
6,500 Unilever N.V.................. 846
2,800 Wolters Kluwer N.V............ 247
--------
7,739
--------
PORTUGAL (2.6%)
45,200 Banco Chemical S.A.
(Registered)................ 454
75,000 Banco Commercial Portugues
(Registered)................ 993
25,000 Banco Portugues de
Investimento (New).......... 437
4,900 Corticeira Amorim S.A......... 74
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
9
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<C> <S> <C>
SHARES
VALUE
(000)
- ------------------------------------------------------
PORTUGAL (CONT.)
9,000 Jeronimo Martins.............. $ 455
18,300 Lisnave-Estaleiros Navais de
Lisboa S.A.................. 88
6,200 Mota e Companhia S.A.......... 131
24,607 Portugal Telecom S.A.
(Registered)................ 471
27,000 Sonae Investmentos............ 646
13,200 UNICER-Uniao Cervejeira
S.A......................... 223
--------
3,972
--------
SINGAPORE (2.9%)
23,000 Amcol Holdings Ltd............ 67
62,000 City Developments Ltd......... 379
18,000 Cycle & Carriage Ltd.......... 161
65,000 DBS Land Ltd.................. 204
32,000 Development Bank of Singapore
Ltd. (Foreign).............. 364
16,000 First Capital Corp. Ltd....... 50
19,000 Fraser & Neave Ltd............ 219
25,000 Hai Sun Hup Group Ltd......... 15
33,000 Hotel Properties Ltd.......... 58
15,000 Inchcape Bhd.................. 49
9,000 Jurong Shipyard Ltd........... 64
40,000 Keppel Corp., Ltd............. 326
22,000 Natsteel Ltd.................. 46
63,000 Neptune Orient Lines Ltd...... 73
47,000 Oversea-Chinese Banking Corp.
(Foreign)................... 521
12,000 Overseas Union Entrprise
Ltd......................... 73
25,000 Parkway Holdings Ltd.......... 61
4,000 Robinson & Co. Ltd............ 16
13,000 Shangri-La Hotel Ltd.......... 52
59,000 Singapore Airlines Ltd.
(Foreign)................... 545
16,800 Singapore Press Holdings
(Foreign)................... 251
47,000 Straits Steamship Land Ltd.... 163
31,000 Straits Trading Co., Ltd...... 78
125,000 United Industrial Corp.
Ltd......................... 121
49,000 United Overseas Bank Ltd.
(Foreign)................... 463
--------
4,419
--------
SPAIN (2.9%)
600 Acerinox S.A.................. 74
6,700 Argentaria S.A................ 248
11,000 Autopistas Concesionaria
Espanola S.A................ 107
12,800 Banco Bilbao Vizcaya S.A...... 370
8,500 Banco Central Hispano
Americano S.A............... 180
8,500 Banco de Santander S.A........ 335
1,150 Corporacion Financiera Alba... 59
1,258 Corporacion Mapfre............ 62
272 Corporacion Mapfre (New)...... 13
3,800 Dragados y Construccion
S.A......................... 55
3,100 Ebro Agricolas S.A............ 32
+1,200 Empresa Nacional de Cellulosas
S.A......................... 31
14,200 Empresa Nacional de
Electricdad S.A............. 701
5,700 Ercros S.A.................... 6
1,300 FASA Renault S.A.............. 39
850 Fomento Construction
Contractas S.A.............. 72
2,050 Gas Natural SDG S.A........... 245
SHARES
VALUE
(000)
- ------------------------------------------------------
49,000 Iberdrola S.A................. $ 369
200 Inmobilaria Metro Vasco
Central S.A................. 6
550 Portland Valderrivas S.A...... 38
16,400 Repsol S.A.................... 516
2,100 Tabacalera S.A., Class A...... 79
51,500 Telefonica Nacional de Espana
S.A......................... 664
17,100 Union Electrica Fenosa S.A.... 80
+2,300 Uralita S.A................... 28
2,500 Vallehermoso S.A.............. 43
1,400 Viscofan Envolturas
Celulosicas S.A............. 21
400 Zardoya Otis S.A.............. 41
--------
4,514
--------
SWITZERLAND (3.1%)
+75 Adia S.A. (Bearer)............ 16
50 Alusuisse-Lonza Holdings Ltd.
(Bearer).................... 31
100 Alusuisse-Lonza Holdings Ltd.
(Registered)................ 63
165 BBC Brown Boveri AG
(Bearer).................... 171
90 Ciba Geigy AG (Bearer)........ 66
450 Ciba Geigy AG (Registered).... 330
2,275 CS Holding AG (Registered).... 208
10 Georg Fischer AG (Bearer)..... 13
135 Holderbank Glarus AG
(Bearer).................... 111
100 Merkur Holding AG
(Registered)................ 28
710 Nestle S.A. (Registered)...... 739
30 Roche Holding AG (Bearer)..... 334
130 Roche Holding AG
(Registered)................ 838
630 Sandoz AG (Registered)........ 434
70 SMH AG (Bearer)............... 45
300 SMH AG (Registered)........... 40
35 Societe Generale de
Surveillance Holding S.A.
(Bearer).................... 61
70 Sulzer AG (Registered)........ 47
+50 SwissAir (Registered)......... 35
450 Swiss Bank Corp. (Bearer)..... 159
700 Swiss Bank Corp.
(Registered)................ 124
300 Swiss Reinsurance
(Registered)................ 231
390 Union Bank of Switzerland
(Bearer).................... 404
430 Union Bank of Switzerland
(Registered)................ 95
100 Zurich Versicherung
(Registered)................ 126
--------
4,749
--------
THAILAND (1.9%)
14,500 Advanced Information Services
Co., Ltd.................... 215
32,400 Bangchak Petroleum Co.,
Ltd......................... 65
44,300 Bangkok Metropolitan Bank
Ltd......................... 53
11,800 CMIC Finance & Securities Co.,
Ltd......................... 45
15,700 Dhana Siam Finance &
Securities Co., Ltd......... 92
8,400 General Finance & Securities
Co., Ltd.................... 41
15,500 Italian-Thai Development Co.,
Ltd......................... 167
20,700 Jasmine International Co.,
Ltd. (Foreign).............. 130
83,500 Krung Thai Bank Ltd.
(Foreign)................... 338
19,600 National Finance & Securities
Co., Ltd.................... 97
19,200 National Petrochemical Co..... 50
+9,900 One Holding Co., Ltd.......... 31
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
10
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<C> <S> <C>
SHARES
VALUE
(000)
- ------------------------------------------------------
THAILAND (CONT.)
16,900 Phatra Thanakit Co., Ltd.
(Foreign)................... $ 141
19,200 PTT Exploration & Production
Co., Ltd.................... 207
31,700 Sahaviriya Steel Industry..... 78
8,600 Shinawatra Computer Co.,
Ltd......................... 213
+21,700 Shinawatra Satellite Co.,
Ltd......................... 50
74,600 Siam City Bank Ltd.
(Foreign)................... 103
138,000 TelecomAsia Corp., Ltd.
(Foreign)................... 517
26,500 Thai Military Bank Ltd.
(Foreign)................... 107
14,500 United Communications
Industry.................... 212
--------
2,952
--------
UNITED KINGDOM (15.0%)
58,300 Abbey National plc............ 434
42,300 Argyll Group plc.............. 226
40,900 Arjo Wiggins Appleton plc..... 167
16,500 Associated British Foods
plc......................... 174
48,500 Barclays plc.................. 521
30,500 Bass plc...................... 292
100,177 BAT Industries plc............ 767
19,400 BICC plc...................... 92
35,800 Blue Circle Industries plc.... 160
17,400 BOC Group plc................. 222
35,800 Boots Co. plc................. 290
16,400 Bowater plc................... 126
24,600 BPB Industries plc............ 122
14,300 British Aerospace plc......... 128
33,400 British Airways plc........... 219
163,600 British Gas plc............... 754
178,800 British Petroleum Co. plc..... 1,282
63,400 British Steel plc............. 173
194,000 British Telecommunications
plc......................... 1,210
121,200 BTR plc....................... 616
8,280 Burmah Castrol plc............ 120
73,323 Cable & Wireless plc.......... 502
34,500 Cadbury Schweppes plc......... 252
22,500 Caradon plc................... 85
25,109 Coats Viyella plc............. 74
+14,700 Commercial Union plc.......... 137
14,300 Courtaulds plc................ 102
10,200 De La Rue Co. plc............. 152
15,700 Eastern Electricity plc....... 162
36,100 Forte plc..................... 131
20,000 General Accident plc.......... 183
109,500 General Electric plc.......... 535
15,400 GKN plc....................... 157
91,335 Glaxo Holdings plc............ 1,121
70,010 Grand Metropolitan plc........ 429
34,900 Great Universal Stores plc.... 327
46,700 Guardian Royal Exchange plc... 154
59,400 Guinness plc.................. 447
172,901 Hanson plc.................... 605
34,800 Harrisons & Crossfields plc... 79
67,500 HSBC Holdings plc............. 870
24,600 Imperial Chemical Industries
plc......................... 301
48,100 Ladbroke Group plc............ 129
SHARES
VALUE
(000)
- ------------------------------------------------------
21,500 Land Securities plc........... $ 208
30,700 Lasmo plc..................... 84
40,300 Lloyds Bank plc............... 400
25,200 Lonrho plc.................... 59
87,046 Marks and Spencer plc......... 560
16,400 MEPC plc...................... 100
44,000 National Power plc............ 312
18,400 North West Water Group plc.... 162
29,700 Peninsular & Oriental Steam
Navigation Co............... 274
40,900 Pilkington plc................ 114
72,100 Prudential Corp. plc.......... 384
15,400 Rank Organization plc......... 97
22,897 Redland plc................... 150
27,000 Reed International plc........ 379
53,800 Reuters Holdings plc.......... 449
9,200 RMC Group plc................. 155
30,700 Royal Bank of Scotland Group
plc......................... 209
24,200 Royal Insurance Holdings
plc......................... 119
41,900 RTZ Corp. plc................. 547
57,940 Sainsbury (J) plc............. 407
25,800 Scottish Power plc............ 133
53,200 Sears plc..................... 84
16,600 Sedgwick Group plc............ 36
12,300 Slough Estates plc............ 43
41,600 SmithKline Beecham plc, Class
A........................... 377
10,900 Southern Electricity plc...... 111
38,706 Tarmac plc.................... 69
20,500 Taylor Woodrow plc............ 38
55,079 Tesco plc..................... 254
19,400 Thames Water plc.............. 147
17,400 THORN EMI plc................. 361
14,300 TI Group plc.................. 89
36,800 Trafalgar House plc........... 26
22,000 Unilever plc.................. 445
35,800 Vodafone Group plc............ 133
9,000 Warburg (S.G.) Group plc...... 104
29,100 Zeneca Group plc.............. 492
--------
23,140
--------
UNITED STATES (0.0%)
1,167 U.S. Industries, Inc.......... 16
--------
TOTAL COMMON STOCKS (Cost $136,932)......... 143,231
--------
PREFERRED STOCKS (1.3%)
AUSTRALIA (0.1%)
25,693 News Corp., Ltd............... 127
--------
BRAZIL (1.0%)
18,666,000 Aracruz Celulose S.A., Class
B........................... 44
11,100,000 Banco Bradesco................ 94
2,500,000 Banco do Brasil............... 30
1,100,000 Banco do Estado Sao Paulo..... 6
145,000 Brahma........................ 48
700,000 Ceval Alimentos S.A........... 8
1,050,000 Cia Brasileira de Petroleo
Ipiranga.................... 12
2,372,500 Cia Energetica de Minas
Gerais...................... 46
60,000 Cia Energetica de Sao Paulo... 2
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
11
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<C> <S> <C>
SHARES
VALUE
(000)
- ------------------------------------------------------
BRAZIL (CONT.)
70,000 Cia Siderurgica de Tubarao.... $ 52
1,550,000 Eletrobras.................... 413
15,000 Industrias Klabin de Papel e
Celulose S.A................ 21
210,000 Itaubanco..................... 64
+65,000 Itausa Investimentos Itau
S.A......................... 37
2,200,000 Petrobras..................... 186
16,000 Sadia Concordia............... 15
7,300,000 Telecomunicacoes
Brasileiras................. 240
375,000 Telecomunicacoes de Sao
Paulo....................... 47
33,500,000 Usinas Siderurgicas de Minas
Gerias...................... 38
1,150,000 Vale Do Rio Doce.............. 174
--------
1,577
--------
GERMANY (0.2%)
380 RWE AG........................ 105
80 SAP AG........................ 101
--------
206
--------
ITALY (0.0%)
29,000 Fiat S.p.A.................... 63
--------
TOTAL PREFERRED STOCKS (Cost $1,695)........ 1,973
--------
NO. OF
RIGHTS
- ------------
RIGHTS (0.0%)
AUSTRALIA (0.0%)
**+2,181 Coca-Cola Amatil Ltd.,
expiring 7/26/95............ 3
--------
BRAZIL (0.0%)
**+200,000 Banco Bradesco................ --
**+2,663 Brahma........................ 1
+254,000 Telebras...................... --
--------
1
--------
FRANCE (0.0%)
**+1,346 Cie Bancaire S.A.............. 16
--------
INDONESIA (0.0%)
**+18,500 Matahari Putra Prima, expiring
8/04/95..................... 18
--------
SPAIN (0.0%)
+400 Zardoya Otis S.A., expiring
7/26/95..................... 4
--------
TOTAL RIGHTS (Cost $16)..................... 42
--------
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
NO. OF VALUE
WARRANTS (000)
- ------------------------------------------------------
+1,550 R.A.S. S.p.A., Savings Shares,
expiring 12/31/97........... $ 4
--------
16
--------
THAILAND (0.0%)
*+3,050 CMIC Finance & Securities Co.,
Ltd. (Foreign), expiring
1999........................ 1
+6,400 National Finance & Securities
Co., Ltd., expiring
11/15/99.................... --
--------
1
--------
TOTAL WARRANTS (Cost $1).................... 22
--------
NO. OF
UNITS
- ------------
UNITS (0.3%)
AUSTRALIA (0.0%)
+34,929 Westfield Trust............... 61
--------
UNITED KINGDOM (0.3%)
534 British Aerospace plc......... 6
40,200 SmithKline Beecham plc........ 357
--------
363
--------
TOTAL UNITS (Cost $346)..................... 424
--------
FACE
AMOUNT
(000)
- ------------
CONVERTIBLE DEBENTURES (0.0%)
FRANCE (0.0%)
FF *600 Sanofi 4.00%, 1/01/00 (Cost
$38)........................ 38
--------
TOTAL FOREIGN AND US SECURITIES (94.5%)
(Cost $139,028)............................. 145,730
--------
SHORT-TERM INVESTMENT (14.7%)
REPURCHASE AGREEMENT (14.7%)
$ 22,660 Goldman Sachs, 6.00%, dated
6/30/95, due 7/03/95, to be
repurchased at $22,671,
collateralized by $22,950
United States Treasury Notes
6.375%, due 6/30/97, valued
at $23,172 (Cost $22,660)... 22,660
--------
FOREIGN CURRENCY (0.4%)
BF 389 Belgian Franc................. 14
L 4 British Pound................. 7
IL 5,434 Italian Lira.................. 3
Y 6,079 Japanese Yen.................. 72
MA 907 Malaysian Ringgit............. 372
S$ 11 Singapore Dollar.............. 7
SP 2,737 Spanish Peseta................ 23
CHF 4 Swiss Franc................... 3
TB 2,398 Thai Baht..................... 97
--------
TOTAL FOREIGN CURRENCY (Cost $599).......... 598
--------
TOTAL INVESTMENTS (109.6%) (Cost
$162,287)................................... 168,988
--------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
12
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
VALUE
(000)
- ----------------------------------------------------
OTHER ASSETS (2.1%)
Receivable for Portfolio
Shares Sold................ $ 1,580
Net Unrealized Gain on
Foreign Forward Currency
Contracts.................. 677
Dividends Receivable........ 632
Foreign Withholding Tax
Reclaim Receivable......... 252
Receivable for Investments
Sold....................... 72
Interest Receivable......... 4
Other....................... 12 $ 3,229
----------
LIABILITIES (-11.7%)
Payable for Investments
Purchased.................. (17,601)
Custodian Fees Payable...... (86)
Payable for Portfolio Shares
Redeemed................... (85)
Investment Advisory Fees
Payable.................... (67)
Payable to Custodian........ (57)
Administrative Fees
Payable.................... (24)
Directors' Fees and Expenses
Payable.................... (1)
Other Liabilities........... (49) (17,970)
---------- --------
NET ASSETS (100%)......................... $154,247
--------
--------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 14,021,360 outstanding
$.001 par value shares (authorized
500,000,000 shares)..................... $11.00
--------
--------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT
INFORMATION:
Under the terms of forward foreign currency
contracts open at June 30, 1995, the Portfolio is
obligated to deliver or is to receive foreign
currency in exchange for US dollars as indicated
below:
<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>
$ 83 $ 83 7/03/95 MA 204 $ 83 $ --
IL 22,491 14 7/03/95 $ 14 14 --
$ 30 30 7/05/95 MA 73 30 --
$ 8,026 8,026 7/06/95 L 4,996 7,949 (77)
IL 6,047 4 7/31/95 $ 4 4 --
$ 1,900 1,900 4/30/96 BF 54,274 1,921 21
$ 7,378 7,378 4/30/96 Y 606,988 7,459 81
BF 225,256 7,973 4/30/96 $ 8,000 8,000 27
Y 2,268,600 27,875 4/30/96 $ 28,500 28,500 625
--------- --------- -----
$ 53,283 $ 53,960 $ 677
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------------------------------------
+ -- Non-income producing
securities
* -- Security is valued at cost --
See Note A-1
** -- Security is valued at fair
value -- See Note A-1
NCS -- Non Convertible Shares
BF -- Belgian Franc
L -- British Pound
FF -- French Franc
IL -- Italian Lira
Y -- Japanese Yen
MA -- Malaysian Ringgit
- ------------------------------------------------
SUMMARY OF FOREIGN AND US SECURITIES BY INDUSTRY CLASSIFICATION
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------------------------------------------
Capital Equipment............. $ 17,616 11.4%
Consumer Goods................ 24,913 16.2
Energy........................ 17,908 11.6
Finance....................... 36,935 23.9
Gold Mines.................... 95 0.1
Materials..................... 18,547 12.0
Multi-Industry................ 8,464 5.5
Services...................... 21,252 13.8
---------- ---
$ 145,730 94.5%
---------- ---
---------- ---
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
13
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (98.3%)
CHINA (2.2%)
890,400 China Merchants Shekou Port Services, Class B..... $ 483
28,200 Jilin Chemical Co. Ltd. ADR....................... 543
5,505,000 Maanshan Iron & Steel Co., Class H................ 1,153
51,000 Shandong Huaneng Power Co., Ltd. ADR.............. 389
200,000 Shanghai Diesel Engine Co., Ltd., Class B......... 124
265,000 Shanghai Erfanji Co., Ltd., Class B............... 39
313,235 Shanghai Jin Jiang Tower Ltd., Class B............ 100
1,601,600 Shanghai Jinqiao, Class B......................... 769
590,900 Shanghai Phoenix Bicycle Ltd., Class B............ 128
+650,000 Shanghai Refrigerator Compressor, Class B......... 233
638,000 Shanghai Tyre & Rubber Co., Class B............... 191
120,000 Shanghai Yaohua Pilkington Glass, Class B......... 120
180,400 Shenzhen Chiwan Wharf Holdings, Class B........... 90
**1,000,000 Shenzhen North Jainshe Motorcycle................. 485
4,265,000 Yizheng Chemical Fibre Co., Class H............... 1,488
----------
6,335
----------
HONG KONG (25.6%)
2,637,000 Cheung Kong Holdings Ltd.......................... 13,052
358,000 China Light & Power Co., Ltd...................... 1,841
1,209,500 Citic Pacific Ltd................................. 3,040
4,180,000 C.P. Pokphand Co., Ltd............................ 1,472
11,712,000 Guangdong Investments Ltd......................... 6,395
610,000 Harbin Power Equipment Co......................... 195
462,369 Hong Kong & Shanghai Bank Holdings plc............ 5,931
815,500 Hong Kong Electric Holdings Ltd................... 2,772
4,999,000 Hong Kong Telecommunications Ltd.................. 9,885
3,648,000 Hopewell Holdings Ltd............................. 3,088
1,927,000 Hutchison Whampoa Ltd............................. 9,314
1,805,000 New World Development Co., Ltd.................... 6,007
200,000 Sum Cheong International.......................... 114
612,100 Sun Hung Kai Properties Ltd....................... 4,529
661,560 Swire Pacific Ltd., Class A....................... 5,044
906,000 Varitronix International Ltd...................... 1,587
----------
74,266
----------
INDIA (0.8%)
38,000 Grasim Industries Ltd. GDR........................ 912
51,000 Hindalco Industries Ltd. GDR...................... 1,479
----------
2,391
----------
INDONESIA (6.4%)
**600,000 Asiana Imi Industries (Foreign)................... 256
**378,000 Bank International Indonesia (Foreign)............ 1,167
**450,000 Barito Pacific Timber (Foreign)................... 647
**5,160,000 Bimantara Citra................................... 2,896
**621,826 Charoen Pokphand (Foreign)........................ 1,354
**517,500 Duta Pertiwi (Foreign)............................ 523
**268,000 Indocement Tunggal (Foreign)...................... 1,053
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
**700,000 Indosat (Foreign)................................. $ 2,656
**351,600 Kalbe Farma (Foreign)............................. 1,610
**210,000 Keramika Indonesia Assosiasi (Foreign)............ 283
**1,000,000 Ometraco (Foreign)................................ 718
**601,000 Polysindo Eka Perkasa (Foreign)................... 337
**916,800 Sona Topas Tourism (Foreign)...................... 1,235
**277,333 Sorini Corp. (Foreign)............................ 1,326
**85,000 Suba Indah (Foreign).............................. 42
**1,250,000 Ultra Jaya Milk (Foreign)......................... 1,123
**644,800 United Tractors (Foreign)......................... 1,375
----------
18,601
----------
KOREA (3.2%)
53,900 Korea Electric Power (Foreign).................... 2,019
+**900 Korea Mobile Telecom (Foreign).................... 949
81,200 Pohang Iron & Steel Co., Ltd. ADR................. 2,395
**14,100 Samsung Electronics............................... 2,904
679 Samsung Electronics GDS........................... 49
16,411 Samsung Electronics GDS (Non-voting shares)....... 866
----------
9,182
----------
MALAYSIA (21.4%)
651,000 Bandar Raya Developments Bhd...................... 1,415
811,500 Genting Bhd....................................... 8,022
609,000 Land & General Holdings Bhd....................... 2,036
1,437,500 Malayan Banking Bhd............................... 11,380
955,316 Malaysian International Shipping Bhd. (Foreign)... 2,802
2,280,000 Renong Bhd........................................ 4,246
1,144,000 Resorts World Bhd................................. 6,710
650,000 Sime Darby Bhd.................................... 1,813
987,000 Tan & Tan Development Bhd......................... 1,230
544,000 Technology Resources Industries Bhd............... 1,562
1,103,000 Telekom Malaysia Bhd.............................. 8,370
1,206,000 Tenaga Nasional Bhd............................... 4,922
500,000 Time Engineering Bhd.............................. 1,682
932,757 United Engineers Ltd. (Malaysia).................. 5,930
----------
62,120
----------
PAKISTAN (0.2%)
7,300 Pakistan Telecommunications GDR................... 741
----------
PHILIPPINES (6.1%)
+285,200 Aboitiz Equity Ventures........................... 58
1,559,200 Ayala Corp., Class B.............................. 1,740
1,435,625 Ayala Land, Inc., Class B......................... 1,658
+108,250 International Container Terminal Services, Class
B............................................... 74
5,352,800 JG Summit Holding, Class B........................ 1,593
378,450 Manila Electric Co., Class B...................... 3,038
4,823,500 Petron Corp....................................... 3,116
18,125 Philippine Long Distance Telephone Co. ADR........ 1,300
15,430 Philippine Long Distance Telephone Co., Class B... 1,103
82,540 Philippine National Bank, Class B................. 961
**215,000 Pilipino Telephone Corp........................... 168
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Asian Equity Portfolio
17
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
PHILIPPINES (CONT.)
317,200 San Miguel Corp., Class B......................... $ 1,316
+5,018,000 SM Prime Holdings, Inc., Class B.................. 1,375
277,800 Universal Robina.................................. 144
----------
17,644
----------
SINGAPORE (15.4%)
252,000 British-American Tobacco Co....................... 1,150
875,080 City Developments Ltd............................. 5,354
727,000 DBS Land Ltd...................................... 2,279
470,500 Development Bank of Singapore Ltd. (Foreign)...... 5,353
248,800 Fraser & Neave Ltd................................ 2,866
707,000 Keppel Corp., Ltd................................. 5,767
+75,000 Odin Mining & Investment.......................... 25
599,166 Oversea-Chinese Banking Corp. (Foreign)........... 6,645
374,000 Sembawang Corp. Ltd............................... 2,275
111,000 Singapore Airlines Ltd. (Foreign)................. 1,025
178,400 Singapore Press Holdings (Foreign)................ 2,668
1,949,000 Singapore Technologies Industrial Corp............ 2,957
532,000 Straits Steamship Land Ltd........................ 1,842
500,000 Straits Trading Co., Ltd.......................... 1,252
361,200 United Overseas Bank Ltd.......................... 3,412
----------
44,870
----------
TAIWAN (2.7%)
+612,000 Advanced Semiconductor
Engineering, Inc................................ 1,777
+648,000 Taiwan Semiconductor Manufacturing Co............. 3,149
+550,000 United Micro Electronics Corp., Ltd............... 2,822
----------
7,748
----------
THAILAND (14.3%)
109,000 Advanced Information Services Co. (Foreign)....... 1,616
554,500 Bangkok Bank Ltd. (Foreign)....................... 6,110
712,900 Finance One Co., Ltd.(Foreign).................... 5,256
174,900 International Engineering Co., Ltd. (Foreign)..... 1,311
202,800 National Finance & Securities Co. Ltd.
(Foreign)....................................... 1,002
185,800 Phatra Thanakit Co., Ltd. (Foreign)............... 1,551
111,100 Shinawatra Computer Co., Ltd (Foreign)............ 2,754
45,000 Siam Cement Co., Ltd. (Foreign)................... 2,873
294,300 Siam Commercial Bank (Foreign).................... 2,814
1,538,300 TelecomAsia Corp. (Foreign)....................... 5,764
586,270 Thai Farmers Bank Ltd. (Foreign).................. 5,605
320,000 Thai Telephone & Telecom (Foreign)................ 2,800
101,000 United Communications (Foreign)................... 1,483
375,000 Wongpaitoon Footware Co., Ltd. (Foreign).......... 577
----------
41,516
----------
TOTAL COMMON STOCKS (Cost $233,405)............................. 285,414
----------
<CAPTION>
NO. OF VALUE
RIGHTS (000)
</TABLE>
- ------------------------------------------------------------
<TABLE>
<C> <S> <C>
RIGHTS (0.0%)
INDONESIA (0.0%)
**+400,000 Ometraco, expiring 8/29/95........................ $ --
**+1,833,600 Sona Topas Tourism, expiring 7/13/95.............. --
----------
TOTAL RIGHTS (Cost $0).......................................... --
----------
<CAPTION>
NO. OF
WARRANTS
- ------------
<C> <S> <C>
WARRANTS (0.0%)
HONG KONG (0.0%)
+432,000 Wai Kee Holdings Ltd., expiring 12/31/96.......... 6
THAILAND (0.0%)
+157,200 National Finance & Securities Co. Ltd., expiring
11/15/99........................................ --
----------
TOTAL WARRANTS (Cost $0)........................................ 6
----------
<CAPTION>
NO. OF
UNITS
- ------------
<C> <S> <C>
UNITS (0.1%)
INDIA (0.1%)
34,000 SIV Industries Ltd. GDR (Cost $649)............... 357
----------
TOTAL FOREIGN SECURITIES (98.4%) (Cost $234,054)................ 285,777
----------
<CAPTION>
AMOUNT (000)
- ------------
<C> <S> <C>
FOREIGN CURRENCY (2.3%)
HK$ 21,700 Hong Kong Dollar.................................. 2,804
MA 2,479 Malaysian Ringgit................................. 1,017
T$ 2,221 Taiwan Dollar..................................... 86
TB 66,471 Thai Baht......................................... 2,693
----------
TOTAL FOREIGN CURRENCY (Cost $6,599)............................ 6,600
----------
TOTAL INVESTMENTS (100.7%) (Cost $240,653)...................... 292,377
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (2.4%)
Receivable for Investments Sold................. $ 3,924
Receivable for Portfolio Shares Sold............ 2,289
Dividends Receivable............................ 710
Foreign Withholding Tax Reclaim Receivable...... 13
Other........................................... 19 6,955
----------
LIABILITIES (-3.1%)
Payable to Custodian............................ (7,691)
Payable for Investments Purchased............... (566)
Investment Advisory Fees Payable................ (483)
Custodian Fees Payable.......................... (104)
Administrative Fees Payable..................... (41)
Net Unrealized Loss on Forward Foreign Currency
Contracts...................................... (5)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (44) (8,935)
---------- ----------
NET ASSETS (100%)............................................. $ 290,397
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Asian Equity Portfolio
18
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
- ------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 14,194,574 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $20.46
----------
----------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open at June 30,
1995, the Portfolio is obligated to deliver foreign currency in exchange
for US dollars as indicated below:
</TABLE>
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ------------ --------- ----------- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C>
HK$ 21,700 $ 2,804 7/03/95 $ 2,804 $ 2,804 $ --
MA 5,529 2,268 7/03/95 $ 2,266 2,266 (2)
TB 66,471 2,693 7/03/95 $ 2,690 2,690 (3)
--------- --------- -----
$ 7,765 $ 7,760 $ (5)
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing securities
** -- Security is valued at fair value -- See Note A-1
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
HK$ -- Hong Kong Dollar
MA -- Malaysian Ringgit
TB -- Thai Baht
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment..................... $ 30,570 10.5%
Consumer Goods........................ 16,192 5.6
Energy................................ 18,292 6.3
Finance............................... 107,365 37.0
Materials............................. 15,861 5.5
Mining................................ 25 --
Multi-Industry........................ 26,874 9.2
Services.............................. 70,598 24.3
--------- -----
$ 285,777 98.4 %
--------- -----
--------- -----
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Asian Equity Portfolio
19
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (79.9%)
ARGENTINA (2.3%)
+6 Acindar Industrial S.A., Class B.................. $ --
72,161 Banco de Galicia y Buenos Aires, Class B.......... 287
279,933 Banco de Galicia y Buenos Aires ADR............... 4,409
39,995 Banco del Sud Argentina, Class B.................. 248
2,872 Banco Frances del Rio de la Plata, Class B........ 17
+193,932 Banesto Banco Shaw S.A., Class B.................. 621
18,286 Buenos Aires Embotelladora ADR.................... 460
67,858 Capex S.A., Class A............................... 526
120,670 Capex S.A. ADR.................................... 1,855
440,360 Cia Naviera Perez Companc, Class B................ 1,850
493,926 CIADEA (Renault) S.A.............................. 2,396
89,537 Massalin Particulares, Class B.................... 864
431,533 Quilmes Industrial S.A............................ 8,415
--------
21,948
--------
BRAZIL (5.2%)
18,483,200 Banco Nacional S.A................................ 401
105,160,000 Cia Acos Especiais Itabira........................ 682
696 Cia Energetica de Minas Gerais ADR................ 14
106,283 Cia Energetica de Minas Gerais GDR................ 2,072
117,687,740 Cia Energetica de Sao Paulo....................... 3,835
265,309 Cia Energetica de Sao Paulo ADR................... 3,018
62,407,000 Cia Paulista de Forca E Luz....................... 3,125
132,425,000 Cia Siderurgica Nacional.......................... 3,020
34,000 Cigarros Souza Cruz............................... 257
7,340,000 Eletrobras........................................ 1,914
144,985 Rhodia-Ster ADS................................... 2,030
26,329 Rhodia-Ster GDS................................... 369
9,012,000 Servicos de Eletricdade........................... 2,839
191,153,000 Telebras.......................................... 5,420
545,464 Telebras ADR...................................... 18,000
5,175,000 Telecomunicacoes de Sao Paulo..................... 658
264,236 Usiminas Siderurgicas de Minas Gerais ADR......... 2,940
--------
50,594
--------
CHINA (2.1%)
750,000 Beiren Printing Machine, Class H.................. 154
3,036,400 China Merchants Shekou Port Services, Class B..... 1,648
91,500 Jilin Chemical Co. Ltd. ADR....................... 1,761
11,305,000 Maanshan Iron & Steel Co., Class H................ 2,367
162,400 Shandong Huaneng Power Co., Ltd. ADR.............. 1,238
1,907,500 Shanghai Diesel Engine Co., Ltd., Class B......... 1,183
+803,000 Shanghai Erfanji Co., Ltd., Class B............... 119
500,000 Shanghai Industries Sewing Machine, Class B....... 92
949,975 Shanghai Jin Jiang Tower Ltd., Class B............ 304
3,673,680 Shanghai Jinqiao, Class B......................... 1,763
+1,062,750 Shanghai Outer Gaoqiao Free Zone, Class B......... 448
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
14,550 Shanghai Petrochemical Co. ADR.................... $ 457
903,800 Shanghai Phoenix Bicycle Ltd., Class B............ 195
+1,304,030 Shanghai Refrigerator Compressor, Class B......... 467
450,000 Shanghai Shangling Electric, Class B.............. 374
986,000 Shanghai Tyre & Rubber Co., Class B............... 296
354,000 Shanghai Yaohua Pilkington Glass, Class B......... 354
1,200,000 Shangkai Lujiazui Finance & Trade Development Co.,
Class B......................................... 842
2,707,400 Shenzhen Chiwan Wharf Holdings, Class B........... 1,347
13,590,000 Yizheng Chemical Fibre Co., Class H............... 4,742
+68,000 Zhuhai Lizhu Pharmaceutical Group Inc., Class B... 30
--------
20,181
--------
COLOMBIA (0.8%)
17,130,000 Banco de Colombia................................. 6,496
53,070 Cementos Paz Del Rio ADR.......................... 895
--------
7,391
--------
GREECE (3.0%)
+303,645 Aegek............................................. 6,746
90,000 Alpha Credit Bank of Athens....................... 4,995
176,798 Delta Dairy S.A................................... 3,677
116,670 Ergo Bank S.A..................................... 5,366
294,955 Hellenic Bottling Co. S.A......................... 8,755
--------
29,539
--------
HONG KONG (8.3%)
1,294,000 Cheung Kong Holdings Ltd.......................... 6,405
2,015,000 Citic Pacific Ltd................................. 5,065
14,327,000 C.P. Pokphand Co., Ltd............................ 5,045
65,800 Great Wall Electric Ltd. ADR...................... 280
11,244,000 Guangdong Investments Ltd......................... 6,139
931,400 Hang Seng Bank Ltd................................ 7,102
2,336,000 Harbin Power Equipment Co......................... 747
2,331,000 Hong Kong Telecommunications Ltd.................. 4,609
8,849,000 Hopewell Holdings Ltd............................. 7,491
2,668,000 Hutchison Whampoa Ltd............................. 12,896
2,244,000 New World Development Co., Ltd.................... 7,468
286,000 Sun Hung Kai Properties Ltd....................... 2,116
1,164,000 Swire Pacific Ltd., Class A....................... 8,875
2,619,000 Varitronix International Ltd...................... 4,586
7,180,000 Wai Kee Holdings Ltd.............................. 1,364
--------
80,188
--------
HUNGARY (0.2%)
15,945 Egis.............................................. 346
104,558 Gedeon Richter Ltd................................ 1,673
--------
2,019
--------
INDIA (9.1%)
230,000 American Dry Fruits............................... 315
1,200 Andhra Valley Power Supply, Class B............... 4
100,000 AP Rayon, Class B................................. 260
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
22
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
INDIA (CONT.)
100,000 Aruna Sugars & Enterprises, Class B............... $ 131
1,200 Bajaj Auto Ltd., Class A.......................... 28
917,000 Balaji Foods & Feeds.............................. 496
15,000 Ballapur Industries Ltd., Class B................. 87
20,000 Baroda Rayon Corp................................. 303
102,284 Bharat Forge Co., Ltd., Class A................... 319
***33,571 Bharat Forge Co., Ltd. (New)...................... 53
200,000 Bharat Heavy Electricals, Class B................. 771
**3,100,000 Bharat Heavy Electricals (New).................... 11,798
12,800 Bharat Petroleum Corp., Ltd....................... 119
375,000 Bharat Pipes & Fittings Ltd., Class B............. 215
**125,000 Bharat Pipes & Fittings Ltd. (New)................ 66
100,000 BPL Ltd........................................... 379
27,400 Cable Corp. of India Ltd.......................... 76
195,000 Carrier Aircon Ltd., Class B...................... 981
90,000 Cosmo Films Ltd................................... 430
25,000 Crompton Greaves.................................. 147
77,000 DCM Shriram Industries Ltd........................ 478
38,800 Delta Industries Ltd.............................. 173
185,000 Essab India Ltd................................... 395
50,000 Essel Packaging................................... 346
5,400 Fabworth (India) Ltd.............................. 5
2,400 Flex Industries Ltd., Class B..................... 14
**34,766 Flex Industries Ltd. (New)........................ 193
5,000 Fuller............................................ 79
371,800 Garware Plastics & Polyester, Class A............. 2,901
314,500 Geekay Exim Ltd................................... 1,152
475,000 Godrej Soaps Ltd.................................. 2,420
28,100 Hero Honda, Class B............................... 172
1,700 Hindustan Petroleum Corp.......................... 20
108,280 Housing Development Finance Corp.................. 8,224
@*78,000 India Magnum Fund, Class A (acquired
11/25/92-3/01/94, Cost $3,782).................. 3,822
@55,194 India Magnum Fund, Class B........................ 2,594
644,625 India Organic Chemical Ltd........................ 965
43,590 Indian Aluminum GDR............................... 474
100 Indian Rayon & Industries Ltd., Class A........... 1
40,000 Indian Seamless Steel & Alloys.................... 18
9,000 Indo Gulf Fertilizer & Chemical, Class A.......... 17
571,200 Indo Rama Synthetic, Class B...................... 873
100,000 Infosys Technology Ltd............................ 1,509
158,100 ITC Agrotech, Class B............................. 498
450 ITW Signode Ltd., Class B......................... 2
225 ITW Signode Ltd. (New)............................ 1
377,200 Jai Parabolic Springs Ltd......................... 384
**268,800 Jai Parabolic Springs Ltd. (New).................. 260
5,292 JCT Ltd. GDR...................................... 94
212,550 JK Synthetics Ltd................................. 218
98,500 Kiloskar Oil Engine, Class B...................... 427
550 Lakme Ltd., Class B............................... 5
150,000 Lakshmi Precision................................. 399
145,000 Laser Lamp........................................ 101
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
770,000 Mahanagar Telephone Nigam......................... $ 4,046
88,484 Mahavir Spinning Mills Ltd........................ 420
570,700 Maikaal Fibres.................................... 236
180,700 Mardia Chemicals Ltd.............................. 581
@19,389 Morgan Stanley India Investment Fund, Inc......... 199
20 Motor Industries Co., Ltd., Class A............... 4
73,650 MRF Ltd., Class B................................. 4,081
24,000 Mukand Iron & Steel Works, Class A................ 206
17,606 Nahar Spinning Mills Ltd., Class B................ 264
25,000 OM Sindoori Hotels Ltd............................ 61
391,650 Orkay Industries Ltd.............................. 234
100,000 Patheja Forgings & Auto Parts, Class B............ 318
150,000 Patheja Forgings & Auto Parts (New)............... 478
318,935 PCS Data Products Ltd., Class B................... 203
900 Pentafour Products Ltd., Class B.................. 1
240,700 Philips India, Ltd................................ 2,346
275,000 Polar Latex....................................... 182
232,700 Priyadarshini Cement Ltd., Class B................ 263
14,000 Pudumjee.......................................... 93
350,000 PVD Plastic Mouldings Inds. Ltd., Class B......... 268
850 Ranbaxy Laboratories Ltd., Class B................ 18
1,100 Raymond Synthetics Ltd., Class B.................. --
150 Reliance Industries Ltd., Class A................. 1
3,770 Reliance Industries Ltd. GDS...................... 69
73,581 Reliance Industries Ltd. GDS (New)................ 1,343
84,500 Rossel Industries Ltd............................. 209
100,000 Saurashtra Cement & Chemicals, Class B............ 290
331,000 SCICI Ltd., Class B............................... 722
50,000 Secals Ltd........................................ 119
30,000 Shanti Gears Ltd., Class B........................ 134
108,000 Sharp Industries Ltd.............................. 72
360,000 Shipping Corp. of India........................... 367
25,000 Shree Vindhya Paper Mills......................... 70
125,636 Shree Vindhya Paper Mills (New)................... 352
13,200 S.K.F. Bearings Ltd............................... 1,093
45,000 Sri Venkatesa Mills Ltd........................... 229
1,499,550 State Bank of India............................... 8,930
16,850 Sundaram Finance, Class B......................... 203
928,500 Super Forgings & Steels........................... 1,190
233,300 Tata Engineering & Locomotive, Class A............ 4,190
28,350 Tata Hydro Electric Power......................... 84
2,200 Tata Power Co., Ltd............................... 8
450,000 Titagarh Steels Ltd............................... 644
1,600 T.P.I. India Ltd.................................. 2
10,000 T.V.S. Suzuki..................................... 78
838 United Phosphorus Ltd. GDR........................ 18
202,500 Uniworth International Ltd., Class B.............. 163
783,000 Uttam Steels Ltd., Class A........................ 692
783,000 Uttam Steels Ltd. (New)........................... 711
4,604 Videocon International Ltd., Class A.............. 15
81,600 Videsh Sanchar Nigam Ltd.......................... 2,017
710,040 VXL Ltd........................................... 803
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
23
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
INDIA (CONT.)
34,500 Vysya Bank........................................ $ 2,802
--------
88,334
--------
INDONESIA (5.9%)
6,027 Asia Pulp & Paper Co. Ltd. ADR.................... 76
1,373,000 Bank Bali (Foreign)............................... 3,483
**1,703,500 Barito Pacific Timber (Foreign)................... 2,448
**16,740,000 Bimantara Citra................................... 9,396
**3,359,598 Charoen Pokphand (Foreign)........................ 7,317
**624,500 Duta Pertiwi (Foreign)............................ 631
**1,077,000 Indocement Tunggal (Foreign)...................... 4,232
**1,227,500 Indosat (Foreign)................................. 4,658
**1,008,100 Jembo Cable Co. (Foreign)......................... 905
**1,424,700 Kalbe Farma (Foreign)............................. 6,525
**481,000 Keramika Indonesia Assosiasi (Foreign)............ 648
**2,196,000 Polysindo Eka Perkasa (Foreign)................... 1,233
**1,445,400 Sona Topas Tourism (Foreign)...................... 1,947
**1,220,000 Sorini Corp. (Foreign)............................ 5,834
**150,000 Suba Indah (Foreign).............................. 74
**733,800 Tempo Scan Pacific (Foreign)...................... 3,789
**2,145,500 United Tractors (Foreign)......................... 4,576
--------
57,772
--------
ISRAEL (2.7%)
52,530 Elbit Ltd......................................... 3,944
2,860 First International Bank of Israel, Class 1....... 354
16,900 First International Bank of Israel, Class 5....... 2,086
524,467 Israel Land Development Co........................ 1,572
80,819 Koor Industries Ltd............................... 6,882
424,625 Osem Investment Ltd............................... 3,276
+137,336 PEC Israel Economic Corp.......................... 3,691
54,397 Scitex Ltd........................................ 1,169
164,365 Super Sol Ltd., Class B........................... 3,141
--------
26,115
--------
KOREA (1.1%)
**36,500 Samsung Electronics (Foreign)..................... 7,517
5,099 Samsung Electronics (New)......................... 1,037
48,000 Yukong Ltd. (Foreign)............................. 2,007
--------
10,561
--------
MALAYSIA (0.2%)
735,000 Bandar Raya Developments Bhd...................... 1,598
--------
MEXICO (8.9%)
+364,612 Apasco S.A., Class A.............................. 1,447
4,877,920 Banacci, Class B.................................. 7,492
763,553 Banacci, Class L.................................. 1,161
1,719,214 Cemex CPO ADR..................................... 11,689
5,300 Cemex S.A., Class A............................... 18
513,519 Empresas ICA S.A. ADR............................. 5,264
3,153,550 FEMSA, Class B.................................... 7,367
+200,005 Grupo Carso ADR................................... 2,185
+6,953,900 Grupo Financiero Bancomer, Class B................ 2,036
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
+986,340 Grupo Financiero Bancomer, Class L................ $ 260
1,246,140 Grupo Financiero Bancomer ADR..................... 7,477
+934,000 Grupo Financiero Bancrecer, Class B............... 217
+69,380 Grupo Financiero GBM Atlantico ADR................ 193
+3,906,660 Grupo Financiero Probursa, Class C................ 1,725
809,370 Grupo Herdez, Class A............................. 239
50 Grupo Iusacell S.A. ADR, Class D.................. 1
+147,592 Grupo Mexicano Desarrollo ADR, Class B............ 572
42,960 Grupo Mexicano Desarrollo ADR, Class L............ 193
52,600 Grupo Sidek S.A. ADR.............................. 243
+1,473,700 Grupo Sidek S.A., Class A......................... 1,330
+1,195,400 Grupo Sidek S.A., Class B......................... 1,071
55,344 Grupo Sidek S.A., Class L......................... 58
+385,288 Grupo Tribasa S.A. ADR............................ 3,275
145,460 Hylsamex S.A. ADR................................. 2,655
6,203 Hylsamex S.A. GDR................................. 113
310,400 Interceramica, Class C............................ 511
+30,600 Interceramica ADR................................. 241
231,555 Panamerican Beverages, Inc., Class A.............. 6,947
372,363 Telefonos de Mexico S.A. ADR, Class L............. 11,031
2,334,730 Tolmex S.A., Class B2............................. 9,115
--------
86,126
--------
MOROCCO (1.3%)
20,000 Banque Marocaine du Commerce Exterieur............ 864
55,123 ONA Group......................................... 2,283
146,300 SNI Maroc......................................... 7,640
58,221 Wafabank.......................................... 2,376
--------
13,163
--------
PAKISTAN (2.3%)
41,850 Adamjee Insurance Co., Ltd........................ 153
720,976 Cherat Cement Ltd................................. 1,164
6,135 Crescent Investment Bank.......................... 7
42,205 Crescent Textile Mills Ltd........................ 34
1,049,500 Dewan Salman Fibre................................ 3,455
1,379,500 D.G. Khan Cement Ltd.............................. 1,948
3,017,900 Fauji Fertilizer Co., Ltd......................... 5,942
1,700,000 Karachi Electric Supply Corp...................... 1,468
80,977 Muslim Commercial Bank Ltd........................ 109
781,191 Nishat Mills Ltd.................................. 725
125,900 Pakistan State Oil Co., Ltd....................... 1,524
32,230 Pakistan Telecommunications....................... 3,433
26,900 Pakistan Telecommunications GDR................... 2,730
298,000 Zahur Textile Mills............................... 36
--------
22,728
--------
PERU (0.5%)
35 Cementos Lima S.A................................. --
141,356 Cementos Norte Pacasmayo, Class T................. 408
***497,000 Cementos Yura..................................... 3,109
12,325 Cerveceria Backus y Johnston, Class C............. 272
+396,386 Nacional de Cerveza, Class T...................... 267
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
24
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
PERU (CONT.)
+94,833 Southern Peru Copper, Class T..................... $ 427
--------
4,483
--------
PHILIPPINES (3.5%)
3,985,562 Ayala Land, Inc., Class B......................... 4,604
12,448,530 JG Summit Holding, Class B........................ 3,704
661,698 Manila Electric Co., Class B...................... 5,311
15,645,916 Petron Corp....................................... 10,108
2,515 Philippine Long Distance Telephone Co., Class B... 180
1,203,120 San Miguel Corp., Class B......................... 4,993
+18,157,168 SM Prime Holdings, Inc., Class B.................. 4,977
--------
33,877
--------
POLAND (0.7%)
20,000 Bank Rozwoju Eksportu S.A......................... 320
45,000 Debica............................................ 634
***33,400 Eastbridge........................................ 2,246
+137,620 Elektrim.......................................... 485
2,085,038 International UNP Holdings........................ 789
+373,740 Mostostal Exports, Class A........................ 942
11,125 Wedel S.A......................................... 651
15,735 Zwyeic............................................ 1,190
--------
7,257
--------
PORTUGAL (0.9%)
150,800 Banco Totta & Acores, Class B..................... 3,195
120,000 Filmes Lusmundo................................... 1,312
14,271 Jeronimo Martins.................................. 727
@9,945 Portuguese Investment Fund........................ 654
140,000 UNICER-Uniao Cervejeira S.A....................... 2,364
--------
8,252
--------
RUSSIA (2.1%)
***462,150 Alliance Cellulose Ltd............................ 9,295
***54,035 Alliance Cellulose Ltd., Class B.................. 1,500
***317,851 Russian Telecom Development Corp.................. 3,179
***400,000 SFMT, Inc......................................... 4,000
*/***990 Storyfirst Communications, Inc., Class C (acquired
3/01/95, Cost $660)............................. 660
*/***2,640 Storyfirst Communications, Inc., Class D (acquired
3/01/95, Cost $1,980)........................... 1,980
--------
20,614
--------
SOUTH AFRICA (2.7%)
44,830 Anglo American Industrial Corp., Ltd.............. 2,219
700,000 Bidvest Group Ltd................................. 3,609
1,450,439 Gencor Ltd........................................ 4,986
796,900 Liberty Life Strategic Investments................ 2,685
953,959 Sasol Ltd......................................... 9,143
433,000 Trans Natal Coal Corp., Ltd....................... 3,334
--------
25,976
--------
SRI LANKA (0.0%)
19,575 Aitken Spence & Co., Ltd.......................... 75
113,000 Distillers Corp. S.A. Ltd......................... 17
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
81,200 John Keells Holdings Ltd.......................... $ 308
--------
400
--------
TAIWAN (3.6%)
+2,309,000 Advanced Semiconductor Engineering Inc............ 6,705
+3,052,800 Taiwan Semiconductor Manufacturing Co............. 14,834
+2,603,891 United Micro Electronics Corp., Ltd............... 13,358
--------
34,897
--------
THAILAND (6.9%)
298,550 Advanced Information Services Co. (Foreign)....... 4,426
1,287,700 Bangkok Bank Ltd.................................. 11,268
428,200 Bangkok Bank Ltd. (Foreign)....................... 4,718
2,608,500 Finance One Co., Ltd. (Foreign)................... 19,232
146,200 Land & House Co., Ltd. (Foreign).................. 3,080
9,335 Phatra Thanakit Co., Ltd.......................... 74
780,965 Phatra Thanakit Co., Ltd. (Foreign)............... 6,517
144,600 Shinawatra Computer Co., Ltd. (Foreign)........... 3,585
71,200 Siam Cement Co., Ltd. (Foreign)................... 4,546
1,244,700 Thai Farmers Bank Ltd............................. 9,026
--------
66,472
--------
TURKEY (5.1%)
1,573,000 Aksa.............................................. 1,388
8,913,000 Borusan........................................... 3,477
+13,186,600 Ege Biracilik Ve Malt Sanayii..................... 15,508
4,014,000 Ege Seramik Sanayi Ve Ticaret A.S................. 1,952
1,666,000 Migros Turk TAS................................... 1,865
14,346,000 Sarkuysan......................................... 3,812
8,340,000 Tat Konserve...................................... 6,508
+9,754,000 Tofas Turk Otomobil Fabrikasi..................... 8,604
124,572 Tofas Turk Otomobil Fabrikasi GDR, Class E........ 529
1,354,075 Turkas Petroculuk A.S............................. 490
220,482 Turkiye Garanti Bankasi ADR....................... 2,991
38,305,200 Yapi Ve Kredi Bankasi A.S......................... 2,469
--------
49,593
--------
UNITED KINGDOM (0.2%)
909,844 Lonrho plc........................................ 2,142
--------
ZIMBABWE (0.3%)
1,980,000 Trans Zambezi Industries Ltd...................... 2,970
35,281 Trans Zambezi Industries Ltd., Class S............ 53
--------
3,023
--------
TOTAL COMMON STOCKS (Cost $794,609).............................. 775,243
--------
PREFERRED STOCKS (10.8%)
BRAZIL (10.8%)
1,527,714,183 Banco Bradesco.................................... 12,945
387,910,000 Banco do Brasil................................... 4,636
18,800,000 Banco do Estado Sao Paulo......................... 106
298,898,880 Banco Nacional S.A................................ 5,813
3,000,000 Bombril........................................... 63
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
25
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
BRAZIL (CONT.)
34,992,000 Brahma............................................ $ 11,480
21,189,000 Brasmotor S.A..................................... 3,913
118,244,284 Cia Acos Especiais Itabira........................ 880
96,442,103 Cia Energetica de Minas Gerais.................... 1,886
46,744,470 Cia Energetica de Sao Paulo....................... 1,848
16,959,000 Cia Paulista de Forca E Luz....................... 557
+470,000,000 Cia Siderurgica Paulista, Class B................. 781
72,579,850 Eletrobras........................................ 19,318
39,130,800 Itaubanco......................................... 11,903
37,930,101 Lojas Americanas S.A.............................. 845
105,758 Lojas Americanas S.A. (Bonus)..................... 15
270,000 Multibras S.A..................................... 223
104,394,333 Petrobras......................................... 8,846
12,500 Sadia Concordia................................... 12
135,699,175 Telecomunicacoes Brasileiras...................... 4,467
49,160,815 Telecomunicacoes de Sao Paulo..................... 6,088
2,621,051,000 Usinas Siderurgicas de Minas Gerais............... 2,961
30,873,000 Vale Do Rio Doce.................................. 4,662
--------
104,248
--------
INDIA (0.0%)
2,700 Fabworth (India) Ltd.............................. 2
--------
PORTUGAL (0.0%)
35,340 Filmes Lusmundo................................... 328
--------
TOTAL PREFERRED STOCKS (Cost $92,142)............................ 104,578
--------
<CAPTION>
NO. OF
RIGHTS
- -------------
<C> <S> <C>
RIGHTS (0.1%)
BRAZIL (0.0%)
**+27,013,689 Banco Bradesco.................................... 29
+291,030 Brahma............................................ 95
--------
124
--------
INDIA (0.0%)
**+674 Flex Industries Ltd............................... --
--------
INDONESIA (0.0%)
**+2,890,800 Sona Topas Tourism, expiring 7/13/95.............. --
--------
PAKISTAN (0.0%)
**+6,330 Crescent Textile Mills Ltd........................ 2
**+20,625 Dewan Salman Fibre................................ --
+92,643 Muslim Commercial Bank Ltd........................ 125
+78,119 Nishat Mills Ltd., expiring 9/30/95............... 22
--------
149
--------
TURKEY (0.1%)
**+833,000 Migros Turk TAS, expiring 8/01/95................. 914
--------
TOTAL RIGHTS (Cost $1,131)....................................... 1,187
--------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- ------------------------------------------------------------
<C> <S> <C>
WARRANTS (0.1%)
HONG KONG (0.0%)
+540,000 Wai Kee Holdings Ltd., expiring 12/31/96.......... $ 7
--------
INDIA (0.1%)
+27,383 Flex Industries Ltd., expiring 11/23/97........... 155
+44,702 Garware Plastics & Polyesters, expiring 4/04/98... 584
+25,726 Tata Engineering & Locomotive Ltd., expiring
3/08/96......................................... 122
--------
861
--------
POLAND (0.0%)
**+1,014,000 International UNP Holdings, expiring 12/31/95..... --
--------
THAILAND (0.0%)
+10 Finance One Co., Ltd., expiring 3/15/99........... --
--------
TOTAL WARRANTS (Cost $84)........................................ 868
--------
<CAPTION>
NO. OF
UNITS
- -------------
<C> <S> <C>
UNITS (0.1%)
MEXICO (0.1%)
308,100 Interceramica (Cost $1,525)....................... 508
--------
<CAPTION>
SHARES
- -------------
<C> <S> <C>
PURCHASED OPTIONS (0.0%)
BRAZIL (0.0%)
+37,900,000 Cia Paulista de Forca E Luz, strike price BRL 70,
expiring 10/16/95 (Cost $2)..................... 59
--------
<CAPTION>
FACE
AMOUNT
(000)
- -------------
<C> <S> <C>
BONDS (0.1%)
ECUADOR (0.1%)
$ 3,716 Republic of Ecuador PDI Bonds, (Floating Rate)
7.25%, 2/27/15
(Cost $1,005)................................... 1,236
--------
CONVERTIBLE DEBENTURES (0.5%)
COLOMBIA (0.4%)
5,615 Banco de Colombia 5.20%, 2/01/99.................. 4,267
--------
INDIA (0.1%)
IR 336 DCM Shriram Industries, Zero Coupon, 2/21/02...... 501
17 Indian Seamless, 10.00%, 10/12/99................. 50
130 Tata Iron & Steel, 2.25%, 4/01/99................. 121
--------
672
--------
TOTAL CONVERTIBLE DEBENTURES (Cost $6,053)....................... 4,939
--------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
26
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
NON-CONVERTIBLE DEBENTURES (0.5%)
INDIA (0.5%)
IR 34 Bharat Forge Co., Ltd., 14.50%, 3/04/00........... $ 49
341 DCM Shriram Industries Ltd., 16.50%, 2/21/02...... 671
4,470 Garware Plastics & Polyester, 16.00%, 4/04/98..... 142
1,467 Mahavir Spinning Mills Ltd., Series A, 14.00%,
12/31/99........................................ 121
500 Raymond Ltd., 16.00%, 12/31/99.................... 1,593
70 Saurashtra Cement & Chemicals Ltd., 18.00%,
12/31/99........................................ 2,229
--------
TOTAL NON-CONVERTIBLE DEBENTURES (Cost $5,071)................... 4,805
--------
LOAN AGREEMENTS (5.1%)
POLAND (0.0%)
$ 54 Republic of Poland Interest Arrears PDI Bonds,
3.25%, 10/27/14................................. 32
--------
RUSSIA (5.1%)
CHF ++1,910 Bank for Foreign Economic Affairs (Floating
Rate)........................................... 502
$ ++150,503 Bank for Foreign Economic Affairs (Floating
Rate)........................................... 48,914
--------
49,416
--------
TOTAL LOAN AGREEMENTS (Cost $48,022)............................. 49,448
--------
TOTAL FOREIGN SECURITIES (97.2%) (Cost $949,644)................. 942,871
--------
SHORT-TERM INVESTMENTS (3.5%)
US GOVERNMENT AND AGENCY OBLIGATION (2.4%)
$23,000 US Treasury Bill, 8/24/95......................... 22,803
--------
REPURCHASE AGREEMENT (1.1%)
10,975 U.S. Trust, 5.90%, dated 6/30/95, due 7/03/95, to
be repurchased at $10,980, collateralized by
$11,360 United States Treasury Bills, due
7/27/95, valued at $11,315...................... 10,975
--------
TOTAL SHORT-TERM INVESTMENTS (Cost $33,778)...................... 33,778
--------
<CAPTION>
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
FOREIGN CURRENCY (1.2%)
APS 2,012 Argentine Peso.................................... $ 2,012
BLR 458 Brazilian Real.................................... 497
CP 385,379 Colombian Peso.................................... 438
HK$ 427 Hong Kong Dollar.................................. 55
HU 95,794 Hungarian Forint.................................. 779
IR 80,927 Indian Rupee...................................... 2,577
IN 1,850,558 Indonesian Rupiah................................. 831
MP 1,619 Mexican New Peso.................................. 259
PR 46,842 Pakistani Rupee................................... 1,512
PZ 593 Polish Zlotey..................................... 253
T$ 60,781 Taiwan Dollar..................................... 2,353
TB 3,262 Thai Baht......................................... 132
TL 7,173,000 Turkish Lira...................................... 162
--------
TOTAL FOREIGN CURRENCY (Cost $11,918)............................ 11,860
--------
TOTAL INVESTMENTS (101.9%) (Cost $995,340)....................... 988,509
--------
</TABLE>
<TABLE>
<CAPTION>
OTHER ASSETS (2.0%)
<S> <C> <C>
Receivable for Investments Sold................. $ 11,113
Receivable for Portfolio Shares Sold............ 4,705
Dividends Receivable............................ 2,849
Interest Receivable............................. 510
Foreign Withholding Tax Reclaim Receivable...... 21
Net Unrealized Gain on Forward Foreign Currency 7
Contracts......................................
Other........................................... 63 19,268
-------------
LIABILITIES (-3.9%)
Payable for Investments Purchased............... (33,187)
Investment Advisory Fees Payable................ (2,423)
Custodian Fees Payable.......................... (1,153)
Deferred India Taxes............................ (771)
Payable for India Taxes......................... (222)
Administrative Fees Payable..................... (120)
Payable to Custodian............................ (94)
Payable for Portfolio Shares Redeemed........... (29)
Sub-Administrative Fees Payable................. (25)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (121) (38,146)
------------- --------
NET ASSETS (100%)................................................ $969,631
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 68,213,334 outstanding $.001 par value shares
(authorized 500,000,000 shares)................................ $14.21
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
27
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open at June 30,
1995, the Portfolio is obligated to deliver US dollars in exchange for
foreign currency as indicated below:
</TABLE>
<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>
$ 71 $ 71 7/03/95 BLR 65 $ 71 $ --
$ 491 491 7/03/95 GRD 111,509 495 4
$ 1,317 1,317 7/03/95 PE 193,152 1,320 3
--------- --------- ---
$ 1,879 $ 1,886 $ 7
--------- --------- ---
--------- --------- ---
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing securities
++ -- Non-income producing securities -- in default
* -- Restricted as to public resale. Total value of
restricted securities at June 30, 1995 was $6,462
or 0.7% of net assets. (Total cost $6,422)
** -- Security is valued at fair value -- See Note A-1
*** -- Security is valued at cost -- See Note A-1
@ -- The fund is advised by an affiliate
ADR -- American Depositary Receipt
ADS -- American Depositary Shares
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
NCS -- Non Convertible Shares
BLR -- Brazilian Real
GRD -- Greek Drachma
PE -- Portuguese Escudo
Floating Rate Securities. Interest rate changes on these instruments are
based on changes in a designated base rate.
</TABLE>
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment..................... $ 85,577 8.8%
Consumer Goods........................ 146,772 15.1
Energy................................ 88,131 9.1
Finance............................... 235,333 24.3
Loan Agreements....................... 50,683 5.2
Materials............................. 147,294 15.2
Multi-Industry........................ 89,620 9.2
Services.............................. 99,461 10.3
--------- ---
$ 942,871 97.2%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
28
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (91.0%)
BELGIUM (2.9%)
+4,500 Arbed S.A......................................... $ 656
11,000 Delhaize Freres et Cie, 'Le Lion', S.A............ 495
5,000 G.I.B. Holdings, Ltd.............................. 237
55 G.I.B. Holdings, Ltd. (New)....................... 3
--------
1,391
--------
DENMARK (1.1%)
11,160 Unidanmark A/S, Class A (Registered).............. 547
--------
FINLAND (3.7%)
30,500 Amer-Yhtymae Oy, Class A.......................... 554
17,500 Huhtamaki Oy, Series 1............................ 573
+40,600 Kansallis-Osake Pankki............................ 44
40,000 Pohjola Insurance Co., Ltd., Class B.............. 627
--------
1,798
--------
FRANCE (10.5%)
1,200 Bongrain S.A...................................... 718
3,700 Cie de Saint Gobain............................... 447
+15,500 Credit Lyonnais CDI............................... 893
9,000 Elf Aquitaine..................................... 665
3,400 Eridania Beghin-Say S.A........................... 524
+3,805 Legris Industries S.A............................. 271
2,700 Precision Mecaniques Labinal S.A.................. 476
26,000 Thomson CSF....................................... 583
9,000 Total S.A., Class B............................... 542
--------
5,119
--------
GERMANY (11.5%)
4,500 BASF AG........................................... 960
2,260 Bayer AG.......................................... 561
+9,000 Bremer Vulkan Verbund AG.......................... 524
2,380 Commerzbank AG.................................... 570
1,300 Karstadt AG....................................... 569
1,500 Mannesmann AG..................................... 458
+3,700 Varta AG.......................................... 703
1,700 Veba AG........................................... 667
2,000 Volkswagen AG..................................... 576
--------
5,588
--------
ITALY (6.4%)
+230,000 Editoriale L'Expresso S.p.A....................... 485
+470,000 Impregilo S.p.A................................... 454
20,305 Safilo S.p.A...................................... 141
350,000 Stet Di Risp (NCS)................................ 778
205,500 Telecom Italia S.p.A.............................. 557
10,000 Telecom Italia S.p.A. Di Risp (NCS)............... 21
242,200 Unicem Di Risp (NCS).............................. 697
--------
3,133
--------
NETHERLANDS (10.7%)
23,571 ABN Amro Holdings N.V............................. 910
3,300 Akzo Nobel N.V.................................... 394
3,587 Hollandsche Beton Groep N.V....................... 618
12,812 Internationale Nederlanden Groep N.V.............. 709
6,000 Koninklijke Bijenkorf Beheer N.V.................. 431
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
25,000 Koninklijke Van Ommeren N.V....................... $ 768
23,500 Philips Electronics N.V........................... 995
10,000 Royal PTT Nederland N.V........................... 360
--------
5,185
--------
NORWAY (2.3%)
140,000 Den Norske Bank A/S, Class A Free................. 379
16,604 Hafslund Nycomed, Class B......................... 384
28,000 Saga Petroleum A/S, Class B....................... 370
--------
1,133
--------
PORTUGAL (0.3%)
+@1,905 Portuguese Investment Fund........................ 125
--------
SPAIN (8.8%)
+68,000 Asturiana del Zinc S.A............................ 649
+60,000 Banco Espanol de Credito S.A...................... 413
17,000 Banco de Santander S.A............................ 671
9,615 Bodegas y Bebidas S.A............................. 280
1,903 Bodegas y Bebidas S.A. (New)...................... 56
+27,870 Grupo Duro Felguera S.A........................... 115
110,000 Iberdrola S.A..................................... 829
76,000 Sevillana de Electricidad S.A..................... 468
62,000 Telefonica Nacional de Espana S.A................. 799
--------
4,280
--------
SWEDEN (2.3%)
140,000 Skandinaviska Enskilda Banken, Class A............ 727
19,000 S.K.F. AB, Class B................................ 384
--------
1,111
--------
SWITZERLAND (15.4%)
870 Alusuisse-Lonza Holdings Ltd. (Registered)........ 546
+500 Ascom Holdings AG (Bearer)........................ 625
460 Bobst AG (Bearer)................................. 699
700 Ciba Geigy AG (Bearer)............................ 512
275 Ciba Geigy AG (Registered)........................ 202
1,700 Forbo Holding AG (Registered)..................... 830
1,030 Hero AG (Bearer).................................. 564
+500 Holderbank Glarus AG (Bearer)..................... 410
1,200 Magazine Globus (Participating Certificates)...... 844
300 Moevenpick Holding AG (Participating
Certificates)................................... 135
490 Nestle S.A. (Registered).......................... 510
670 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 756
+1,200 SwissAir (Registered)............................. 831
--------
7,464
--------
UNITED KINGDOM (15.1%)
145,500 Asprey plc........................................ 169
70,000 Associated British Foods plc...................... 740
+249,990 Automated Security Holdings plc................... 195
20,000 Bass plc.......................................... 191
200,000 BET plc........................................... 391
70,000 BSM Group plc..................................... 189
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
European Equity Portfolio
31
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
UNITED KINGDOM (CONT.)
245,900 Christian Salvesen plc............................ $ 1,041
118,856 John Mowlem & Co. plc............................. 132
75,000 Kwik Save Group plc............................... 774
24,895 McAlpine (Alfred) plc............................. 57
67,222 Reckitt & Colman plc.............................. 709
45,014 Rolls-Royce plc................................... 125
174,411 Royal Insurance Holdings plc...................... 857
136,000 Sketchley plc..................................... 245
105,000 Tate & Lyle plc................................... 710
24,000 Unilever plc...................................... 486
+253,775 Wembley plc....................................... 10
175,000 WPP Group plc..................................... 337
--------
7,358
--------
TOTAL COMMON STOCKS (Cost $41,102)............................ 44,232
--------
PREFERRED STOCKS (4.4%)
GERMANY (4.4%)
2,400 RWE AG............................................ 660
3,000 Spar Handels AG................................... 780
3,200 Volkswagen AG..................................... 708
--------
TOTAL PREFERRED STOCKS (Cost $1,963).......................... 2,148
--------
<CAPTION>
NO. OF
WARRANTS
- ----------
<C> <S> <C>
WARRANTS (0.0%)
SWITZERLAND (0.0%)
2,500 Holderbank Glarus AG, expiring 12/20/95 (Cost
$0)............................................. 3
--------
TOTAL FOREIGN SECURITIES (95.4%) (Cost $43,065)............... 46,383
--------
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (2.0%)
REPURCHASE AGREEMENT (2.0%)
$ 963 U.S. Trust 5.90%, dated 6/30/95, due 7/03/95 to be
repurchased at $963, collateralized by $1,005
United States Treasury Bills, due 7/27/95,
valued at $1,001 (Cost $963).................... 963
--------
FOREIGN CURRENCY (3.0%)
DM 1,372 Deutsche Mark..................................... 991
FF 678 French Franc...................................... 140
IL 49 Italian Lira...................................... --
SP 8 Spanish Peseta.................................... --
SK 2,437 Swedish Krona..................................... 335
CHF 1 Swiss Franc....................................... 1
--------
TOTAL FOREIGN CURRENCY (Cost $1,461).......................... 1,467
--------
TOTAL INVESTMENTS (100.4%) (Cost $45,489)..................... 48,813
--------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
------------------------------------------------------------
OTHER ASSETS (1.1%)
Receivable for Portfolio Shares Sold............ $381
Dividends Receivable............................ 94
Foreign Withholding Tax Reclaim Receivable...... 71 $ 546
-----
LIABILITIES (-1.5%)
Payable for Investments Purchased............... (490)
Payable for Portfolio Shares Redeemed........... (25)
Net Unrealized Loss on Forward Foreign Currency
Contracts...................................... (133)
Investment Advisory Fees Payable................ (47)
Administrative Fees Payable..................... (7)
Custodian Fees Payable.......................... (6)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (26) (735)
----- --------
NET ASSETS (100%) $48,624
--------
--------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 3,443,295 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $14.12
--------
--------
------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open at June 30,
1995, the Portfolio is obligated to deliver foreign currency in
exchange for US dollars as indicated below:
</TABLE>
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE LOSS
(000) (000) DATE (000) (000) (000)
- ---------- --------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
DM 400 $ 290 8/09/95 $ 253 $ 253 $ (37)
CHF 2,750 2,444 6/10/96 $ 2,420 2,420 (24)
DM 3,000 2,191 6/10/96 $ 2,152 2,152 (39)
FF 7,100 1,455 6/10/96 $ 1,422 1,422 (33)
--------- --------- -----
$ 6,380 $ 6,247 $ (133)
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing securities
@ -- The fund is advised by an affiliate.
NCS -- Non Convertible Shares
DM -- Deutsche Mark
FF -- French Franc
CHF -- Swiss Franc
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT
INDUSTRY (000) OF NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Capital Equipment................... $ 7,168 14.7%
Consumer Goods...................... 9,253 19.0
Energy.............................. 3,372 6.9
Finance............................. 7,926 16.3
Materials........................... 9,317 19.2
Multi-Industry...................... 670 1.4
Services............................ 8,677 17.9
--------- ---
$ 46,383 95.4%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
European Equity Portfolio
32
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (98.8%)
AUSTRALIA (1.6%)
50,000 Brambles Industries Ltd........................... $ 474
+400,000 McPherson's Ltd................................... 34
220,000 Westpac Banking Corp.............................. 796
--------
1,304
--------
BELGIUM (1.1%)
20,000 Delhaize Freres et Cie, 'Le Lion' S.A............. 900
--------
CANADA (0.3%)
+200,000 Canadian Pioneer Energy, Class A.................. 204
70,000 Northern Reef Exploration Ltd..................... 66
--------
270
--------
FRANCE (4.9%)
1,800 Bongrain S.A...................................... 1,078
+12,000 Credit Lyonnaise CDI.............................. 691
18,573 Elf Aquitaine..................................... 1,373
4,900 Precision Mecaniques Labinal S.A.................. 864
--------
4,006
--------
GERMANY (7.4%)
5,200 BASF AG........................................... 1,109
3,822 Bayer AG.......................................... 949
2,700 Karstadt AG....................................... 1,182
3,000 Mannesmann AG..................................... 916
+2,764 Sinn AG........................................... 668
+2,225 Varta AG.......................................... 423
1,910 Veba AG........................................... 749
260 Volkswagen AG..................................... 75
--------
6,071
--------
HONG KONG (0.9%)
220,000 Jardine Strategic Holdings, Inc................... 708
--------
IRELAND (3.1%)
737,397 Anglo Irish Bank Corp. plc........................ 604
73,900 Arnotts plc....................................... 315
470,000 Avonmore Foods plc, Class A....................... 1,031
227,500 Green Property plc................................ 596
--------
2,546
--------
ITALY (3.2%)
500,000 Stet Di Risp (NCS)................................ 1,111
700,000 Telecom Italia S.p.A. Di Risp (NCS)............... 1,481
--------
2,592
--------
JAPAN (9.0%)
65,000 Fuji Photo Film Ltd............................... 1,540
24,000 Hitachi Ltd....................................... 239
110,000 Kao Corp.......................................... 1,323
130,000 Nichido Fire & Marine Insurance Co................ 1,050
18,000 Sony Corp......................................... 864
30,000 Stanley Electric Co............................... 189
100,000 Sumitomo Rubber Industries........................ 743
5,000 TDK Corp.......................................... 228
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
40,000 Toyo Seikan Kaisha Ltd............................ $ 1,169
--------
7,345
--------
NETHERLANDS (8.2%)
42,811 ABN Amro Holdings N.V............................. 1,652
2,101 Hollandsche Beton Groep N.V....................... 362
22,677 Internationale Nederlanden Groep N.V.............. 1,254
40,000 Koninklijke Van Ommern N.V........................ 1,229
15,160 Nedlloyd Groep N.V................................ 516
8,000 Oce-Van Der Grinten N.V........................... 451
30,000 Philips Electronics N.V........................... 1,270
--------
6,734
--------
SPAIN (2.6%)
89,500 Iberdrola S.A..................................... 674
112,300 Telefonica Nacional de Espana S.A................. 1,447
--------
2,121
--------
SWEDEN (1.5%)
230,000 Skandinaviska Enskilda Banken, Class A............ 1,195
--------
SWITZERLAND (7.5%)
+500 Ascom Holdings AG (Bearer)........................ 625
1,000 Bobst AG (Bearer)................................. 1,520
1,800 Ciba-Geigy AG (Registered)........................ 1,319
1,400 Forbo Holdings AG (Registered).................... 683
1,400 Magazine Globus (Participating Certificates)...... 985
900 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 1,016
--------
6,148
--------
UNITED KINGDOM (10.8%)
51,443 Barclays plc...................................... 553
100,000 Bass plc.......................................... 957
298,700 Christian Salvesen plc............................ 1,264
110,000 Forte plc......................................... 398
100,000 John Mowlem & Co. plc............................. 111
150,000 Kwik Save Group plc............................... 1,549
180,000 Matthews (Bernard) plc............................ 312
+**653,333 Pentos plc........................................ --
259,552 Pilkington plc.................................... 720
73,023 Rolls-Royce plc................................... 203
202,325 Tate & Lyle plc................................... 1,368
40,000 Unilever plc...................................... 810
279,000 WPP Group plc..................................... 537
--------
8,782
--------
UNITED STATES (36.7%)
+89,000 Addington Resources, Inc.......................... 1,313
18,000 Aluminum Company of America....................... 902
+15,400 AMR Corp.......................................... 1,149
59,975 Aviall, Inc....................................... 502
50,500 Beazer Homes USA, Inc............................. 840
29,500 Brooklyn Bancorp, Inc............................. 996
+150,000 Cadiz Land Co., Inc............................... 656
116,000 Comsat Corp....................................... 2,277
57,000 Cray Research, Inc................................ 1,389
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Global Equity Portfolio
34
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
UNITED STATES (CONT.)
80,000 Data General Corp................................. $ 770
89,500 Egghead, Inc...................................... 1,197
50,000 Enhance Financial Services Group, Inc............. 969
45,000 Finova Group, Inc................................. 1,575
30,000 Gap, Inc.......................................... 1,046
+134,200 GenRad, Inc....................................... 1,023
16,000 Georgia Pacific Corp.............................. 1,388
60,000 Johnstown America Industries, Inc................. 623
+31,000 Kaiser Ventures, Inc.............................. 198
24,300 Lukens, Inc....................................... 784
4,600 MBIA, Inc......................................... 306
40,000 MCI Communications Corp........................... 880
31,300 Mellon Bank Corp.................................. 1,303
+56,500 Mercer International, Inc......................... 1,186
22,000 Midlantic Corp.................................... 880
22,300 Philip Morris Cos., Inc........................... 1,659
12,000 Prime Retail, Inc................................. 147
+47,500 Rohr, Inc......................................... 683
41,300 Sierra Tucson Cos., Inc........................... 181
25,000 Sun Co., Inc...................................... 684
13,100 Tecumseh Products Co., Class A.................... 576
70,000 Waban, Inc........................................ 1,041
88,000 WorldCorp, Inc.................................... 869
--------
29,992
--------
TOTAL COMMON STOCKS (Cost $74,611)........................... 80,714
--------
CONVERTIBLE PREFERRED STOCKS (0.0%)
HONG KONG (0.0%)
21,000 Jardine Strategic Holdings, Inc. IDR, 7.50%,
5/07/97 (Cost $21).............................. 23
--------
PREFERRED STOCKS (0.8%)
GERMANY (0.8%)
3,000 Volkswagen AG (Cost $647)......................... 663
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
- -----------
<C> <S> <C>
WARRANTS (0.0%)
SWITZERLAND (0.0%)
+500 Forbo Holdings (Registered), expiring 11/01/95
(Cost $0)....................................... 1
--------
TOTAL FOREIGN & US SECURITIES (99.6%) (Cost $75,279)........... 81,401
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
- -----------
<C> <S> <C>
FOREIGN CURRENCY (0.0%)
IL 180 Italian Lira...................................... --
NG 29 Netherlands Guilder............................... 19
--------
TOTAL FOREIGN CURRENCY (Cost $19).............................. 19
--------
TOTAL INVESTMENTS (99.6%) (Cost $75,298)....................... 81,420
--------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ------------------------------------------------------------
OTHER ASSETS (1.4%)
Receivable for Investments Sold................. $840
Dividends Receivable............................ 208
Foreign Withholding Tax Reclaim Receivable...... 89
Other........................................... 4 $ 1,141
-----------
LIABILITIES (-1.0%)
Payable to Custodian............................ (543)
Payable for Investments Purchased............... (137)
Investment Advisory Fees Payable................ (116)
Unrealized Loss on Forward Foreign Currency (18)
Contracts.....................................
Custodian Fees Payable.......................... (14)
Administrative Fees Payable..................... (11)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (36) (876)
----------- --------
NET ASSETS (100%).............................................. $ 81,685
--------
--------
</TABLE>
<TABLE>
<C> <S> <C>
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 5,538,187 outstanding $.001 par value
shares (authorized 500,00,000 shares)........................ $14.75
--------
--------
</TABLE>
- ------------------------------------------------
<TABLE>
<C> <S> <C>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open at June 30,
1995, the Portfolio is obligated to deliver foreign currency in
exchange for US dollars as indicated below:
</TABLE>
<TABLE>
<CAPTION>
IN
CURRENCY TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE LOSS
(000) (000) DATE (000) (000) (000)
- ----------- ----- ----------- ------------- ----- -----------------
<S> <C> <C> <C> <C> <C>
NZ$ 788 $ 526 7/03/95 $ 508 $ 508 $ (18)
----- ----- -----
----- ----- -----
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing securities
** -- Security is valued at fair value -- See Note A-1
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
NZ$ -- New Zealand Dollar
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FOREIGN & US SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Capital Equipment...................... $ 17,922 21.9%
Consumer Goods......................... 13,894 17.0
Energy................................. 5,979 7.3
Finance................................ 16,023 19.6
Materials.............................. 7,837 9.6
Multi-Industry......................... 6,161 7.6
Services............................... 13,585 16.6
--------- ---
$ 81,401 99.6%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Global Equity Portfolio
35
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (89.9%)
AUSTRALIA (22.7%)
182,200 Acacia Resources Ltd.............................. $ 321
455,600 Central Norseman Gold Corporation Ltd............. 314
+380,800 Delta Gold N.L.................................... 709
421,000 Gold Mines of Kalgoorlie Ltd...................... 377
355,300 Great Central Mines N.L........................... 778
22,800 Great Central Mines N.L. ADR...................... 152
+327,500 Newcrest Mining Ltd............................... 1,389
68,300 Poseidon Gold Ltd................................. 137
+455,600 Wiluna Mines Ltd.................................. 486
--------
4,663
--------
CANADA (29.2%)
34,200 Barrick Gold Corp................................. 864
91,100 Bolivar Goldfields Ltd............................ 119
38,700 Cambior, Inc...................................... 479
66,100 Hemlo Gold Mines, Inc............................. 702
41,500 Kinross Gold Corp................................. 310
123,300 Miramar Mining.................................... 640
34,000 Placer Dome, Inc.................................. 888
+73,400 Prime Resource Group, Inc......................... 508
360,000 Royal Oak Mines, Inc.............................. 1,125
+51,000 TVX Gold, Inc..................................... 367
--------
6,002
--------
SOUTH AFRICA (0.6%)
10,000 Free State Consolidated Gold Mines Ltd. ADR....... 124
--------
UNITED STATES (37.4%)
+149,200 Amax Gold, Inc.................................... 821
+96,400 Dakota Mining Corp................................ 169
3,828 Freeport McMoRan Copper & Gold, Inc., Class A..... 79
113,900 Freeport McMoRan, Inc............................. 2,007
136,700 Gold Reserve Corp................................. 854
66,200 Homestake Mining Co............................... 1,092
58,100 Newmont Gold Co................................... 2,338
+32,785 Pegasus Gold, Inc................................. 332
--------
7,692
--------
TOTAL COMMON STOCKS (Cost $19,404)............................. 18,481
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
- -----------
<C> <S> <C>
WARRANTS (0.1%)
UNITED STATES (0.1%)
+25,000 Gold Reserve Corp., expiring 3/96
(Cost $0)....................................... 20
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
CONVERTIBLE BONDS (3.1%)
CANADA (2.2%)
**$ 400 Bema Gold Corp. 7.50%, 9/28/99.................... $ 447
--------
UNITED STATES (0.9%)
250 Canyon Resources 6.00%, 6/01/98................... 190
--------
TOTAL CONVERTIBLE BONDS (Cost $681)............................ 637
--------
TOTAL FOREIGN & US SECURITIES (93.1%) (Cost $20,085)........... 19,138
--------
SHORT-TERM INVESTMENT (6.2%)
REPURCHASE AGREEMENT (6.2%)
1,263 U.S. Trust 5.90%, dated 6/30/95, due 7/03/95, to
be repurchased at $1,264, collateralized by
$1,320 United States Treasury Bills, due
7/27/95, valued at $1,315 (Cost $1,263)......... 1,263
--------
TOTAL INVESTMENTS (99.3%) (Cost $21,348)....................... 20,401
--------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (2.1%)
Receivable for Investments Sold................. $ 389
Receivable for Portfolio Shares Sold............ 36
Interest Receivable............................. 12
Dividends Receivable............................ 2
Other........................................... 1 440
-----
LIABILITIES (-1.4%)
Payable for Portfolio Shares Redeemed........... (200)
Investment Sub-Advisory Fees Payable............ (37)
Investment Advisory Fees Payable................ (4)
Custodian Fees Payable.......................... (3)
Administrative Fees Payable..................... (3)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (39) (287)
----- --------
NET ASSETS (100%).............................................. $ 20,554
--------
--------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 2,157,065 outstanding $.001 par value shares
(authorized 500,000,000 shares).............................. $9.53
--------
--------
</TABLE>
- ------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing securities
** -- Security is valued at fair value -- See Note A-1
ADR -- American Depositary Receipt
</TABLE>
- ------------------------------------------------
SUMMARY OF FOREIGN & US SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Gold Mines............................. $ 19,138 93.1%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Gold Portfolio
38
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (86.6%)
AUSTRALIA (4.3%)
3,535,000 Brambles Industries Ltd........................... $ 33,507
4,380,000 CSR Ltd........................................... 13,694
+1,500,000 McPherson's Ltd................................... 128
3,934,882 Westpac Banking Corp.............................. 14,231
----------
61,560
----------
BELGIUM (1.3%)
+63,700 Arbed S.A......................................... 9,289
39,290 Delhaize Freres et Cie 'Le Lion', S.A............. 1,767
160,000 G.I.B. Holdings Ltd............................... 7,590
2,156 G.I.B. Holdings Ltd. (New)........................ 102
----------
18,748
----------
DENMARK (1.2%)
+80,000 Novo-Nordisk A/S-B................................ 8,530
169,000 Unidanmark A/S, Class A (Registered).............. 8,291
----------
16,821
----------
FINLAND (1.5%)
350,000 Huhtamaki Oy, Series 1............................ 11,463
+505,400 Kansallis-Osake Pankki............................ 550
650,000 Pohjola Insurance Co., Ltd., Class B.............. 10,188
----------
22,201
----------
FRANCE (5.5%)
12,500 Bongrain S.A...................................... 7,483
111,560 Cie de Saint Gobain............................... 13,477
+153,050 Credit Lyonnaise CDI.............................. 8,816
200,000 Elf Aquitaine..................................... 14,781
+50,500 PSA Peugeot Citrogen S.A.......................... 7,007
17,650 Salomon S.A., Series A............................ 7,987
+242,500 Thomson CSF....................................... 5,434
224,170 Total S.A., Class B............................... 13,494
----------
78,479
----------
GERMANY (10.6%)
110,000 BASF AG........................................... 23,463
105,000 Bayer AG.......................................... 26,076
60,250 Bremer Vulkan Verbund AG.......................... 3,505
46,200 Commerzbank AG.................................... 11,066
55,000 Karstadt AG....................................... 24,083
73,125 Mannesmann AG..................................... 22,324
+24,900 Varta AG.......................................... 4,732
75,000 Veba AG........................................... 29,427
25,000 Volkswagen AG..................................... 7,199
----------
151,875
----------
HONG KONG (0.0%)
**90,600 China Light & Power Co., Ltd...................... 410
----------
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
ITALY (3.2%)
+2,560,500 Olivetti Di Risp (NCS)............................ $ 1,760
2,568,000 SME Meridonale.................................... 6,406
9,000,000 Stet Di Risp (NCS)................................ 20,003
4,720,000 Telecom Italia S.p.A.............................. 12,799
2,655,000 Telecom Italia S.p.A. Di Risp (NCS)............... 5,617
----------
46,585
----------
JAPAN (20.3%)
643,000 Aisin Seiki Co., Ltd.............................. 7,338
890,000 Canon, Inc........................................ 14,479
1,300,000 Daibiru Corp...................................... 15,142
3,000 East Japan Railway Co............................. 15,385
1,800,000 Fuji Photo Film Ltd............................... 42,653
2,400,000 Hitachi Ltd....................................... 23,908
1,700,000 Kao Corp.......................................... 20,442
1,215,000 Kirin Brewery Co., Ltd............................ 12,891
1,700,000 Matsushita Electric Industries Ltd................ 26,455
81,000 Murata Manufacturing Co., Ltd..................... 3,065
2,400,000 Nichido Fire & Marine Insurance Co................ 19,381
1,800 Nippon Telegraph & Telephone Corp................. 15,066
350,000 Sony Corp......................................... 16,793
750,000 Stanley Electric Co............................... 4,721
2,215,000 Sumitomo Rubber Industries........................ 16,451
360,000 TDK Corp.......................................... 16,382
84,000 Tokuyama Corp..................................... 411
700,000 Toyo Seikan Kaisha................................ 20,466
----------
291,429
----------
NETHERLANDS (10.6%)
689,142 ABN Amro Holdings N.V............................. 26,598
112,500 Akzo Nobel N.V.................................... 13,447
81,059 Hollandsche Beton Groep N.V....................... 13,968
563,750 Internationale Nederlanden Groep N.V.............. 31,182
247,500 Koninklijke Bijenkorf Beheer N.V.................. 17,763
153,050 Nedlloyd Groep N.V................................ 5,216
56,436 Oce-Van Der Grinten N.V........................... 3,183
750,000 Philips Electronics N.V........................... 31,754
61,200 Randstad Holdings N.V............................. 4,329
39,415 Unilever N.V. (Certificate)....................... 5,128
----------
152,568
----------
NEW ZEALAND (0.4%)
2,098,671 Fisher & Paykel Industries Ltd.................... 6,169
392,500 Smith City Group Ltd.............................. --
----------
6,169
----------
NORWAY (1.5%)
2,400,000 Den Norske Bank A/S, Class A Free................. 6,500
622,660 Hafslund Nycomed, Class B......................... 14,390
----------
20,890
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
International Equity Portfolio
43
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
SINGAPORE (2.5%)
9,875,000 Jardine Strategic Holdings, Inc................... $ 31,798
3,265,000 Neptune Orient Lines Ltd. (Foreign)............... 3,785
----------
35,583
----------
SPAIN (3.3%)
297,500 Grupo Duro Felguera S.A........................... 1,229
2,345,000 Iberdrola S.A..................................... 17,667
2,250,000 Telefonica Nacional de Espana S.A................. 28,996
----------
47,892
----------
SWEDEN (2.3%)
3,100,000 Skandinaviska Enskilda Banken, Class A............ 16,103
473,000 S.K.F. AB, Class B................................ 9,555
401,200 Svenska Cellulosa AB, Class B..................... 7,443
----------
33,101
----------
SWITZERLAND (7.3%)
29,583 Alusuisse-Lonza Holdings Ltd. (Registered)........ 18,549
+2,605 Ascom Holdings AG (Bearer)........................ 3,258
25,008 Ciba Geigy AG (Registered)........................ 18,330
16,000 Forbo Holdings AG (Registered).................... 7,809
17,600 Holderbank Financiere Glaris AG (Bearer).......... 14,444
22,000 Nestle S.A. (Registered).......................... 22,908
+29,500 SwissAir (Registered)............................. 20,418
----------
105,716
----------
UNITED KINGDOM (10.8%)
630,000 Associated British Foods plc...................... 6,655
+1,360,104 Automated Security Holdings plc................... 1,060
530,000 Barclays plc...................................... 5,695
1,194,500 Bass plc.......................................... 11,431
3,608,000 Christian Salvesen plc............................ 15,269
2,175,221 Forte plc......................................... 7,873
2,138,606 Grand Metropolitan plc............................ 13,117
4,841,985 John Mowlem & Co. plc............................. 5,393
1,100,000 Kwik Save Group plc............................... 11,358
843,000 McAlpine (Alfred) plc............................. 1,918
1,888,979 Pilkington plc.................................... 5,244
1,430,000 Reckitt & Colman plc.............................. 15,084
2,496,884 Rolls-Royce plc................................... 6,932
2,947,100 Royal Insurance Holdings plc...................... 14,489
1,310,441 Tate & Lyle plc................................... 8,861
755,000 Unilever plc...................................... 15,285
5,325,000 WPP Group plc..................................... 10,251
----------
155,915
----------
TOTAL COMMON STOCKS (Cost $1,001,378).......................... 1,245,942
----------
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS (4.7%)
GERMANY (4.7%)
+30,450 Fag Kugelficsher AG............................... $ 3,938
100,000 RWE AG............................................ 27,494
29,525 Spar Handels AG................................... 7,680
125,000 Volkswagen AG..................................... 27,638
----------
TOTAL PREFERRED STOCKS (Cost $54,443).......................... 66,750
----------
CONVERTIBLE PREFERRED STOCKS (0.1%)
NETHERLANDS (0.0%)
1,506 ABN Amro Holdings N.V............................. 6
2,196 International Nederlanden Groep N.V............... 11
----------
17
----------
HONG KONG (0.1%)
1,863,000 Jardine Strategic Holdings, Inc. IDR, 7.50%,
5/07/97......................................... 2,031
----------
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $1,923)............... 2,048
----------
<CAPTION>
NO. OF
WARRANTS
- -----------
<C> <S> <C>
WARRANTS (0.0%)
SWITZERLAND (0.0%)
+7,280 Forbo Holdings AG (Registered), expiring
11/01/95........................................ 13
+90,700 Holderbank Financiere Glaris AG, expiring
12/20/95........................................ 126
----------
TOTAL WARRANTS (Cost $0)....................................... 139
----------
TOTAL FOREIGN SECURITIES (91.4%) (Cost $1,057,744)............. 1,314,879
----------
<CAPTION>
FACE
AMOUNT
(000)
- -----------
<C> <S> <C>
SHORT-TERM INVESTMENT (2.7%)
REPURCHASE AGREEMENT (2.7%)
$ 39,409 Goldman Sachs, 6.00%, dated 6/30/95, due 7/03/95,
to be repurchased at $39,429, collateralized by
$35,730 United States Treasury Note, 9.25%, due
8/15/98 valued at $40,240 (Cost $39,409)........ 39,409
----------
FOREIGN CURRENCY (6.7%)
A$ 1 Australian Dollar................................. 1
BF 1,072 Belgian Franc..................................... 38
L 7,926 British Pound..................................... 12,610
DM 73,549 Deutsche Mark..................................... 53,144
IL 1,168 Italian Lira...................................... 1
Y 2,502,488 Japanese Yen...................................... 29,502
NG 575 Netherlands Guilder............................... 371
SK 1,288 Swedish Krona..................................... 176
CHF 527 Swiss Franc....................................... 458
----------
TOTAL FOREIGN CURRENCY (Cost $95,049).......................... 96,301
----------
TOTAL INVESTMENTS (100.8%) (Cost $1,192,202)................... 1,450,589
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
International Equity Portfolio
44
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
------------------------------------------------------------
OTHER ASSETS (1.5%)
Receivable for Investments Sold................. $ 14,358
Dividends Receivable............................ 4,349
Foreign Withholding Tax Reclaim Receivable...... 1,986
Receivable for Portfolio Shares Sold............ 512
Interest Receivable............................. 7
Other........................................... 86 $ 21,298
-----------
LIABILITIES (-2.3%)
Net Unrealized Loss on Forward Foreign Currency
Contracts..................................... (24,888)
Payable for Investments Purchased............... (4,685)
Investment Advisory Fees Payable................ (2,662)
Payable for Portfolio Shares Redeemed........... (943)
Administrative Fees Payable..................... (181)
Custodian Fees Payable.......................... (120)
Payable to Custodian............................ (2)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (102) (33,584)
----------- ----------
NET ASSETS (100%).............................................. $1,438,303
----------
----------
</TABLE>
<TABLE>
<C> <S> <C>
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 94,285,439 outstanding $.001 par value shares
(authorized 500,000,000 shares).............................. $15.25
----------
----------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open at June 30,
1995, the Portfolio is obligated to deliver or is to receive foreign
currency in exchange for US 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>
FM 1,241 $ 290 7/03/95 DM 405 $ 292 $ 2
DM 40,000 28,957 8/09/95 $25,252 25,252 (3,705)
Y 6,115,000 73,026 9/27/95 $64,627 64,627 (8,399)
CHF 66,500 58,339 11/14/95 $52,749 52,749 (5,590)
FF 206,000 42,362 11/20/95 $38,741 38,741 (3,621)
SP 5,225,000 42,367 12/01/95 $42,195 42,195 (172)
DM 95,500 69,596 3/01/96 $66,193 66,193 (3,403)
-------- -------- ---------
$314,937 $290,049 ($24,888)
-------- -------- ---------
-------- -------- ---------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing securities
** -- Security is valued at fair value - See Note A-1
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
DM -- Deutsche Mark
FM -- Finnish Markka
FF -- French Franc
Y -- Japanese Yen
SP -- Spanish Peseta
CHF -- Swiss Franc
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT
INDUSTRY (000) OF NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment................. $ 262,045 18.2%
Consumer Goods.................... 324,607 22.6
Energy............................ 75,779 5.3
Finance........................... 203,463 14.1
Materials......................... 177,507 12.3
Multi-Industry.................... 55,627 3.9
Services.......................... 215,851 15.0
--------- ---
$1,314,879 91.4%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
International Equity Portfolio
45
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
------------------------------------------------------------
COMMON STOCKS (92.2%)
AUSTRALIA (8.0%)
63,410 Arnotts Ltd....................................... $ 374
1,000,000 Auspine Ltd....................................... 3,695
2,340,756 BRL Hardy Ltd..................................... 2,611
990,079 Bains Harding Ltd................................. 183
2,230,000 Burswood Property Trust........................... 2,314
2,351,732 Country Road Ltd.................................. 1,972
+3,099,000 McPhersons Ltd.................................... 264
5,342,529 Parbury Ltd....................................... 2,505
1,721,500 Solution 6 Holdings Ltd........................... 1,101
----------
15,019
----------
DENMARK (2.0%)
+107,000 SYD-Sonderjylland Holdings........................ 3,783
----------
FINLAND (2.6%)
115,000 Amer-Yhtymae Oy, Class A.......................... 2,090
180,000 Hartwall Oy, Class A.............................. 2,653
----------
4,743
----------
FRANCE (10.6%)
53,500 Dauphin O.T.A..................................... 2,658
5,400 De Dietrich et Compagnie.......................... 2,650
18,970 Europeene de Propulsion S.A....................... 1,243
8,100 Galeries Layfayette............................... 3,106
14,000 Omnium de Gestion & Finance....................... 2,508
24,500 Precision Mecaniques Labinal S.A.................. 4,318
88,996 Sediver S.A....................................... 3,302
----------
19,785
----------
GERMANY (6.5%)
14,000 Duerr Beteiligungs AG............................. 4,957
+10,688 Sinn AG........................................... 2,583
+20,000 Varta AG.......................................... 3,801
2,210 Vossloh AG........................................ 850
----------
12,191
----------
HONG KONG (1.7%)
5,200,000 Pico Far East Holdings Ltd........................ 538
2,040,000 Tungtex Holdings Co., Ltd......................... 382
5,800,000 Vitasoy International Holdings Ltd................ 2,305
----------
3,225
----------
IRELAND (2.2%)
1,070,000 Avonmore Foods plc, Class A....................... 2,347
687,000 Green Property plc................................ 1,800
----------
4,147
----------
ITALY (2.3%)
+718,000 Editoriale L'Expresso S.p.A....................... 1,540
621,600 Unicem Di Risp (NCS).............................. 1,788
75,000 Vincenzo Zucchi S.p.A............................. 367
212,500 Vincenzo Zucchi S.p.A. (NCS)...................... 520
----------
4,215
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
------------------------------------------------------------
JAPAN (8.1%)
15,000 Daikin Manufacturing Ltd.......................... $ 226
231,000 Foster Electric Co., Ltd.......................... 1,076
707,000 Japan Oil Transportation.......................... 3,709
213,000 Japan Vilene Co., Ltd............................. 1,243
99,000 Kansei Corp....................................... 759
124,000 Nifco, Inc........................................ 1,550
415,000 Toc Co............................................ 3,767
+442,000 Tokai Senko K.K................................... 1,667
170,000 Toyoda Gosei Co................................... 1,223
----------
15,220
----------
NETHERLANDS (9.3%)
23,772 Ahrend Groep N.V.................................. 3,137
23,575 Hollandsche Beton Groep N.V....................... 4,062
28,885 Industriemij Welna N.V............................ 880
36,000 Konin Nijverdal -- Ten Carte N.V.................. 1,801
141,000 Koninklijke Van Ommeren N.V....................... 4,332
8,802 Polynorm N.V...................................... 958
30,000 Randstad Holdings N.V............................. 2,122
----------
17,292
----------
NEW ZEALAND (1.0%)
645,592 Fisher & Paykel Industries Ltd.................... 1,898
----------
NORWAY (1.0%)
11,500 Adelsten, Class B................................. 1,380
228,020 Oceanor........................................... 518
----------
1,898
----------
SPAIN (4.9%)
+334,000 Asturiana del Zinc S.A............................ 3,187
65,393 Bodegas y Bebidas S.A............................. 1,907
15,423 Bodegas y Bebidas S.A. (New)...................... 450
76,262 Gas y Electricidad S.A............................ 3,673
----------
9,217
----------
SWITZERLAND (15.5%)
3,960 Bobst AG (Bearer)................................. 6,018
8,400 Elco Looser Holding AG (Registered)............... 3,115
3,400 Hero AG (Bearer).................................. 1,860
995 Kuoni Reisen Holdings, Class B (Registered)....... 1,599
+1,650 LEM Holdings AG................................... 487
5,424 Magazine Globus (Participating Certificates)...... 3,816
5,850 Porst Holding AG (Bearer)......................... 1,219
590 Schweizerische Industrie-Gesellschaft Holdings
(Bearer)........................................ 1,378
4,400 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 4,968
+4,250 Von Moos Holding AG (Bearer)...................... 568
+4,600 Zellweger Uster AG (Bearer)....................... 3,955
----------
28,983
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
International Small Cap Portfolio
48
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------
<C> <S> <C>
UNITED KINGDOM (16.5%)
3,631,578 Anglo Irish Bank Corp. plc (British Pound
Shares)......................................... $ 3,120
559,500 Asprey plc........................................ 650
1,055,000 BSM Group plc..................................... 2,854
31,700 Bespak plc........................................ 141
+1,449,216 Blagden Industries plc............................ 3,020
369,500 Bluebird Toys plc................................. 1,258
3,790,000 Casket plc........................................ 663
214,300 Church & Co. plc.................................. 1,527
+3,045,850 Donelon Tyson plc................................. 363
952,000 GEI International plc............................. 1,742
212,000 Hadleigh Industries Group plc..................... 530
390,000 Hornby Group plc.................................. 856
210,000 International Business Communications (Holdings)
plc............................................. 942
877,294 John Mowlem & Co. plc............................. 977
206,335 Mallett plc....................................... 223
1,637,405 Matthews (Bernard) plc............................ 2,840
+**2,659,393 Pentos plc........................................ --
345,526 Perry Group plc................................... 830
1,600,000 Shandwick plc..................................... 980
691,000 Sketchley plc..................................... 1,242
1,600,000 The 600 Group plc................................. 2,393
345,000 Tibbett & Britten Group plc....................... 2,662
541,700 Waterman Partnership Holdings plc................. 422
+34,505,500 YRM plc........................................... 690
----------
30,925
----------
TOTAL COMMON STOCKS (Cost $174,506)............................. 172,541
----------
PREFERRED STOCKS (1.8%)
GERMANY (1.8%)
2,400 Jil Sander AG..................................... 1,673
7,745 Shaerf AG......................................... 1,707
----------
TOTAL PREFERRED STOCKS (Cost $3,316)............................ 3,380
----------
<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..... 3
----------
SWITZERLAND (0.0%)
+4,600 Zellweger Luwa AG, expiring 5/21/97............... 34
----------
TOTAL WARRANTS (Cost $0)........................................ 37
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
------------------------------------------------------------
CONVERTIBLE DEBENTURES (0.2%)
ITALY (0.2%)
IL 518,000 Mediobanca S.p.A. 5.50%, 1/01/00 (Cost $328)...... $ 266
----------
TOTAL FOREIGN SECURITIES (94.2%) (Cost $178,150)................ 176,224
----------
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT (3.2%)
$ 5,984 U.S. Trust, 5.90%, dated 6/30/95, due 7/03/95, to
be repurchased at $5,987, collateralized by
$6,200 United States Treasury Bills, due
7/27/95, valued at $6,176 (Cost $5,984)......... 5,984
----------
FOREIGN CURRENCY (3.8%)
L 1,010 British Pound..................................... 1,607
DM 4,444 Deutsche Mark..................................... 3,211
HK$ 378 Hong Kong Dollar.................................. 49
IL 74 Italian Lira...................................... --
Y 189,293 Japanese Yen...................................... 2,231
NG 20 Netherlands Guilder............................... 13
SP 1 Spanish Peseta.................................... --
----------
TOTAL FOREIGN CURRENCY (Cost $7,114)............................ 7,111
----------
TOTAL INVESTMENTS (101.2%) (Cost $191,248)...................... 189,319
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.8%)
Cash............................................ $ 71
Dividends Receivable............................ 447
Receivable for Investments Sold................. 417
Foreign Withholding Tax Reclaim Receivable...... 366
Receivable for Portfolio Shares Sold............ 129
Interest Receivable............................. 8
Other........................................... 8 1,446
------------
LIABILITIES (-2.0%)
Net Unrealized Loss on Forward Foreign Currency
Contracts..................................... (2,374)
Payable for Investments Purchased............... (858)
Investment Advisory Fees Payable................ (383)
Payable for Portfolio Shares Redeemed........... (45)
Custodian Fees Payable.......................... (27)
Administrative Fees Payable..................... (23)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (36) (3,747)
------------ ----------
NET ASSETS (100%)............................................... $ 187,018
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 12,116,594 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................... $15.43
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
International Small Cap Portfolio
49
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open at June 30,
1995, the Portfolio is obligated to deliver foreign currency in exchange
for US dollars as indicated below:
</TABLE>
<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
- ----------- --------- ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
HK$ 377 $ 49 7/03/95 $ 49 $ 49 $ --
Y 725,000 8,658 9/27/95 $ 7,662 7,662 (996)
Y 100,000 1,194 9/27/95 $ 1,057 1,057 (137)
DM 10,300 7,507 3/04/96 $ 7,099 7,099 (408)
SP 675,000 5,412 3/04/96 $ 5,107 5,107 (305)
CHF 8,750 7,732 3/04/96 $ 7,204 7,204 (528)
--------- --------- -------------
$ 30,552 $ 28,178 $ (2,374)
--------- --------- -------------
--------- --------- -------------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing securities
** -- Security is valued at fair value -- See Note A-1
NCS -- Non Convertible Shares
DM -- Deutsche Mark
HK$ -- Hong Kong Dollar
Y -- Japanese Yen
SP -- Spanish Peseta
CHF -- Swiss Franc
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment..................... $ 44,305 23.7%
Consumer Goods........................ 38,094 20.4
Energy................................ 6,860 3.6
Finance............................... 14,231 7.6
Materials............................. 23,866 12.8
Multi-Industry........................ 3,928 2.1
Services.............................. 44,940 24.0
--------- ---
$ 176,224 94.2%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
International Small Cap Portfolio
50
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (85.6%)
CAPITAL EQUIPMENT (27.2%)
40,000 Amada Co., Ltd.................................... $ 342
35,000 Daifuku........................................... 392
40,000 Daikin Industries Ltd............................. 322
30,000 Dai Nippon Printing Co., Ltd...................... 477
26,000 Fuji Machine Manufacturing Co..................... 794
35,000 Kyudenko Co., Ltd................................. 487
60,000 Matsui Construction............................... 526
70,000 Mitsubishi Heavy Industries Ltd................... 475
24,000 Nifco, Inc........................................ 300
35,000 Ricoh Co., Ltd.................................... 300
80,000 Taisei Corp., Ltd................................. 473
86,000 Teijin Seiki Co., Ltd............................. 385
30,000 Toshiba Engineering & Construction................ 246
85,000 Tsubakimoto Chain................................. 399
----------
5,918
----------
CONSUMER GOODS (11.3%)
50,000 Japan Vilene Co., Ltd............................. 292
9,000 Nintendo Corp., Ltd............................... 517
75,000 Nissan Motor Co................................... 479
11,500 Sankyo Co., Ltd................................... 267
50,000 Suzuki Motor Co., Ltd............................. 557
15,000 Yamanouchi Pharmaceutical Co...................... 338
----------
2,450
----------
ELECTRICAL & ELECTRONICS (19.5%)
20,000 CMK............................................... 259
60,000 Hitachi Ltd....................................... 598
40,000 Matsushita Electric Industries Ltd................ 622
23,000 Mitsumi Electric Co., Ltd......................... 396
56,000 NEC Corp.......................................... 613
8,000 Sony Corp......................................... 384
40,000 Stanley Electric Co............................... 252
12,000 TDK Corp.......................................... 546
90,000 Toshiba Corp...................................... 570
----------
4,240
----------
FINANCE (6.9%)
20,000 Daiwa Securities Co., Ltd......................... 211
41,000 Keihanshin Real Estate............................ 275
30,000 Mitsubishi Estate Co., Ltd........................ 338
35,000 Nichido Fire & Marine Insurance................... 283
10,000 Nomura Securities Co.............................. 174
43,000 Sumitomo Corp. Leasing Ltd........................ 227
----------
1,508
----------
MATERIALS (10.0%)
53,000 Asahi Tec Corp.................................... 362
61,000 Kaneka Corp....................................... 392
48,000 Kansei Corp....................................... 368
58,000 Nippon Konpo Unyu Soko............................ 530
52,000 Okura Industrial Co., Ltd......................... 338
25,000 Sanwa Shutter..................................... 188
----------
2,178
----------
MULTI-INDUSTRY (1.9%)
8,400 FamilyMart........................................ 421
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
SERVICES (8.8%)
50,000 Inabata & Co...................................... $ 296
32,000 Nishio Rent All Co................................ 698
20,000 Sangetsu Co., Ltd................................. 531
6,000 Secom Co., Ltd.................................... 377
----------
1,902
----------
TOTAL COMMON STOCKS (Cost $20,927)............................ 18,617
----------
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (13.6%)
REPURCHASE AGREEMENT (13.6%)
$ 2,949 U.S. Trust, 5.90%, dated 6/30/95, due 7/03/95, to
be repurchased at $2,950, collateralized by
$2,970 United States Treasury Bills, due
7/20/95-7/27/95, valued at $2,961 (Cost
$2,949)......................................... 2,949
------
FOREIGN CURRENCY (0.0%)
Y 1 Japanese Yen (Cost $0)............................ --
----------
TOTAL INVESTMENTS (99.2%) (Cost $23,876)...................... 21,566
----------
OTHER ASSETS (4.7%)
Cash............................................ $ 642
Receivable for Portfolio Shares Sold............ 235
Dividends Receivable............................ 154
Other........................................... 3 1,034
----------
LIABILITIES (-3.9%)
Payable for Investments Purchased............... (496)
Net Unrealized Loss on Forward Foreign Currency (285)
Contracts......................................
Investment Advisory Fees Payable................ (31)
Custodian Fees Payable.......................... (8)
Administrative Fees Payable..................... (3)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (30) (854)
---------- ----------
NET ASSETS (100%)............................................. $ 21,746
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 2,655,494 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $8.19
----------
----------
</TABLE>
- ------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open at June 30, 1995,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for US 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>
$ 2,791 $ 2,791 11/22/95 Y 230,000 $ 2,768 $ (23)
Y 980,000 11,793 11/22/95 $ 11,531 11,531 (262)
--------- --------- -----
$ 14,584 $ 14,299 $ (285)
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------------------------------------
Y -- Japanese Yen
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
53
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (59.3%)
ARGENTINA (8.6%)
2,150 Banco del Sud Argentina, Class B.................. $ 13
+133,372 Banco del Suquia, Class B......................... 193
+3,500 Buenos Aires Embotelladora ADR.................... 88
32,970 Capex S.A. ADR.................................... 507
25,000 CIADEA (Renault) S.A.............................. 121
14,424 Quilmes Industrial S.A............................ 281
----------
1,203
----------
BRAZIL (19.0%)
22,850,000 Cia Acos Especiais Itabira........................ 148
1,584 Cia Energetica de Minas Gerias ADR................ 31
7,422 Cia Energetica de Minas Gerias GDR................ 145
3,637,000 Cia Energetica de Sao Paulo....................... 119
1,446,000 Cia Paulista de Forca E Luz....................... 72
9,580,000 Cia Siderurgica Nacional.......................... 219
1,440,000 Eletrobras........................................ 375
+30,700 Eletrobras ADR.................................... 415
20,000 Rhodia-Ster GDR................................... 280
375,000 Servicos de Eletricdade........................... 118
11,400 Telebras ADR...................................... 376
1,604,500 Telecomunicacoes de Sao Paulo..................... 204
13,420 Usiminas Siderurgicas de Minas Gerias ADR......... 149
----------
2,651
----------
CHILE (2.7%)
9,310 Empresa Nacional de Electricidad S.A. ADR......... 247
6,350 Maderas y Sinteticos S.A. ADR..................... 119
----------
366
----------
MEXICO (26.5%)
10,950 ALFA S.A. de C.V., Class A........................ 133
+72,000 Apasco S.A........................................ 286
198,880 Banacci, Class B.................................. 305
34,829 Banacci, Class L.................................. 53
38,970 Cemex CPO ADR..................................... 265
17,060 Empresas ICA S.A. ADR............................. 175
186,000 FEMSA, Class B.................................... 434
+5,000 Grupo Carso S.A. ADR.............................. 55
67,970 Grupo Financiero Bancomer ADR..................... 408
+33,831 Grupo Financiero Bancomer, Class L................ 9
91,500 Grupo Financiero Banorte, Class C................. 119
+11,770 Grupo Mexicano Desarrollo ADR, Class B............ 46
+47,750 Grupo Sidek S.A., Class B......................... 43
6,450 Grupo Simec S.A. ADR, Class B..................... 64
+1,350 Grupo Tribasa S.A. ADR............................ 11
15,800 Hylsamex S.A. ADR................................. 288
9,615 Panamerican Beverages, Inc., Class A.............. 288
10,620 Telefonos de Mexico S.A. ADR, Class L............. 313
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
102,400 Tolmex S.A., Class B2............................. $ 400
----------
3,695
----------
PERU (2.5%)
44,200 Banco de Credito del Peru......................... 77
158,600 Telefonica del Peru S.A., Class B................. 271
----------
348
----------
TOTAL COMMON STOCKS (Cost $8,044)............................. 8,263
----------
PREFERRED STOCKS (31.7%)
BRAZIL (31.7%)
61,870,000 Banco Bradesco.................................... 524
14,770,000 Banco do Brasil................................... 177
4,820,000 Banco do Estado Sao Paulo......................... 27
3,550,000 Banco Nacional S.A................................ 69
1,158,173 Brahma............................................ 380
360,000 Brasmotor......................................... 67
+230,000 Centrais Eletricas de Santa Catarina, Class B..... 186
1,540,000 Cia Energetica de Sao Paulo....................... 61
6,600 Cia Energetica de Sao Paulo ADR................... 75
5,760,000 Cia Paulista de Forca E Luz....................... 189
4,000,000 Continental 2001.................................. 87
550,000 Coteminas......................................... 173
169,000 Dixie Laleka S.A.................................. 132
583,000 Eletrobras........................................ 155
1,590,400 Itaubanco......................................... 484
8,650,000 Lojas Renner...................................... 147
99,000 Multibras S.A..................................... 82
4,550,000 Petrobras......................................... 386
58,300,000 Refrigeracao Parana............................... 113
6,232,000 Telebras.......................................... 205
3,149,000 Telecomunicacoes de Sao Paulo..................... 390
1,142,000 Vale Do Rio Doce.................................. 173
320,000 WEG S.A........................................... 146
----------
TOTAL PREFERRED STOCKS (Cost $4,560).......................... 4,428
----------
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
CONVERTIBLE DEBENTURES (2.3%)
COLOMBIA (2.3%)
$ 430 Banco de Colombia 5.20%, 2/01/99
(Cost $389)..................................... 327
----------
<CAPTION>
NO. OF
RIGHTS
- ----------
<C> <S> <C>
RIGHTS (0.0%)
BRAZIL (0.0%)
+**1,117,250 Banco Bradesco (Cost $0).......................... 1
----------
TOTAL FOREIGN SECURITIES (93.3%) (Cost $12,993)............... 13,019
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Latin American Portfolio
57
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
SHORT-TERM INVESTMENT (4.4%)
REPURCHASE AGREEMENT (4.4%)
$ 613 U.S. Trust, 5.90%, dated 6/30/95,
due 7/03/95, to be repurchased at
$613, collateralized by $645
United States Treasury Bills, due
7/27/95, valued at $642 (Cost
$613)............................. $ 613
---------
FOREIGN CURRENCY (2.3%)
APS 33 Argentine Peso...................... 33
BLR 62 Brazilian Real...................... 67
MP 1,400 Mexican New Peso.................... 224
PS 3 Peruvian Sol........................ 1
---------
TOTAL FOREIGN CURRENCY (Cost $327)................. 325
---------
TOTAL INVESTMENTS (100%) (Cost $13,933)............ 13,957
---------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (4.1%)
Cash................................... $ 1
Receivable for Portfolio Shares Sold... 355
Receivable for Investments Sold........ 161
Dividends Receivable................... 18
Interest Receivable.................... 10
Expense Reimbursement Receivable....... 23 568
---------
LIABILITIES (-4.1%)
Payable for Investments Purchased...... (510)
Custodian Fees Payable................. (22)
Administrative Fees Payable............ (2)
Sub-Administrative Fees Payable........ (2)
Directors' Fees and Expenses Payable... (2)
Other Liabilities...................... (34) (572)
--------- ---------
NET ASSETS (100%)................................... $ 13,953
---------
---------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 1,586,250 outstanding $.001 par
value shares (authorized 500,000,000 shares)...... $8.80
---------
---------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT
INFORMATION:
Under the terms of forward foreign currency contracts open at
June 30, 1995, the Portfolio is obligated to deliver US
dollars in exchange for foreign currency as indicated below:
</TABLE>
<TABLE>
<CAPTION>
IN
CURRENCY EXCHANGE UNREALIZED
TO DELIVER SETTLEMENT FOR LOSS
(000) VALUE (000) DATE (000) VALUE (000) (000)
- ---------- ----- ---------- ----------- ----- -------------
<S> <C> <C> <C> <C> <C>
$ 8 $ 8 7/03/95 BLR 7 $ 8 --
-- --
-- --
-----
-----
</TABLE>
- ------------------------------------------------------------
+ -- Non-income producing securities
** -- Security is valued at fair value -- See Note A-1
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
BLR -- Brazilian Real
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Capital Equipment...................... $ 558 4.0%
Consumer Goods......................... 2,339 16.8
Energy................................. 3,227 23.1
Finance................................ 2,668 19.1
Materials.............................. 2,564 18.4
Multi-Industry......................... 175 1.2
Services............................... 1,488 10.7
--------- ---
$ 13,019 93.3%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Latin American Portfolio
58
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCK (91.8%)
CAPITAL GOODS/CONSTRUCTION (14.3%)
AEROSPACE & DEFENSE (14.3%)
+7,200 Litton Industries, Inc............................ $ 266
15,800 Lockheed Martin Corp.............................. 997
9,200 McDonnell Douglas Corp............................ 706
8,200 United Technologies Corp.......................... 641
----------
TOTAL CAPITAL GOODS/CONSTRUCTION............................ 2,610
----------
CONSUMER CYCLICAL (9.2%)
FOOD SERVICE & LODGING (1.7%)
8,900 Hospitality Franchise Systems, Inc................ 308
----------
LEISURE RELATED (1.4%)
4,300 Eastman Kodak Co.................................. 261
----------
PUBLISHING (1.6%)
5,300 Gannett Co., Inc.................................. 288
----------
RETAIL-GENERAL (4.5%)
+6,500 AutoZone, Inc..................................... 163
+12,300 General Nutrition Cos., Inc....................... 432
5,500 Home Depot, Inc................................... 223
----------
818
----------
TOTAL CONSUMER-CYCLICAL..................................... 1,675
----------
CONSUMER STAPLES (32.7%)
BEVERAGES & TOBACCO (24.8%)
8,400 Coca Cola Co...................................... 536
4,200 PepsiCo, Inc...................................... 192
51,000 Philip Morris Cos., Inc........................... 3,793
----------
4,521
----------
FOOD (2.1%)
5,400 Kellogg Co........................................ 385
----------
HEALTH CARE SUPPLIES & SERVICES (5.8%)
5,200 American Home Products Corp....................... 402
6,300 Columbia/HCA Healthcare Corp...................... 272
9,400 United Healthcare Corp............................ 389
----------
1,063
----------
TOTAL CONSUMER STAPLES...................................... 5,969
----------
ENERGY (0.5%)
COAL, GAS, & OIL (0.5%)
3,900 Occidental Petroleum Corp......................... 89
----------
FINANCE (23.6%)
BANKING (5.2%)
13,900 Ahmanson (H.F.) & Co.............................. 306
9,900 Citicorp.......................................... 573
300 Wells Fargo & Co.................................. 54
----------
933
----------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
FINANCIAL SERVICES (10.8%)
16,700 American Express Co............................... $ 586
7,600 Federal Home Loan Mortgage Corp................... 522
5,000 Federal National Mortgage Association............. 472
8,800 Franklin Resources, Inc........................... 392
----------
1,972
----------
INSURANCE (7.6%)
15,400 Ace, Ltd.......................................... 447
15,500 Exel Ltd.......................................... 806
5,400 PartnerRe Holdings, Ltd........................... 141
----------
1,394
----------
TOTAL FINANCE............................................... 4,299
----------
MATERIALS (2.9%)
FOREST PRODUCTS & PAPER (2.9%)
6,700 Champion International Corp....................... 349
+8,400 Stone Container Corp.............................. 179
----------
TOTAL MATERIALS............................................. 528
----------
TECHNOLOGY (8.6%)
COMPUTERS (5.3%)
7,300 International Business Machines Corp.............. 701
+3,000 Microsoft, Inc.................................... 271
----------
972
----------
ELECTRONICS (3.3%)
+2,000 Applied Material, Inc............................. 173
3,000 Intel Corp........................................ 190
1,800 Texas Instruments, Inc............................ 241
----------
604
----------
TOTAL TECHNOLOGY............................................ 1,576
----------
TOTAL COMMON STOCK (Cost $15,576)............................. 16,746
----------
PURCHASED PUT OPTION (0.0%)
CONSUMER STAPLES (0.0%)
BEVERAGES & TOBACCO (0.0%)
+20,000 Philip Morris Cos., Inc., expiring 7/22/95, strike
price $70 (Cost $8)............................. 4
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENTS (6.2%)
US GOVERNMENT OBLIGATION (2.7%)
$500 U.S. Treasury Bill, 8/17/95....................... 497
----------
REPURCHASE AGREEMENT (3.5%)
642 U.S. Trust, 5.90%, dated 6/30/95, due 7/03/95, to
be repurchased at $642, collateralized by $675
United States Treasury Bills, due 7/27/95,
valued at $672.................................. 642
----------
TOTAL SHORT-TERM INVESTMENTS (Cost $1,138).................... 1,139
----------
TOTAL INVESTMENTS (98.0%) (Cost $16,722)...................... 17,889
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
61
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ------------------------------------------------------------
OTHER ASSETS (5.2%)
Receivable for Investments Sold................. $ 829
Receivable for Portfolio Shares Sold............ 63
Dividends Receivable............................ 37
Expense Reimbursement Receivable................ 17 $ 946
-----
LIABILITIES (-3.2%)
Payable for Investments Purchased............... (531)
Written Options Outstanding, at Value (premiums
received $9)................................... (22)
Custodian Fees Payable.......................... (2)
Administrative Fees Payable..................... (2)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (22) (580)
----- ----------
NET ASSETS (100%)............................................. $ 18,255
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 1,546,129 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $11.81
----------
----------
</TABLE>
<TABLE>
<S> <C> <C>
OPEN WRITTEN COVERED CALL OPTIONS:
Open written covered call options at June 30, 1995 were:
</TABLE>
<TABLE>
<CAPTION>
NO. OF EXERCISE EXPIRATION VALUE
DESCRIPTION CONTRACTS PRICE DATE (000)
- ------------------------- --------------- ----------- ----------- -----
<S> <C> <C> <C> <C>
McDonnell Douglas Corp... 40 $ 125 7/31/95 $ 12
Coca Cola Co............. 52 88 8/30/95 10
---
(Premiums $9)....................................................... $ 22
---
---
</TABLE>
- ------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing securities
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
62
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
------------------------------------------------------------
COMMON STOCKS (92.7%)
CAPITAL GOODS/CONSTRUCTION (2.2%)
ELECTRICAL EQUIPMENT (1.5%)
60,000 Molex, Inc., Class A.............................. $ 2,190
----------
ENVIRONMENTAL CONTROLS (0.7%)
+50,000 Western Waste Industries.......................... 1,006
----------
TOTAL CAPITAL GOODS/CONSTRUCTION............................ 3,196
----------
CONSUMER-CYCLICAL (19.5%)
AUTOMOTIVE (0.9%)
46,100 Pep Boys-Manny, Moe & Jack........................ 1,233
----------
FOOD SERVICE & LODGING (6.8%)
+80,000 Cheesecake Factory, Inc........................... 2,060
100,000 Cracker Barrel Old Country Store, Inc............. 2,062
60,000 Hospitality Franchise Systems, Inc................ 2,078
+90,000 ShoLodge, Inc..................................... 1,339
+85,000 Sonic Corp........................................ 2,295
----------
9,834
----------
PRINTING & PUBLISHING (2.4%)
50,000 Lee Enterprises, Inc.............................. 1,906
+29,700 Scholastic Corp................................... 1,611
----------
3,517
----------
RETAIL-GENERAL (9.4%)
+100,000 Bed, Bath & Beyond, Inc........................... 2,425
+110,000 Central Tractor Farm & Country, Inc............... 1,182
+70,000 General Nutrition Cos., Inc....................... 2,459
75,000 Heilig Meyers Co.................................. 1,913
+30,000 Kohl's Corp....................................... 1,369
+80,000 Lechters, Inc..................................... 1,240
+50,000 OfficeMax, Inc.................................... 1,394
+44,000 Sunglass Hut International, Inc................... 1,529
----------
13,511
----------
TOTAL CONSUMER-CYCLICAL..................................... 28,095
----------
CONSUMER-STAPLES (23.6%)
DRUGS (5.2%)
60,000 Forest Laboratories, Inc.......................... 2,662
50,000 Genzyme Corp. -- General Division................. 1,988
+80,000 Immucor, Inc...................................... 740
+50,000 Scherer (R.P.) Corp............................... 2,113
----------
7,503
----------
HEALTH CARE SUPPLIES & SERVICES (18.4%)
60,000 Arrow International, Inc.......................... 2,490
55,000 Ballard Medical Products.......................... 715
+120,000 Biomet, Inc....................................... 1,845
+60,000 CRA Managed Care, Inc............................. 1,350
+100,000 Haemonetics Corp.................................. 1,925
+6,300 Health Management, Inc............................ 68
+97,500 Health Management Systems, Inc.................... 2,779
+60,000 Healthsource, Inc................................. 2,100
+130,000 HEALTHSOUTH Rehabilitation Corp................... 2,259
+65,000 IDEXX Laboratories, Inc........................... 1,690
+100,000 Mariner Health Group, Inc......................... 1,125
+110,200 Quantum Health Resources, Inc..................... 1,804
+75,000 Research Industries Corp.......................... 1,725
+75,000 Vencor, Inc....................................... 2,362
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
------------------------------------------------------------
+80,000 Vivra, Inc........................................ $ 2,170
----------
26,407
----------
TOTAL CONSUMER-STAPLES...................................... 33,910
----------
FINANCE (5.3%)
FINANCIAL SERVICES (2.9%)
100,000 Cash America International, Inc................... 737
40,000 First Financial Management Corp................... 3,420
----------
4,157
----------
INSURANCE (2.4%)
55,000 Mutual Risk Management Ltd........................ 1,843
50,000 NAC Re Corp....................................... 1,556
----------
3,399
----------
TOTAL FINANCE............................................... 7,556
----------
MATERIALS (2.2%)
MISCELLANEOUS MATERIALS & COMMODITIES (2.2%)
+85,000 Viking Office Products, Inc....................... 3,103
----------
SERVICES (7.7%)
PROFESSIONAL SERVICES (7.7%)
75,000 Cintas Corp....................................... 2,663
+95,000 CUC International, Inc............................ 3,990
115,000 G & K Services, Inc., Class A..................... 2,243
55,000 Premier Industrial Corp........................... 1,299
+46,800 Vallen Corp....................................... 807
----------
TOTAL SERVICES.............................................. 11,002
----------
TECHNOLOGY (32.2%)
ELECTRONICS (14.1%)
+35,000 Electroglas, Inc.................................. 2,004
+60,000 Fusion Systems Corp............................... 2,055
+75,000 Level One Communications, Inc..................... 1,612
70,000 Linear Technology, Inc............................ 4,585
+70,000 Maxim Integrated Products, Inc.................... 3,552
55,000 Sensormatic Electronics........................... 1,953
+47,400 Xilinx, Inc....................................... 4,444
----------
20,205
----------
OFFICE EQUIPMENT (17.2%)
25,000 Adobe Systems, Inc................................ 1,450
+85,000 BISYS Group, Inc.................................. 1,891
+90,000 Compuware Corp.................................... 2,767
+100,000 Concord EFS Corp.................................. 2,625
+70,000 EMC Corp.......................................... 1,697
+180,000 Informix Corp..................................... 4,568
+40,000 Microchip Technology, Inc......................... 1,455
+55,000 Progress Software Corp............................ 2,846
+58,000 SPS Transaction Services, Inc..................... 2,008
+65,000 SunGard Data Systems, Inc......................... 3,396
----------
24,703
----------
TELECOMMUNICATIONS (0.9%)
+50,000 Mobile Telecommunications Technologies Corp....... 1,363
----------
TOTAL TECHNOLOGY............................................ 46,271
----------
TOTAL COMMON STOCKS (Cost $94,460)............................ 133,133
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144 - 152)
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
65
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (7.3%)
REPURCHASE AGREEMENT (7.3%)
$ 10,504 Goldman Sachs, 6.00%, dated 6/30/95, due 7/03/95,
to be repurchased at $10,509, collateralized by
$7,820 United States Treasury Notes, 11.875%,
due 11/15/03, valued at $10,744 (Cost
$10,504)........................................ $ 10,504
----------
TOTAL INVESTMENTS (100.0%) (Cost $104,964).................... 143,637
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.8%)
Receivable for Investments Sold................. $ 1,134
Dividends Receivable............................ 22
Interest Receivable............................. 2
Other........................................... 7 1,165
----------
LIABILITIES (-0.8%)
Payable for Portfolio Shares Redeemed........... (775)
Investment Advisory Fees Payable................ (309)
Payable for Investments Purchased............... (78)
Administrative Fees Payable..................... (18)
Custodian Fees Payable.......................... (5)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (30) (1,216)
---------- ----------
NET ASSETS (100%)............................................. $ 143,586
----------
----------
</TABLE>
<TABLE>
<C> <S> <C>
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 7,870,255 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $18.24
----------
----------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+ -- Non-income producing securities
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144 - 152)
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
66
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (90.3%)
CAPITAL GOODS/CONSTRUCTION (12.0%)
AEROSPACE & DEFENSE (9.9%)
+54,400 Litton Industries, Inc............................ $ 2,006
46,600 Lockheed Martin Corp.............................. 2,942
22,800 Loral Corp........................................ 1,180
40,600 McDonnell Douglas Corp............................ 3,116
30,500 Rockwell International Corp....................... 1,395
48,900 United Technologies Corp.......................... 3,820
----------
14,459
----------
BUILDING & CONSTRUCTION (0.5%)
+34,300 USG Corp.......................................... 815
----------
ELECTRICAL EQUIPMENT (0.8%)
21,200 General Electric Co............................... 1,195
----------
MACHINERY (0.8%)
17,500 Caterpillar, Inc.................................. 1,124
----------
TOTAL CAPITAL GOODS/CONSTRUCTION............................ 17,593
----------
CONSUMER-CYCLICAL (16.5%)
AUTOMOTIVE (2.6%)
21,300 Chrysler Corp..................................... 1,020
29,700 Ford Motor Co..................................... 884
14,300 General Motors Corp............................... 670
30,000 Goodyear Tire & Rubber Co......................... 1,237
----------
3,811
----------
BROADCAST-RADIO & TELEVISION (2.1%)
10,600 CBS, Inc.......................................... 710
59,000 New World Communications.......................... 1,232
+25,918 Viacom, Inc., Class B............................. 1,202
----------
3,144
----------
FOOD SERVICE & LODGING (2.4%)
+33,650 Boston Chicken, Inc............................... 814
47,000 Cracker Barrel Old Country Store, Inc............. 970
49,800 Hospitality Franchise Systems, Inc................ 1,724
----------
3,508
----------
GAMING & LODGING (0.5%)
21,450 National Gaming Corp.............................. 185
38,400 Trump Hotels & Casino Resort...................... 514
----------
699
----------
HOUSEHOLD FURNISHINGS & APPLIANCES (0.9%)
30,300 Duracell International, Inc....................... 1,310
----------
LEISURE RELATED (2.2%)
30,200 Eastman Kodak Co.................................. 1,831
18,300 Polaroid Corp..................................... 746
35,800 Toy Biz, Inc...................................... 649
----------
3,226
----------
PUBLISHING (1.9%)
33,800 Gannett Co., Inc.................................. 1,834
22,600 Time Warner, Inc.................................. 929
----------
2,763
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
RETAIL-GENERAL (3.9%)
+50,300 AutoZone, Inc..................................... $ 1,264
+42,300 General Nutrition Cos., Inc....................... 1,486
24,700 Harcourt General, Inc............................. 1,050
31,400 Home Depot, Inc................................... 1,276
19,600 Lowe's Cos., Inc.................................. 585
----------
5,661
----------
TOTAL CONSUMER-CYCLICAL..................................... 24,122
----------
CONSUMER-STAPLES (20.6%)
BEVERAGES & TOBACCO (11.6%)
50,000 Coca Cola Co...................................... 3,188
33,700 PepsiCo, Inc...................................... 1,538
154,400 Philip Morris Cos., Inc........................... 11,484
26,200 UST, Inc.......................................... 779
----------
16,989
----------
DRUGS (4.2%)
20,900 American Home Products Corp....................... 1,617
22,500 Merck & Co., Inc.................................. 1,103
21,150 Pfizer, Inc....................................... 1,954
32,600 Schering-Plough Corp.............................. 1,438
----------
6,112
----------
FOOD (2.4%)
25,600 Kellogg Co........................................ 1,827
33,200 Ralston Purina Group.............................. 1,693
----------
3,520
----------
HEALTH CARE SUPPLIES & SERVICES (2.0%)
42,500 Columbia/HCA Healthcare Corp...................... 1,838
26,100 United Healthcare Corp............................ 1,080
----------
2,918
----------
PERSONAL CARE PRODUCTS (0.4%)
+66,100 Playtex Products, Inc............................. 653
----------
TOTAL CONSUMER-STAPLES...................................... 30,192
----------
DIVERSIFIED (1.0%)
33,200 AlliedSignal, Inc................................. 1,477
----------
ENERGY (2.7%)
COAL, GAS, & OIL (2.7%)
10,700 Exxon Corp........................................ 755
14,300 Mobil Corp........................................ 1,373
14,900 Occidental Petroleum Corp......................... 341
12,800 Royal Dutch Petroleum Co.......................... 1,560
----------
TOTAL ENERGY................................................ 4,029
----------
FINANCE (18.6%)
BANKING (5.3%)
71,400 Ahmanson (H.F.) & Co.............................. 1,571
47,800 Citicorp.......................................... 2,767
23,800 Morgan (J.P.) & Co., Inc.......................... 1,669
9,600 Wells Fargo & Co.................................. 1,730
----------
7,737
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Equity Growth Portfolio
69
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
FINANCIAL SERVICES (9.6%)
15,700 Aetna Life & Casualty Co.......................... $ 987
81,100 American Express Co............................... 2,849
37,100 Countrywide Credit Industries, Inc................ 779
12,900 Dean Witter Discover & Co......................... 606
21,600 Federal Home Loan Mortgage Corp................... 1,485
55,600 Federal National Mortgage Association............. 5,247
30,200 Franklin Resources, Inc........................... 1,344
20,100 Travelers, Inc.................................... 879
----------
14,176
----------
INSURANCE (3.7%)
60,200 Ace, Ltd.......................................... 1,746
54,000 Exel Ltd.......................................... 2,808
32,200 PartnerRe Holdings, Ltd........................... 841
----------
5,395
----------
TOTAL FINANCE............................................... 27,308
----------
MATERIALS (4.0%)
CHEMICALS (1.6%)
31,600 Hercules, Inc..................................... 1,541
9,100 Monsanto Co....................................... 820
----------
2,361
----------
FOREST PRODUCTS & PAPER (2.4%)
35,700 Champion International Corp....................... 1,861
11,100 Mead Corp......................................... 659
+45,300 Stone Container Corp.............................. 963
----------
3,483
----------
TOTAL MATERIALS............................................. 5,844
----------
SERVICES (2.6%)
BUSINESS SERVICES (0.5%)
+33,800 Bell & Howell Holding Co.......................... 684
----------
PROFESSIONAL SERVICES (0.8%)
+28,700 CUC International, Inc............................ 1,205
----------
TRANSPORTATION (1.3%)
+10,800 AMR Corp.......................................... 806
18,400 Burlington Northern, Inc.......................... 1,166
----------
1,972
----------
TOTAL SERVICES.............................................. 3,861
----------
TECHNOLOGY (12.3%)
COMPUTERS (3.6%)
+21,950 Cabletron Systems, Inc............................ 1,169
21,100 Hewlett Packard................................... 1,572
26,500 International Business Machines Corp.............. 2,544
----------
5,285
----------
ELECTRONICS (5.1%)
+14,400 Applied Materials, Inc............................ 1,247
24,100 Intel Corp........................................ 1,526
+26,000 LSI Logic Corp.................................... 1,017
22,700 Motorola, Inc..................................... 1,524
9,600 Texas Instruments, Inc............................ 1,285
21,800 Watkins-Johnson Co................................ 970
----------
7,569
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
SOFTWARE SERVICES (1.1%)
+17,200 Microsoft Corp.................................... $ 1,554
----------
TELECOMMUNICATIONS (2.5%)
+42,200 AirTouch Communications........................... 1,203
47,500 American Telephone & Telegraph Corp............... 2,523
----------
3,726
----------
TOTAL TECHNOLOGY............................................ 18,134
----------
TOTAL COMMON STOCKS (Cost $114,109)........................... 132,560
----------
<CAPTION>
NO. OF
RIGHTS
- ----------
<C> <S> <C>
RIGHTS (0.0%)
CONSUMER-CYCLICAL (0.0%)
BROADCAST RADIO & TELEVISION (0.0%)
+38,800 Viacom, Inc., expiring 7/07/95 (Cost $168)........ 58
----------
<CAPTION>
SHARES
- ----------
<C> <S> <C>
PURCHASED OPTION (0.0%)
CONSUMER STAPLES (0.0%)
BEVERAGES & TOBACCO (0.0%)
75,000 Philip Morris Cos., Inc., expiring 7/22/95, strike
price $70 (Cost $30)............................ 14
----------
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (8.2%)
REPURCHASE AGREEMENT (8.2%)
$ 11,941 Goldman Sachs, 6.05%, dated 6/30/95, due 7/03/95,
to be repurchased at $11,947, collateralized by
$7,690 United States Treasury Bonds 13.875%, due
5/15/11, valued at $12,260 (Cost $11,941)....... 11,941
----------
TOTAL INVESTMENTS (98.5%) (Cost $126,248)..................... 144,573
----------
OTHER ASSETS (2.4%)
Cash............................................ $ 1
Receivable for Investments Sold................. 3,336
Dividends Receivable............................ 248
Interest Receivable............................. 2
Other........................................... 5 3,592
----------
LIABILITIES (-0.9%)
Payable for Investments Purchased............... (1,108)
Investment Advisory Fees Payable................ (160)
Payable for Portfolio Shares Redeemed........... (72)
Administrative Fees Payable..................... (18)
Custodian Fees Payable.......................... (6)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (27) (1,392)
---------- ----------
NET ASSETS (100%)............................................. $ 146,773
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 10,362,996 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $14.16
----------
----------
</TABLE>
- ------------------------------------------------------------
+ -- Non-income producing securities
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Equity Growth Portfolio
70
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (95.6%)
AEROSPACE (3.6%)
35,000 AAR Corp.......................................... $ 626
18,000 Thiokol Corp...................................... 545
85,300 United Industrial Corp............................ 608
----------
1,779
----------
BANKING (10.0%)
21,450 First Security Corp. (Delaware)................... 601
25,000 Green Point Financial Corp........................ 591
18,600 Onbancorp, Inc.................................... 528
33,000 Peoples Heritage Financial Group, Inc............. 495
16,000 Standard Federal Bank............................. 538
26,610 Summit Bancorp., Inc.............................. 565
12,400 Union Bank of San Francisco....................... 524
20,000 Union Planters Corp............................... 535
21,000 Washington Mutual, Inc............................ 492
----------
4,869
----------
BUILDING (3.1%)
12,300 Ameron, Inc. (Delaware)........................... 446
38,800 Gilbert Associates, Inc., Class A................. 504
24,500 Pratt & Lambert, Inc.............................. 573
----------
1,523
----------
CAPITAL GOODS (3.1%)
21,403 Binks Manufacturing Co............................ 543
30,200 Cascade Corp...................................... 483
21,600 Starret (L.S.) Co., Class A....................... 489
----------
1,515
----------
CHEMICALS (4.0%)
30,720 Aceto Corp........................................ 453
23,400 Dexter Corp....................................... 553
22,000 Learonal, Inc..................................... 465
29,800 Quaker Chemical Corp.............................. 484
----------
1,955
----------
COMMUNICATIONS (1.1%)
28,200 Comsat Corp....................................... 553
----------
CONSUMER-DURABLES (2.8%)
21,200 Arvin Industries, Inc............................. 474
30,298 Knape & Vogt Manufacturing Co..................... 454
31,300 Oneida Ltd........................................ 462
----------
1,390
----------
CONSUMER-RETAIL (6.3%)
28,800 CPI Corp.......................................... 551
+5,360 Dave & Busters, Inc............................... 107
41,900 Deb Shops, Inc.................................... 136
26,800 Edison Brothers Stores, Inc....................... 322
21,700 Guilford Mills, Inc............................... 529
44,000 Ross Stores, Inc.................................. 517
13,100 Springs Industries, Inc., Class A................. 488
40,600 Venture Stores, Inc............................... 401
----------
3,051
----------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
CONSUMER-STAPLES (4.3%)
14,802 Block Drug Co., Inc., Class A..................... $ 500
30,400 Coors (Adolph), Inc., Class B..................... 498
25,900 International Multifoods Corp..................... 583
31,400 Nash Finch Co..................................... 510
----------
2,091
----------
ENERGY (2.3%)
21,000 Diamond Shamrock, Inc............................. 541
22,900 Ultramar Corp..................................... 578
----------
1,119
----------
FINANCIAL-DIVERSIFIED (3.1%)
14,900 Finova Group, Inc................................. 521
10,100 GATX Corp......................................... 476
33,000 Manufactured Home Communities, Inc................ 507
----------
1,504
----------
HEALTH CARE (4.2%)
18,500 Beckman Instruments, Inc.......................... 516
31,500 Bindley Western Industries........................ 500
73,700 Kinetic Concepts, Inc............................. 525
26,000 United Wisconsin Services, Inc.................... 520
----------
2,061
----------
INDUSTRIAL (6.1%)
17,200 American Filtrona Corp............................ 507
11,400 Barnes Group, Inc................................. 459
40,700 GenCorp, Inc...................................... 438
44,500 Kaman Corp., Class A.............................. 567
34,900 Zero Corp. (Delaware)............................. 523
24,300 Zurn Industries, Inc.............................. 486
----------
2,980
----------
INSURANCE (5.5%)
16,200 Argonaut Group, Inc............................... 514
30,000 Enhance Financial Services Group, Inc............. 581
19,500 Provident Life & Accident Co. of America, Class
B............................................... 453
17,700 Selective Insurance Group, Inc.................... 584
13,300 USLife Corp....................................... 535
----------
2,667
----------
METALS (2.4%)
8,700 Carpenter Technology Corp......................... 593
14,400 Cleveland-Cliffs Iron Co.......................... 554
----------
1,147
----------
PAPER & PACKAGING (3.0%)
15,500 Ball Corp......................................... 541
11,400 Potlatch Corp..................................... 476
25,500 Sealright Co., Inc................................ 427
----------
1,444
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144 - 152)
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
73
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
SERVICES (11.4%)
23,200 ABM Industries, Inc............................... $ 536
21,200 Angelica Corp..................................... 530
27,000 Bowne & Co........................................ 462
30,700 Cross (A.T.) Co., Class A......................... 457
43,000 Handleman Co...................................... 414
52,000 Jackpot Enterprises, Inc.......................... 527
18,400 National Service Industries, Inc.................. 531
25,900 New England Business Services, Inc................ 512
55,400 Piccadilly Cafeterias, Inc........................ 485
35,500 Russ Berrie & Co., Inc............................ 493
16,100 Wallace Computer Services, Inc.................... 618
----------
5,565
----------
TECHNOLOGY (10.2%)
28,000 Augat, Inc........................................ 574
11,500 Avnet, Inc........................................ 556
48,000 Core Industries, Inc.............................. 516
21,800 Cubic Corp........................................ 490
33,700 Gerber Scientific, Inc............................ 564
19,900 Joslyn Corp....................................... 522
20,900 MTS Systems Corp.................................. 564
30,500 National Computer Systems, Inc.................... 633
27,000 Scitex Corp. Ltd.................................. 581
----------
5,000
----------
TRANSPORTATION (2.1%)
22,800 Overseas Shipholding Group, Inc................... 473
24,600 SkyWest, Inc...................................... 557
----------
1,030
----------
UTILITIES (7.0%)
18,700 Central Hudson Gas & Electric..................... 505
13,300 Commonwealth Energy Systems Cos................... 502
15,000 Eastern Enterprises............................... 448
25,900 Oneok, Inc........................................ 554
13,700 Orange & Rockland Utilities, Inc.................. 462
13,500 SJW Corp.......................................... 484
28,500 Washington Water Power Co......................... 456
----------
3,411
----------
TOTAL COMMON STOCKS (Cost $43,469)............................ 46,654
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
SHORT-TERM INVESTMENT (4.4%)
REPURCHASE AGREEMENT (4.4%)
$ 2,168 U.S. Trust, 5.90%, dated 6/30/95, due 7/03/95, to
be repurchased at $2,169, collateralized by
$2,250 United States Treasury Bills, due
7/27/95, valued at $2,241 (Cost $2,168)......... $ 2,168
----------
TOTAL INVESTMENTS (100.0%) (Cost $45,637)..................... 48,822
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.2%)
Cash............................................ $ 1
Dividends Receivable............................ 88
Other........................................... 3 92
----------
LIABILITIES (-0.2%)
Investment Advisory Fees Payable................ (63)
Administrative Fees Payable..................... (7)
Custodian Fees Payable.......................... (5)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (26) (102)
---------- ----------
NET ASSETS (100%)............................................. $ 48,812
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 4,239,197 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $11.51
----------
----------
</TABLE>
- ------------------------------------------------------------
+ -- Non-income producing security
The accompanying notes are an integral part of the financial statements. (Pages
144 - 152)
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
74
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (97.1%)
APARTMENT (28.4%)
44,200 Associated Estates Realty Corp.................... $ 934
45,700 Avalon Properties, Inc............................ 908
82,600 Bay Apartment Communities, Inc.................... 1,611
66,500 Equity Residential Properties Trust............... 1,854
56,600 Evans Withycombe Residential, Inc................. 1,153
53,100 Home Properties of New York, Inc.................. 936
63,400 Irvine Apartment Communities, Inc................. 1,094
60,000 Walden Residential Properties, Inc................ 1,102
76,000 Wellsford Residential Property Trust.............. 1,729
----------
11,321
----------
LAND (1.1%)
+66,500 Atlantic Gulf Communities Corp.................... 432
----------
LODGING/LEISURE (4.7%)
+98,600 Host Marriot Corp................................. 1,048
36,000 Starwood Lodging Trust............................ 846
----------
1,894
----------
MANUFACTURED HOME (6.6%)
20,000 Chateau Properties, Inc........................... 418
60,300 ROC Communities, Inc.............................. 1,334
36,200 Sun Communities, Inc.............................. 905
----------
2,657
----------
OFFICE AND INDUSTRIAL (25.9%)
INDUSTRIAL (0.4%)
7,500 First Industrial Realty Trust, Inc................ 154
----------
OFFICE (9.9%)
64,400 Beacon Properties Corp. .......................... 1,280
44,400 Cali Realty Corp.................................. 860
73,100 Carr Realty Corp.................................. 1,261
+64,900 Koger Equity, Inc................................. 568
----------
3,969
----------
OFFICE AND INDUSTRIAL (15.6%)
75,700 Bedford Property Investors, Inc. ................. 435
60,100 Duke Realty Investments, Inc. .................... 1,698
71,400 Liberty Property Trust ........................... 1,401
31,500 Reckson Associates Realty Corp. .................. 764
86,400 Spieker Properties, Inc. ......................... 1,933
----------
6,231
----------
TOTAL OFFICE AND INDUSTRIAL................................. 10,354
----------
SELF STORAGE (4.2%)
102,000 Storage Equities, Inc............................. 1,670
----------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
SHOPPING CENTER (26.2%)
FACTORY OUTLET CENTER (1.4%)
20,800 Chelsea GCA Realty, Inc........................... $ 561
----------
REGIONAL MALL (17.0%)
50,000 CBL & Associates Properties, Inc.................. 994
99,700 Crown American Realty Trust....................... 1,259
93,400 DeBartolo Realty Corp............................. 1,366
76,200 Glimcher Realty Trust............................. 1,581
79,500 Macerich Co....................................... 1,560
----------
6,760
----------
STRIP CENTER (7.8%)
98,200 Alexander Haagen Properties, Inc.................. 1,129
29,800 Developers Diversified Realty Corp................ 857
37,900 Price REIT, Inc., Series B........................ 1,132
----------
3,118
----------
TOTAL SHOPPING CENTER....................................... 10,439
----------
TOTAL COMMON STOCKS (Cost $37,467)............................ 38,767
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENT (4.4%)
REPURCHASE AGREEMENT (4.4%)
$ 1,749 U.S. Trust, 5.90%, dated 6/30/95, due 7/03/95, to
be repurchased at $1,750, collateralized by
$1,820 United States Treasury Bills, due
7/27/95, valued at $1,813 (Cost $1,749)......... 1,749
----------
TOTAL INVESTMENTS (101.5%) (Cost $39,216)..................... 40,516
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (4.1%)
Receivable for Portfolio Shares Sold............ $ 1,000
Receivable for Investments Sold................. 347
Dividends Receivable............................ 285
Other........................................... 1 1,633
----------
LIABILITIES (-5.6%)
Payable for Investments Purchased............... (2,185)
Investment Advisory Fees Payable................ (11)
Administrative Fees Payable..................... (4)
Custodian Fees Payable.......................... (3)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (25) (2,229)
---------- ----------
NET ASSETS (100%)............................................. $ 39,920
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 3,684,831 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $10.83
----------
----------
- ------------------------------------------------------------
+ -- Non-income producing securities
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
78
<PAGE>
- --------------------------------------------------------------------------------
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
COMMON STOCKS (96.8%)
AEROSPACE (2.4%)
33,100 United Technologies Corp.......................... $ 2,586
----------
BANKING (9.5%)
35,450 BankAmerica Corp.................................. 1,866
32,700 Bankers Trust (New York) Corp..................... 2,027
43,100 Chemical Banking Corp............................. 2,037
61,900 First of America Bank Corp........................ 2,298
48,150 Mellon Bank Corp.................................. 2,004
----------
10,232
----------
CAPITAL GOODS (1.9%)
24,100 Deere & Co........................................ 2,064
----------
CHEMICALS (3.9%)
34,675 Eastman Chemical Co............................... 2,063
24,400 Monsanto Co....................................... 2,199
----------
4,262
----------
COMMUNICATIONS (7.3%)
50,200 NYNEX Corp........................................ 2,020
44,100 SBC Communications, Inc........................... 2,100
68,900 Sprint Corp....................................... 2,317
35,600 U.S. West, Inc.................................... 1,482
----------
7,919
----------
CONSUMER-DURABLES (3.8%)
72,500 Ford Motor Co..................................... 2,157
41,400 General Motors Corp............................... 1,941
----------
4,098
----------
CONSUMER-RETAIL (5.9%)
157,200 Kmart Corp........................................ 2,299
33,500 V.F. Corp......................................... 1,801
153,400 Woolworth Corp.................................... 2,320
----------
6,420
----------
CONSUMER-SERVICE & GROWTH (6.1%)
72,600 Deluxe Corp....................................... 2,405
33,500 Eastman Kodak Co.................................. 2,031
99,700 Ogden Corp........................................ 2,181
----------
6,617
----------
CONSUMER-STAPLES (8.6%)
53,400 American Brands, Inc.............................. 2,123
36,800 Anheuser Busch Cos., Inc.......................... 2,093
16,500 CPC International, Inc............................ 1,019
93,600 Fleming Cos., Inc................................. 2,480
36,900 Heinz (H.J.) Co................................... 1,637
----------
9,352
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------
ENERGY (6.7%)
65,300 Ashland Oil, Inc.................................. $ 2,293
15,550 Mobil Corp........................................ 1,493
12,150 Royal Dutch Petroleum Co.......................... 1,481
30,750 Texaco, Inc....................................... 2,018
----------
7,285
----------
FINANCIAL-DIVERSIFIED (2.1%)
47,450 Student Loan Marketing Association................ 2,224
----------
HEALTH CARE (8.4%)
58,000 Bausch & Lomb, Inc................................ 2,407
58,600 Baxter International, Inc......................... 2,132
31,500 Bristol-Myers Squibb Co........................... 2,146
63,400 Upjohn Co......................................... 2,401
----------
9,086
----------
INDUSTRIAL (4.1%)
120,900 Hanson plc ADR.................................... 2,131
47,700 Rockwell International Corp....................... 2,182
5,565 U.S. Industries, Inc.............................. 76
----------
4,389
----------
INSURANCE (5.8%)
64,100 American General Corp............................. 2,163
55,700 Aon Corp.......................................... 2,075
41,900 St. Paul Cos., Inc................................ 2,064
----------
6,302
----------
METALS (2.5%)
45,300 Phelps Dodge Corp................................. 2,673
----------
TECHNOLOGY (4.2%)
48,500 Apple Computer, Inc............................... 2,252
43,200 Harris Corp....................................... 2,230
----------
4,482
----------
TRANSPORTATION (4.1%)
34,600 Burlington Northern, Inc.......................... 2,193
92,500 Ryder System, Inc................................. 2,208
----------
4,401
----------
UTILITIES (9.5%)
84,500 General Public Utilities Corp..................... 2,514
76,600 Northern Indiana Public Service Co................ 2,604
109,800 Pinnacle West Capital Corp........................ 2,690
70,400 Texas Utilities Co................................ 2,420
----------
10,228
----------
TOTAL COMMON STOCKS (Cost $95,661)............................ 104,620
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Value Equity Portfolio
81
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
SHORT-TERM INVESTMENT (7.8%)
REPURCHASE AGREEMENT (7.8%)
$ 8,386 U.S. Trust, 5.90%, dated 6/30/95, due 7/03/95, to
be repurchased at $8,390, collateralized by
$8,685 United States Treasury Bills, due
7/27/95, valued at $8,651 (Cost $8,386)......... $ 8,386
----------
TOTAL INVESTMENTS (104.6%) (Cost $104,047).................... 113,006
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.6%)
Cash............................................ $ 1
Receivable for Investments Sold................. 407
Dividends Receivable............................ 267
Interest Receivable............................. 1
Other........................................... 5 681
----------
LIABILITIES (-5.2%)
Payable for Investments Purchased............... (5,448)
Investment Advisory Fees Payable................ (90)
Payable for Portfolio Shares Redeemed........... (17)
Administrative Fees Payable..................... (13)
Custodian Fees Payable.......................... (5)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (33) (5,607)
---------- ----------
NET ASSETS (100%)............................................. $ 108,080
----------
----------
</TABLE>
<TABLE>
<C> <S> <C>
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 8,274,269 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $13.06
</TABLE>
- ------------------------------------------------------------
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Value Equity Portfolio
82
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (48.3%)
AEROSPACE (1.2%)
3,300 United Technologies Corp.......................... $ 258
----------
BANKING (4.8%)
3,700 BankAmerica Corp.................................. 195
3,400 Bankers Trust (New York) Corp..................... 211
4,300 Chemical Banking Corp............................. 203
6,100 First of America Bank Corp........................ 226
4,700 Mellon Bank Corp.................................. 196
----------
1,031
----------
CAPITAL GOODS (0.9%)
2,300 Deere & Co........................................ 197
----------
CHEMICALS (1.9%)
3,425 Eastman Chemical Co............................... 204
2,300 Monsanto Co....................................... 207
----------
411
----------
COMMUNICATIONS (4.2%)
5,500 NYNEX Corp........................................ 221
5,000 SBC Communications, Inc........................... 238
7,200 Sprint Corp....................................... 242
4,700 U.S. West, Inc.................................... 196
----------
897
----------
CONSUMER -- DURABLES (2.0%)
7,300 Ford Motor Co..................................... 217
4,300 General Motors Corp............................... 202
----------
419
----------
CONSUMER -- RETAIL (3.1%)
17,100 Kmart Corp........................................ 250
3,200 V.F. Corp......................................... 172
15,300 Woolworth Corp.................................... 231
----------
653
----------
CONSUMER -- SERVICE & GROWTH (3.1%)
7,100 Deluxe Corp....................................... 235
3,400 Eastman Kodak Co.................................. 206
9,600 Ogden Corp........................................ 210
----------
651
----------
CONSUMER -- STAPLES (4.3%)
5,500 American Brands, Inc.............................. 219
3,500 Anheuser Busch Cos., Inc.......................... 199
1,700 CPC International, Inc............................ 105
9,400 Fleming Cos., Inc................................. 249
3,400 Heinz (H.J.) Co................................... 151
----------
923
----------
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------
<C> <S> <C>
ENERGY (3.3%)
6,400 Ashland, Inc...................................... $ 225
1,350 Mobil Corp........................................ 130
1,250 Royal Dutch Petroleum Co.......................... 152
3,000 Texaco, Inc....................................... 197
----------
704
----------
FINANCIAL -- DIVERSIFIED (1.1%)
5,100 Student Loan Marketing Association................ 239
----------
HEALTH CARE (3.7%)
5,800 Bausch & Lomb, Inc................................ 241
5,100 Baxter International, Inc......................... 185
2,200 Bristol-Myers Squibb Co........................... 150
5,300 Upjohn Co......................................... 201
----------
777
----------
INDUSTRIAL (2.0%)
12,400 Hanson plc ADR.................................... 218
4,400 Rockwell International Corp....................... 201
565 U.S. Industries, Inc.............................. 8
----------
427
----------
INSURANCE (2.7%)
5,900 American General Corp............................. 199
5,300 Aon Corp.......................................... 198
3,800 St. Paul Cos., Inc................................ 187
----------
584
----------
METALS (1.2%)
4,300 Phelps Dodge Corp................................. 254
----------
TECHNOLOGY (2.1%)
4,900 Apple Computer, Inc............................... 228
4,200 Harris Corp....................................... 217
----------
445
----------
TRANSPORTATION (2.0%)
3,400 Burlington Northern, Inc.......................... 215
9,200 Ryder System, Inc................................. 220
----------
435
----------
UTILITIES (4.7%)
7,700 General Public Utilities Corp..................... 229
7,500 Northern Indiana Public Service Co................ 255
11,100 Pinnacle West Capital Corp........................ 272
7,050 Texas Utilities Co................................ 242
----------
998
----------
TOTAL COMMON STOCKS (Cost $8,984)............................. 10,303
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Balanced Portfolio
85
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
FIXED INCOME SECURITIES (46.5%)
US TREASURY NOTES (46.5%)
$ 4,875 8.25%, 7/15/98.................................... $ 5,187
4,803 5.50%, 4/15/00.................................... 4,710
----------
TOTAL FIXED INCOME SECURITIES (Cost $9,840)................... 9,897
----------
SHORT-TERM INVESTMENT (4.5%)
REPURCHASE AGREEMENT (4.5%)
968 U.S. Trust, 5.90%, dated 6/30/95, due 7/03/95, to
be repurchased at $968, collateralized by $1,010
United States Treasury Bills, due 7/27/95,
valued at $1,006 (Cost $968).................... 968
----------
TOTAL INVESTMENTS (99.3%) (Cost $19,792)...................... 21,168
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.4%)
Interest Receivable............................. $ 241
Dividends Receivable............................ 28
Receivable for Investments Sold................. 27
Receivable from Investment Adviser.............. 1
Other........................................... 1 298
-----
LIABILITIES (-0.7%)
Payable for Investments Purchased............... (104)
Payable for Portfolio Shares Redeemed........... (20)
Custodian Fees Payable.......................... (3)
Administrative Fees Payable..................... (3)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (22) (153)
----- ----------
NET ASSETS (100%)............................................. $ 21,313
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 2,189,455 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $9.73
----------
----------
- ------------------------------------------------------------
ADR -- American Depositary Receipt
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Balanced Portfolio
86
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
DEBT INSTRUMENTS (89.2%)
ALGERIA (1.3%)
LOAN AGREEMENTS (1.3%)
$ 5,788 Algeria Refinanced Loan Agreements, Tranche A,
(Floating Rate), 8.313%, 3/04/00................ $ 2,315
----------
ARGENTINA (6.2%)
BONDS (6.2%)
$ 13,000 Republic of Argentina Discount Bonds, (Floating
Rate), 7.313%, 3/31/23.......................... 7,508
5,295 Republic of Argentina, Series L, "Euro" (Floating
Rate), 7.313%, 3/31/05.......................... 3,263
500 Republic of Argentina, Series L, (Floating Rate),
7.313%, 3/31/05................................. 308
----------
11,079
----------
BRAZIL (21.5%)
BONDS (21.5%)
$ 1,600 Federative Republic of Brazil Debt Conversion
Bonds, Series L, (Floating Rate), 7.313%,
4/15/12......................................... 832
7,750 Federative Republic of Brazil EI Bonds, (Floating
Rate), 7.25%, 4/15/06........................... 4,640
12,200 Federative Republic of Brazil New Money Bonds,
Series L, (Floating Rate), 7.313%, 4/15/09...... 6,573
11,000 Federative Republic of Brazil Par Bond, Series
YL3, 4.00%, 4/15/24............................. 4,909
40,170 Federative Republic of Brazil, Series C,
"Euro" (Floating Rate), 4.00%, 4/15/14.......... 19,834
3,615 Federative Republic of Brazil, Series C, (Floating
Rate), 4.00%, 4/15/14........................... 1,785
----------
38,573
----------
BULGARIA (5.5%)
BONDS (5.5%)
$ 491 Bulgaria Discount, Series A, "Euro" (Floating
Rate), 7.563%, 7/28/24.......................... 245
762 Bulgaria Discount, Series B, (Floating Rate),
8.063%, 7/28/24................................. 380
7,750 Bulgaria Front Loaded Interest Reduction Bond,
Series A, (Floating Rate), 2.00%, 7/28/12....... 1,996
14,000 Bulgaria Interest Arrears Bonds, "Euro", (Floating
Rate), 7.563%, 7/28/11.......................... 5,915
2,983 Bulgaria Interest Arrears Bonds, (Floating Rate),
7.563%, 7/28/11................................. 1,260
----------
9,796
----------
ECUADOR (6.6%)
BONDS (6.6%)
$ 12,000 Republic of Ecuador Discount Bonds,
"Euro" (Floating Rate), 7.25%, 2/28/25.......... 5,970
181 Republic of Ecuador Discount Bonds, (Floating
Rate), 7.25%, 2/28/25........................... 90
824 Republic of Ecuador IE Bonds, (Floating Rate),
6.75%, 12/21/04................................. 486
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
$ 10,000 Republic of Ecuador Par Fund "Euro", (Floating
Rate), 3.00%, 2/28/25........................... $ 3,250
6,407 Republic of Ecuador PDI Bonds, (Floating Rate),
7.25%, 2/27/15.................................. 2,130
----------
11,926
----------
MEXICO (17.3%)
LOAN AGREEMENTS (2.0%)
$ 5,000 United Mexican States Old New Money Loans,
(Floating Rate), 7.263%, 3/20/05................ 3,509
----------
BILLS (2.6%)
MP 13,125 Mexican Cetes, Zero Coupon, 8/24/95............... 1,973
5,513 Mexican Cetes, Zero Coupon, 8/31/95............... 823
6,426 Mexican Cetes, Zero Coupon, 9/07/95............... 951
7,298 Mexican Cetes, Zero Coupon, 2/22/96............... 915
----------
4,662
----------
BONDS (12.7%)
$ 10,000 Banco Nacional de Comercio 7.25%, 2/02/04......... 7,200
3,000 CFE (Petacalco Topolo) 8.125%, 12/15/03........... 2,130
5,000 Mexican Discount Bond Series A, (Floating Rate),
7.219%, 12/31/19 (Value Recovery Rights
Attached)....................................... 3,569
14,700 Petro Mexicanos, 8.625%, 12/01/23................. 9,978
----------
22,877
----------
31,048
----------
MOROCCO (2.6%)
LOAN AGREEMENTS (2.6%)
$ #8,000 Morocco Restructuring and Consolidating Agreement,
Tranche A, (Floating Rate), 7.375%, 1/01/09
(Participation: Chase Manhattan Bank, JP Morgan,
Lehman Brothers, Goldman Sachs, Salomon
Brothers)....................................... 4,710
----------
NIGERIA (6.6%)
BONDS (6.6%)
$ 24,500 Central Bank of Nigeria Par Bonds, (Floating
Rate), 6.25%, 11/15/20 (Warrants Attached)...... 10,841
2,750 Nigeria Promissory Note 4.207%, 1/05/10........... 935
+++250 Nigeria Promissory Note 4.207%, 1/05/10........... 85
----------
11,861
----------
PANAMA (7.1%)
LOAN AGREEMENTS (5.4%)
$ ++16,013 Republic of Panama Refinanced Loan Agreement,
(Floating Rate)................................. 8,166
d++2,800 Republic of Panama Unstructured Loans (Floating
Rate)........................................... 1,428
----------
9,594
----------
BONDS (1.7%)
4,000 Republic of Panama, (Floating Rate) 7.25%,
5/10/02......................................... 3,080
----------
12,674
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
89
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------
PERU (1.6%)
LOAN AGREEMENTS (1.6%)
$ ++5,000 Republic of Peru, Non-Citibank Agreement (Floating
Rate)........................................... $ 2,900
----------
POLAND (0.9%)
BONDS (0.9%)
$ 2,644 Republic of Poland Interest Arrears PDI Bonds,
3.25%, 10/27/14................................. 1,583
----------
RUSSIA (11.8%)
LOAN AGREEMENTS (11.8%)
$ ++65,150 Bank for Foreign Economic Affairs, (Floating
Rate)........................................... 21,175
----------
VENEZUELA (0.2%)
BONDS (0.2%)
$ 841 Republic of Venezuela, Discount Bonds, Series A,
(Floating Rate), 7.188%, 3/31/20 (Oil Warrants
Attached)....................................... 439
56 Republic of Venezuela, Discount Bond, Series B,
(Floating Rate), 6.938%, 3/31/20 (Oil Warrants
Attached)....................................... 29
----------
468
----------
TOTAL DEBT INSTRUMENTS (Cost $156,101)........................ 160,108
----------
NO. OF
WARRANTS
- ----------
WARRANTS (1.3%)
BRAZIL (1.3%)
+3,000 Minas Gerais 8.25%, expiring 2/10/00 (Cost
$2,115)......................................... 2,340
----------
FACE
AMOUNT
(000)
- ----------
SHORT-TERM INVESTMENT (2.8%)
REPURCHASE AGREEMENT (2.8%)
$ 4,997 U.S. Trust, 5.90%, dated 6/30/95, due 7/03/95, to
be repurchased at $4,999, collateralized by
$5,180 United States Treasury Bills, due
7/27/95, valued at $5,160 (Cost $4,997)......... 4,997
----------
TOTAL INVESTMENTS (93.3%) (Cost $163,213)..................... 167,445
----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ------------------------------------------------------------
OTHER ASSETS (22.1%)
Cash............................................ $ 284
Receivable for Investments Sold................. 28,035
Receivable for Portfolio Shares Sold............ 7,362
Interest Receivable............................. 4,053
Other........................................... 7 $ 39,741
----------
LIABILITIES (-15.4%)
Payable for Investments Purchased............... (26,817)
Investment Advisory Fees Payable................ (467)
Custodian Fees Payable.......................... (145)
Written Options Outstanding, at Value (premiums (129)
received $87)..................................
Administrative Fees Payable..................... (24)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (60) (27,643)
---------- ----------
NET ASSETS (100%)............................................. $ 179,543
----------
----------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 19,902,357 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $9.02
----------
----------
</TABLE>
- ------------------------------------------------------------
+ -- Non-income producing security
++ -- Non-income producing securities -- in default
+++ -- Security is subject to delayed delivery -- See Note A-6
d -- Terms of loan agreement not final at June 30, 1995.
# -- Participation interests were acquired through the financial institutions
listed parenthetically. All other loan agreements are assignments. See Note
A-7
MP -- Mexican New Peso
Floating Rate Securities. Interest rate changes on these instruments are based
on changes in a designated base rate.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
WRITTEN CALL OPTIONS (NOTE A-9)
ARGENTINA
CALL OPTIONS
4,000 Argentina Floating Rate Bond, 7.313%, 3/31/05,
strike price $59, expiring 7/14/95 (Premiums
$87)............................................ $ 129
-----
-----
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
90
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
FIXED INCOME SECURITIES (99.4%)
US GOVERNMENT AND AGENCY OBLIGATIONS (60.4%)
US Treasury Bonds (2.6%)
$ 4,000 7.50%, 11/15/16................................... $ 4,355
----------
US Treasury Notes (19.1%)
17,000 8.25%, 7/15/98.................................... 18,089
5,000 6.25%, 5/31/00.................................... 5,053
8,000 7.25%, 8/15/04.................................... 8,549
----------
31,691
----------
Federal Home Loan Mortgage Corporation (11.7%)
17 13.00%, 9/01/10................................... 19
18,601 9.00%, 11/01/24 - 2/01/25......................... 19,386
----------
19,405
----------
Government National Mortgage Association (27.0%)
9 11.00%, 12/15/15.................................. 10
18 10.00%, 5/15/19................................... 19
8,074 6.00%, 2/15/24.................................... 7,549
7,457 8.00%, 3/15/24.................................... 7,634
20,022 7.00%, 5/15/24.................................... 19,703
9,690 7.50%, 1/20/25.................................... 9,927
----------
44,842
----------
TOTAL US GOVERNMENT AND AGENCY OBLIGATIONS.................. 100,293
----------
FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS (8.6%)
5,000 Hydro Quebec 8.05%, 7/07/24....................... 5,465
10,000 Republic of Italy 6.875%, 9/27/23................. 8,876
----------
TOTAL FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS............. 14,341
----------
CORPORATE BONDS AND NOTES (24.3%)
FINANCE (18.0%)
7,000 CCP Insurance 10.50%, 12/15/04.................... 7,399
7,500 Farmers Insurance 8.625%, 5/01/24................. 7,247
5,000 Ford Motor Credit Co. 5.625%, 3/03/97............. 4,947
5,000 General Motors Acceptance Corp. 7.375%, 6/22/00... 5,131
5,000 Goldman Sachs Group 7.80%, 7/15/02................ 5,181
----------
29,905
----------
METALS (3.2%)
5,000 USX Corp. 9.125%, 1/15/13......................... 5,301
----------
SERVICES (3.1%)
5,000 News America Holdings, Inc. 7.50%, 3/01/00........ 5,120
----------
TOTAL CORPORATE BONDS AND NOTES............................. 40,326
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
ASSET BACKED SECURITIES (6.1%)
$ 16 Case Equipment Loan Trust, 92-A 5.40%, 6/15/98.... $ 16
32 Federal Home Loan Mortgage Corp., REMIC 16-B
10.00%, 10/15/19................................ 33
22 Federal National Mortgage Association REMIC 92-59F
6.494%, 8/25/06................................. 22
100 Ford Credit Auto Loan Master Trust, 92-1A 6.875%,
1/15/99......................................... 101
15 General Motors Acceptance Corp. Trust, 92-DA
5.55%, 5/15/97.................................. 14
4,587 Resolution Trust Corp. 9.00%, 3/25/17............. 4,794
5,000 Standard Credit Card Trust 6.75%, 6/07/00......... 5,059
----------
TOTAL ASSET BACKED SECURITIES............................... 10,039
----------
TOTAL FIXED INCOME SECURITIES (Cost $157,764)................. 164,999
----------
SHORT-TERM INVESTMENT (0.9%)
REPURCHASE AGREEMENT (0.9%)
1,480 Goldman Sachs 6.05%, dated 6/30/95, due 7/03/95,
to be repurchased at $1,481, collateralized by
$960 United States Treasury Bonds, 12.50%, due
8/15/14, valued at $1,523 (Cost $1,480)......... 1,480
----------
TOTAL INVESTMENTS (100.3%) (Cost $159,244).................... 166,479
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.6%)
Interest Receivable............................. $ 2,637
Other........................................... 15 2,652
----------
LIABILITIES (-1.9%)
Payable to Custodian............................ (2,962)
Investment Advisory Fees Payable................ (81)
Administrative Fees Payable..................... (28)
Payable for Portfolio Shares Redeemed........... (8)
Custodian Fees Payable.......................... (6)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (27) (3,113)
---------- ----------
NET ASSETS (100%)............................................. $ 166,018
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 15,751,671 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $10.54
----------
----------
</TABLE>
- ------------------------------------------------------------
REMIC -- Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Fixed Income Portfolio
93
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
FIXED INCOME SECURITIES (96.6%)
AUSTRALIAN DOLLAR (2.8%)
GOVERNMENT BONDS (2.8%)
A$ 3,600 Government of Australia 9.00%, 9/15/04............ $ 2,532
--------
BRITISH POUND (6.2%)
GOVERNMENT BONDS (6.2%)
L 3,500 United Kingdom Treasury 8.00%, 12/07/00........... 5,520
--------
CANADIAN DOLLAR (3.2%)
EUROBONDS (3.2%)
C$ 1,500 British Columbia Province 7.75%, 6/16/03.......... 1,073
2,500 Export-Import Bank of Japan 7.75%, 10/08/02....... 1,769
--------
2,842
--------
DANISH KRONE (4.9%)
GOVERNMENT BONDS (4.9%)
DK 26,000 Kingdom of Denmark 7.00%, 12/15/04................ 4,339
--------
DEUTSCHE MARK (14.0%)
GOVERNMENT BONDS (14.0%)
DM 4,500 Deutschland Republic 6.50%, 7/15/03............... 3,152
2,000 Treuhandanstalt 6.25%, 7/29/99.................... 1,456
7,500 Treuhandanstalt 6.875%, 6/11/03................... 5,371
3,500 Treuhandanstalt 6.75%, 5/13/04.................... 2,481
--------
12,460
--------
FINNISH MARKKA (2.2%)
GOVERNMENT BONDS (2.2%)
FM 8,000 Finnish Government 9.50%, 3/15/04................. 1,953
--------
FRENCH FRANC (6.0%)
GOVERNMENT BONDS (6.0%)
FF 26,800 France O.A.T. 6.75%, 10/25/03..................... 5,265
--------
ITALIAN LIRA (4.5%)
GOVERNMENT BONDS (4.5%)
IL 7,395,000 Republic of Italy Treasury Bond 8.50%, 8/01/99.... 4,006
--------
JAPANESE YEN (8.4%)
EUROBONDS (8.4%)
Y 450,000 Republic of Austria 4.75%, 12/20/04............... 6,114
95,000 International Bank for Reconstruction &
Development 5.25%, 3/20/02...................... 1,307
--------
7,421
--------
NETHERLANDS GUILDER (5.1%)
GOVERNMENT BONDS (5.1%)
NG 3,500 Netherlands Government 7.25%, 10/01/04............ 2,300
3,500 Netherlands Government 7.00%, 6/15/05............. 2,253
--------
4,553
--------
NEW ZEALAND DOLLAR (1.7%)
GOVERNMENT BONDS (1.7%)
NZ$ 750 New Zealand Government 6.50%, 2/15/00............. 475
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
NZ$ 1,550 New Zealand Government 8.00%, 4/15/04............. $ 1,061
--------
1,536
--------
SPANISH PESETA (4.1%)
GOVERNMENT BONDS (4.1%)
SP 340,000 Spanish Government 10.25%, 11/30/98............... 2,705
120,000 Spanish Government 10.30%, 6/15/02................ 922
--------
3,627
--------
SWEDISH KRONA (2.0%)
GOVERNMENT BONDS (2.0%)
SK 13,000 Swedish Government 10.25%, 5/05/00................ 1,765
--------
UNITED STATES DOLLAR (31.5%)
EUROBONDS (2.6%)
$ 2,000 Republic of Italy 6.875%, 9/27/23................. 1,782
500 Statens Bostads 8.50%, 5/30/97.................... 519
--------
2,301
--------
US GOVERNMENT AND AGENCY OBLIGATIONS (27.7%)
US TREASURY BONDS
500 12.75%, 11/15/10.................................. 740
3,710 8.125%, 8/15/19................................... 4,328
US TREASURY NOTES
850 7.875%, 2/15/96................................... 861
1,600 7.625%, 4/30/96................................... 1,623
400 5.875%, 5/31/96................................... 400
1,900 6.875%, 2/28/97................................... 1,931
2,000 6.75%, 5/31/97.................................... 2,033
2,030 7.75%, 11/30/99................................... 2,166
350 7.50%, 11/15/01................................... 376
2,070 6.25%, 2/15/03.................................... 2,075
675 7.25%, 5/15/04.................................... 720
US TREASURY STRIPS
/\1,600 2/15/98, Principal Only........................... 1,375
FEDERAL HOME LOAN MORTGAGE CORPORATION
+++300 9.00%, 7/01/25.................................... 313
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
3,246 ARM Pool #8505 7.00%, 9/20/24..................... 3,307
1,556 ARM Pool #8585 7.50%, 1/20/25..................... 1,635
+++700 9.00%, 7/15/25.................................... 735
--------
24,618
--------
YANKEE BONDS (1.2%)
1,000 Hydro Quebec 8.05%, 7/07/24....................... 1,086
--------
28,005
--------
TOTAL FIXED INCOME SECURITIES (Cost $82,117)................... 85,824
--------
SHORT-TERM INVESTMENT (1.8%)
REPURCHASE AGREEMENT (1.8%)
$ 1,624 U.S. Trust, 5.90%, dated 6/30/95, due 7/03/95, to
be repurchased at $1,625, collateralized by
$1,690 United States Treasury Bills, due
7/27/95, valued at $1,683 (Cost $1,624)......... 1,624
--------
TOTAL INVESTMENTS (98.4%) (Cost $83,741)....................... 87,448
--------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
97
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ------------------------------------------------------------
OTHER ASSETS (4.3%)
Cash............................................ $ 195
Interest Receivable............................. 2,047
Receivable for Investments Sold................. 1,546
Other........................................... 9 $ 3,797
-----------
LIABILITIES (-2.7%)
Payable for Investments Purchased............... (2,098)
Net Unrealized Loss on Forward Foreign Currency
Contracts...................................... (192)
Investment Advisory Fees Payable................ (31)
Custodian Fees Payable.......................... (17)
Administrative Fees Payable..................... (13)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (27) (2,379)
----------- --------
NET ASSETS (100%).............................................. $ 88,866
--------
--------
</TABLE>
<TABLE>
<C> <S> <C>
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 7,971,281 outstanding $.001 par value shares
(authorized 500,000,000 shares).............................. $11.15
--------
--------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of forward foreign currency contracts open at June 30,
1995, the Portfolio is obligated to deliver or is to receive foreign
currency in exchange for US dollars or foreign currency as indicated
below:
</TABLE>
<TABLE>
<CAPTION>
CURRENCY NET
TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
- ---------- --------- ----------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
$ 1,944 $ 1,944 7/13/95 NG 3,054 $ 1,972 $ 28
NG 5,000 3,229 7/13/95 $ 3,195 3,195 (34)
NG 4,000 2,584 7/13/95 $ 2,495 2,495 (89)
DM 4,000 2,899 9/06/95 $ 2,803 2,803 (96)
DK 15,000 2,774 9/07/95 $ 2,721 2,721 (53)
A$ 3,000 2,123 9/20/95 NZ$ 3,274 2,175 52
--------- --------- -----
$ 15,553 $ 15,361 $ (192)
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
+++ -- Security is subject to delayed delivery -- See Note
A-6
/\ -- 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.
A$ -- Australian Dollar
DK -- Danish Krone
DM -- Deutsche Mark
NG -- Netherlands Guilder
NZ$ -- New Zealand Dollar
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FIXED INCOME SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -----------------------------------------------------------------
<S> <C> <C>
Energy................................. $ 1,086 1.2%
Finance................................ 3,595 4.1
Foreign Government and Agency
Obligations............................ 56,525 63.6
US Government and Agency Obligations... 24,618 27.7
--------- ---
$ 85,824 96.6%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
98
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES (84.2%)
AEROSPACE & DEFENSE (3.1%)
$ 500 Sabreliner Corp., Series A, 12.50%, 4/15/03....... $ 400
1,500 Tracor, Inc., 10.875%, 8/15/01.................... 1,539
----------
1,939
----------
AUTOMOTIVE (2.1%)
1,500 Venture Holdings, 9.75%, 4/01/04.................. 1,303
----------
BROADCAST-RADIO & TELEVISION (19.4%)
2,250 Ackerley Communications, Inc., Series B, 10.75%,
10/01/03........................................ 2,337
1,000 Cablevision Systems Corp., 9.875%, 2/15/13........ 1,063
1,250 Continental Cablevision, Inc., 9.50%, 8/01/13..... 1,289
1,600 Helicon Group, Series B, 9.00% to 11/01/96, 11.00%
to 11/01/03..................................... 1,466
400 Heritage Media, 11.00%, 10/01/02.................. 426
500 Katz Corp., 12.75%, 11/15/02...................... 524
3,000 Marcus Cable Co., 0.00% to 6/15/00, 14.25% to
12/15/05........................................ 1,598
850 Rogers Cablesystems, Inc., (Yankee Bond), 10.00%,
3/15/05......................................... 875
++14 SpectraVision, Inc., 11.65%, 12/01/02............. 1
2,750 Viacom International, 8.00%, 7/07/06.............. 2,678
----------
12,257
----------
BUILDING MATERIALS & COMPONENTS (3.3%)
2,000 Tarkett International, 9.00%, 3/01/02............. 1,953
158 Walter Industries, Series B, 12.19%, 3/15/00...... 159
----------
2,112
----------
CHEMICALS (3.7%)
1,000 Harris Chemical, 10.75%, 10/15/03................. 945
1,000 Plastic Specialties & Technologies, Inc., 11.25%,
12/01/03........................................ 911
500 Sherritt, Inc., 10.50%, 3/31/14................... 500
----------
2,356
----------
COAL, GAS & OIL (1.3%)
1,300 Clark R&M Holdings, Zero Coupon, 2/15/00.......... 813
----------
ELECTRONICS (1.4%)
400 ADT Operations, 9.25%, 8/01/03.................... 415
1,000 International Semi-Tech, (Yankee Bond), 0.00% to
8/15/00, 11.50% to 8/15/03...................... 500
----------
915
----------
ENTERTAINMENT & LEISURE (3.4%)
886 Kloster Cruise, 13.00%, 5/01/03................... 682
2,000 Six Flags Theme Park, Inc., 0.00% to 6/15/98,
12.25% to 6/15/05............................... 1,450
----------
2,132
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
ENVIRONMENTAL CONTROLS (0.7%)
$ 500 Envirotest Systems Corp., 9.125%, 3/15/01......... $ 415
----------
FINANCIAL SERVICES (5.5%)
1,191 GPA Equipment Trust, 9.125%, 12/02/96............. 1,112
550 GPA Investments, 6.40%, 11/19/98.................. 396
1,000 Terra Nova Holdings, 10.75%, 7/01/05.............. 1,008
1,189 Tiphook Finance Corp., 8.00%, 3/15/00............. 951
----------
3,467
----------
FOOD (2.8%)
750 Americold Corp. 1st Mortgage Bond, Series B,
11.50%, 3/01/05................................. 716
1,150 Pilgrim's Pride Corp., 10.875%, 8/01/03........... 1,081
----------
1,797
----------
FOREST PRODUCTS & PAPER (1.6%)
1,000 United Stationer Supply, 12.75%, 5/01/05.......... 1,016
----------
GAMING & LODGING (0.9%)
575 Louisiana Casino Cruises, 11.50%, 12/01/98........ 535
----------
HEALTH CARE SUPPLIES & SERVICES (0.8%)
625 Eyecare Centers of America, 12.00%, 10/01/03...... 513
----------
METALS (1.8%)
1,250 Algoma Steel, Inc., (Yankee Bond) 12.375%,
7/15/05......................................... 1,150
----------
MULTI-INDUSTRY (1.2%)
750 Day International Group, 11.125%, 6/01/05......... 754
----------
PACKAGING & CONTAINER (4.0%)
500 Owens-Illinois, Inc., 10.50%, 6/15/02............. 519
2,000 Owens-Illinois, Inc., 9.95%, 10/15/04............. 2,040
----------
2,559
----------
PROFESSIONAL SERVICES (1.6%)
1,000 Cabot Safety Corp., 12.50%, 7/15/05............... 1,005
----------
PUBLISHING (3.5%)
1,000 Marvel III Holdings Inc., Series B, 9.125%,
2/15/98......................................... 915
1,900 Marvel Parent Holdings, Zero Coupon, 4/15/98...... 1,335
----------
2,250
----------
RETAIL-GENERAL (2.6%)
2,175 Southland Corp., 5.00%, 12/15/03.................. 1,664
----------
TELECOMMUNICATIONS (8.0%)
3,000 Dial Call Communications, 0.00% to 4/15/99, 12.25%
to 4/15/04...................................... 1,560
450 Horizon Cellular Telephone, 0.00% to 10/01/97,
11.375% to 10/01/00............................. 345
750 Pronet, Inc., 11.875%, 6/15/05.................... 754
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
High Yield Portfolio
101
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS (CONT.)
$ 2,500 Telefonica de Argentina, (Yankee Bond), 11.875%,
11/01/04........................................ $ 2,431
----------
5,090
----------
TEXTILES & APPAREL (4.7%)
1,000 Polysindo Eka Perkasa, (Yankee Bond), 13.00%,
6/15/01......................................... 1,010
2,000 Westpoint Stevens, Inc., 9.375%, 12/15/05......... 1,935
----------
2,945
----------
TRANSPORTATION (0.5%)
319 America West Airlines, 6.00%, 3/31/97............. 300
----------
UTILITIES (6.3%)
650 AES Corp., 9.75%, 6/15/00......................... 665
1,478 Beaver Valley Funding Corp., (Lease Obligation
Bond), 9.00%, 6/01/17........................... 1,241
++474 Columbia Gas Systems, Inc., Employee Thrift Plan
Obligation, 9.875%, 11/30/01.................... 649
1,400 First PV Funding Corp., (Lease Obligation Bond),
10.15%, 1/15/16................................. 1,433
----------
3,988
----------
TOTAL CORPORATE BONDS AND NOTES (Cost $53,038)................ 53,275
----------
FOREIGN GOVERNMENT BONDS(3.2%)
BONDS (3.2%)
1,500 Republic of Argentina, Series L, (Floating Rate),
7.313%, 3/31/05................................. 921
2,500 Republic of Brazil YL4, (Floating Rate), 4.25%,
4/15/24......................................... 1,109
----------
TOTAL FOREIGN GOVERNMENT BONDS (Cost $1,985).................. 2,030
----------
<CAPTION>
SHARES
- ----------
<C> <S> <C>
COMMON STOCKS (0.8%)
BUILDING MATERIALS & COMPONENTS (0.7%)
30,331 Walter Industries, Inc............................ 417
----------
FINANCIAL SERVICES (0.0%)
1,268 WestFed Holdings, Inc., Class B................... --
----------
FOOD SERVICE & LODGING (0.1%)
1,300 Motels of America, Inc............................ 98
----------
GAMING & LODGING (0.0%)
500 Trump Taj Mahal, Class A.......................... 5
----------
MACHINERY (0.0%)
25 Bucyrus-Erie...................................... --
----------
TOTAL COMMON STOCKS (Cost $601)............................... 520
----------
PREFERRED STOCKS (0.0%)
FINANCIAL SERVICES (0.0%)
3,239 WestFed Holdings, Inc., Series A (Cost $57)....... --
----------
<CAPTION>
NO. OF VALUE
RIGHTS (000)
- ------------------------------------------------------------
<C> <S> <C>
RIGHTS (0.0%)
BROADCAST-RADIO & TELEVISION (0.0%)
+35,000 SpectraVision, Inc., expiring 10/08/97 (Cost
$133)........................................... $ 4
----------
<CAPTION>
NO. OF
WARRANTS
- ----------
<C> <S> <C>
WARRANTS (0.5%)
AEROSPACE & DEFENSE (0.0%)
+*500 Sabreliner Corp., expiring 4/15/03 (acquired
6/21/93, cost $10))............................. 5
----------
ELECTRICAL EQUIPMENT (0.3%)
+28,000 Protection One Alarm, Inc., expiring 4/01/03...... 168
----------
GAMING & LODGING (0.0%)
+1,250 Capital Gaming International, Inc., expiring
2/01/99......................................... --
+2,700 Casino Magic Corp., expiring 10/14/96............. --
+1,725 Louisiana Casino Cruises, expiring 12/01/98....... 26
----------
26
----------
HEALTH CARE SUPPLIES & SERVICES (0.0%)
+625 Eye Care Centers of America, expiring 10/01/03.... 3
----------
INSURANCE (0.0%)
+500 Horace Mann Educators Corp., expiring 8/15/99..... 7
----------
METALS (0.1%)
+5,000 Sheffield Steel Corp., expiring 11/01/01.......... 30
----------
PACKAGING & CONTAINER (0.0%)
+1,000 Crown Packaging Holdings, expiring 11/01/03....... 22
----------
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 $221).................................... 295
----------
<CAPTION>
NO. OF
UNITS
- ----------
<C> <S> <C>
UNITS (9.2%)
BROADCAST-RADIO & TELEVISION (3.1%)
2,000 People's Choice TV Corp., 0.00% to 6/01/00,
13.125% to 6/01/04.............................. 967
1,000 Pegasus Media Communications, 12.50%, 7/01/05..... 1,002
----------
1,969
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
High Yield Portfolio
102
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
UNITS (000)
- ------------------------------------------------------------
GAMING & LODGING (3.6%)
<C> <S> <C>
2,208 Maritime Group, 13.50%, 2/15/97................... $ 773
1,864 Trump Taj Mahal Funding Inc., PIK, 11.35%,
11/15/99........................................ 1,477
----------
2,250
----------
METALS (2.5%)
650 Gulf States Steel, 13.50%, 4/15/03................ 631
1,000 Sheffield Steel Corp., 12.00%, 11/01/01........... 980
----------
1,611
----------
TOTAL UNITS (Cost $7,936)..................................... 5,830
----------
TOTAL INVESTMENTS (97.9%) (Cost $63,971)...................... 61,954
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (8.0%)
Receivable for Investments Sold................. $ 3,993
Interest Receivable............................. 1,076
Receivable for Portfolio Shares Sold............ 1
Other........................................... 6 5,076
----------
LIABILITIES (-5.9%)
Payable for Investments Purchased............... (3,127)
Payable to Custodian............................ (524)
Investment Advisory Fees Payable................ (55)
Custodian Fees Payable.......................... (7)
Administrative Fees Payable..................... (9)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (26) (3,749)
---------- ----------
NET ASSETS (100%)............................................. $ 63,281
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 6,145,224 outstanding $.001 par value shares
(authorized 500,000,000 shares)............................. $10.30
----------
----------
</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 held at June 30, 1995 was $5 or
0.0% of net assets (Total Cost $10).
PIK -- Payment-In-Kind. Income may be received in additional
securities or cash at the discretion of the issuer.
</TABLE>
Floating Rate Security. The interest rate changes on these instruments are based
on changes in a designated base rate. The rates shown are those in effect on
June 30, 1995.
At June 30, 1995, approximately 97% 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
144-152)
- --------------------------------------------------------------------------------
High Yield Portfolio
103
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
TAX-EXEMPT INSTRUMENTS (99.2%)
DAILY VARIABLE RATE BONDS (11.2%)
$ 900 Hapeville, Georgia, Industrial Development
Authority, Series 85, 4.35%, 11/01/15........... $ 900
1,500 Jackson County, Mississippi, Port Facility,
Chevron Project, Series 93, 4.20%, 6/01/23...... 1,500
500 Lincoln County, Wyoming, Pollution Control
Revenue, Exxon Project, Series 84A,
4.25%, 11/01/14................................. 500
300 New York City, New York, Water Finance Authority,
Water and Sewer System Revenue, Series 94C,
4.25%, 6/15/22.................................. 300
1,000 Platte County, Wyoming, Pollution Control Revenue,
Series A, 4.35%, 7/01/14........................ 1,000
700 Valdez, Alaska, Marine Terminal Authority, Exxon,
Series 85, 4.20%, 10/01/25...................... 700
----------
TOTAL DAILY VARIABLE RATE BONDS............................... 4,900
----------
FIXED RATE INSTRUMENTS (88.0%)
1,000 Columbus, Ohio, General Obligation Bonds, 5.80%,
1/01/00......................................... 1,053
1,000 Connecticut State Special Obligation, Tax Revenue
Bonds, Transportation, 6.50%, 7/01/09,
Prerefunded 7/01/99 at 102...................... 1,090
1,000 De Kalb County, Georgia, General Obligation Bonds,
7.30%, 1/01/00,
Prerefunded 1/01/97 at 102...................... 1,066
1,000 De Kalb County, Georgia, Water & Sewer Revenue
Bonds 7.00%, 10/01/06........................... 1,068
1,000 Georgia State, General Obligation Bonds, Series E,
6.75%, 12/01/02................................. 1,129
500 Hawaii State, General Obligation Bonds, Series BS,
6.70%, 9/01/97.................................. 527
1,000 Hawaii State, General Obligation Bonds, Series CJ,
6.20%, 1/01/12.................................. 1,022
1,000 Howard County, Maryland, Consolidated Public
Improvement General Obligation Bonds, Series A,
7.20%, 8/01/03,
Prerefunded 8/01/96 at 102...................... 1,054
1,500 Intermountain Power Agency, Utah, Power Supply
Revenue Bonds, Series D, 8.38%, 7/01/12......... 1,636
1,000 Kentucky State Housing Corp. Revenue Bonds, Series
A, 6.00%, 7/01/10............................... 1,012
1,155 Maryland State Department of Transportation,
Construction Revenue Bonds, Second Issue, 6.80%,
11/01/05,
Prerefunded 11/01/99 at 102..................... 1,278
1,000 Massachusetts State, Consolidated Loan, Series A,
7.50%, 3/01/03,
Prerefunded 3/01/00 at 102...................... 1,133
500 Massachusetts State Consolidated Loan, Series A,
7.63%, 6/01/08,
Prerefunded 6/01/01 at 102...................... 582
1,625 Michigan State Housing Development Authority
Revenue Bonds, Series A, 6.75%, 12/01/14........ 1,698
1,500 Minnesota State General Obligation Bonds, 7.00%,
8/01/99,
Prerefunded 8/01/96 at 100...................... 1,550
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 1,400 Mississippi State General Obligation Bonds, 6.00%,
2/01/09......................................... $ 1,440
1,000 Mobile Alabama, Water & Sewer Revenue Bonds,
Series B, 7.25%, 1/01/06........................ 1,036
1,475 Montana State General Obligation Bonds, Long Range
Building Program, Series C, 6.00%, 8/01/13...... 1,498
1,500 Municipal Assistance Corp. for City of New York,
New York, Refunding Revenue Bonds, Series 56,
7.90%, 7/01/98, Prerefunded 7/01/96 at 102...... 1,589
1,000 New Castle County, Delaware, General Obligation
Bonds, 6.25%, 10/15/01.......................... 1,078
1,500 North Little Rock, Arkansas, Electric Revenue
Refunding Bonds, Murray Lock & Dam Hydro, 7.40%,
7/01/15,
Prerefunded 7/01/96 at 102...................... 1,581
500 Ohio State General Obligation Bonds,
6.20%, 8/01/12.................................. 521
1,000 Ohio State Housing Finance Agency, Residential
Mortgage Revenue Bonds, Series A-1, 6.20%,
9/01/14......................................... 1,011
1,000 Pennsylvania State Higher Educational Facilities
Authority, Colleges & Universities Revenue
Bonds, 6.50%, 9/01/02........................... 1,095
1,000 Reedy Creek Improvement District, Florida, Utility
Revenue Bonds, Series 91-1, 6.50%, 10/01/16,
Prerefunded 10/01/01 at 101..................... 1,108
1,000 Redmond, Washington, General Obligation Bonds,
5.75%, 12/01/05................................. 1,038
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...... 1,477
1,350 San Antonio, Texas, General Obligation Bonds,
6.50%, 8/01/14.................................. 1,408
1,000 Tulsa, Oklahoma, General Obligation Bonds, 6.38%,
2/01/02......................................... 1,084
1,000 Virginia Beach, Virginia General Obligation Bonds,
6.00%, 9/01/10.................................. 1,022
500 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds, Series B,
6.60%, 1/01/12.................................. 519
1,000 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds, Series B,
6.65%, 1/01/13.................................. 1,038
1,500 Washington State General Obligation Bonds, Series
86-D, 8.00%, 9/01/09,
Prerefunded 9/01/96 at 100...................... 1,571
500 Washington Suburban Sanitary District, General
Obligation Revenue Bonds, 6.50%, 11/01/05,
Prerefunded 11/01/01 at 102..................... 555
----------
TOTAL FIXED RATE INSTRUMENTS.................................. 38,567
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
106
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
- ------------------------------------------------------------
<C> <S> <C>
TOTAL TAX-EXEMPT INSTRUMENTS.................................. $ 43,467
----------
TOTAL INVESTMENTS (99.2%) (Cost $42,728)...................... 43,467
----------
</TABLE>
<TABLE>
<CAPTION>
OTHER ASSETS (2.2%)
<S> <C> <C>
Cash............................................ $ 44
Interest Receivable............................. 928 972
-----
<CAPTION>
LIABILITIES (-1.4%)
<S> <C> <C>
Payable for Investments Purchased............... (562)
Administrative Fees Payable..................... (5)
Investment Advisory Fees Payable................ (4)
Custodian Fees Payable.......................... (2)
Directors' Fees and Expenses Payable............ (2)
Other Liabilities............................... (34) (609)
----- ----------
<CAPTION>
NET ASSETS (100%)................................. $43,830
<S> <C> <C>
----------
----------
<CAPTION>
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
<S> <C> <C>
Applicable to 4,273,159 outstanding $.001 par
value shares (authorized 500,000,000 shares).... $10.26
----------
----------
</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 U.S. Treasury escrow.
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
107
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
MONEY MARKET INSTRUMENTS (78.9%)
US GOVERNMENT AGENCY OBLIGATIONS (65.1%)
AGENCY DISCOUNT NOTES (41.0%)
Federal Home Loan Mortgage Corp.
$ 25,000 5.91%, 7/14/95.................................... $ 24,947
20,000 5.93%, 7/20/95.................................... 19,938
20,000 5.84%, 7/21/95.................................... 19,935
25,000 6.00%, 7/24/95.................................... 24,906
20,000 5.85%, 8/03/95.................................... 19,893
9,093 5.95%, 8/09/95.................................... 9,035
9,800 5.90%, 8/24/95.................................... 9,715
7,005 5.83%, 9/20/95.................................... 6,914
Federal National Mortgage Association
15,000 5.90%, 7/03/95.................................... 14,995
20,000 5.89%, 7/06/95.................................... 19,984
25,000 5.90%, 7/17/95.................................... 24,935
20,000 6.00%, 8/04/95.................................... 19,888
5,715 5.91%, 8/29/95.................................... 5,660
25,000 5.79%, 9/07/95.................................... 24,731
25,000 5.91%, 9/08/95.................................... 24,722
20,000 5.83%, 9/28/95.................................... 19,715
30,020 5.74%, 10/19/95................................... 29,503
20,000 6.06%, 11/14/95................................... 19,556
----------
338,972
----------
AGENCY FLOATING RATE NOTES (24.1%)
Federal National Mortgage Association
25,000 6.01%, 10/16/95................................... 24,999
65,000 6.02%, 9/02/97.................................... 65,000
25,000 5.58%, 6/02/99.................................... 25,000
13,000 5.58%, 7/26/99.................................... 12,944
25,000 5.58%, 9/22/99.................................... 25,000
Student Loan Marketing Association
46,000 5.86%, 10/30/97................................... 46,063
----------
199,006
----------
TOTAL US GOVERNMENT AGENCY OBLIGATIONS
(Cost $537,978)............................................. 537,978
----------
COMMERCIAL PAPER (10.8%)
FINANCE (10.8%)
30,000 ABN-Amro Holdings Inc. 6.02%, 10/16/95............ 29,477
30,000 Koch Industries 6.20%, 7/5/95..................... 29,979
30,000 UBS Finance, Inc. 6.13%, 7/5/95................... 29,980
----------
TOTAL COMMERCIAL PAPER (Cost $89,436)......................... 89,436
----------
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
CORPORATE FLOATING RATE NOTES (3.0%)
FINANCE (3.0%)
$ 25,000 General Electric Credit Corp. 6.35%, 2/09/96 -
2/15/96 (Cost $25,000).......................... $ 25,000
----------
TOTAL MONEY MARKET INSTRUMENTS (Cost $652,414)................ 652,414
----------
<CAPTION>
VALUE
(000)
<C> <S> <C>
----------
SHORT TERM INVESTMENT (21.1%)
REPURCHASE AGREEMENT (21.1%)
174,944 Goldman Sachs 6.05%, dated 6/30/95, due 7/03/95,
to be repurchased at $175,032, collateralized by
$112,650 United States Treasury Bonds, 13.875%,
due 5/15/11, valued at $179,062 (Cost
$174,944)....................................... 174,944
----------
TOTAL INVESTMENTS (100.0%) (Cost $827,358).................... 827,358
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.3%)
Interest Receivable............................. $ 2,252
Other........................................... 44 2,296
----------
LIABILITIES (-0.3%)
Dividends Payable............................... (1,874)
Investment Advisory Fees Payable................ (605)
Administrative Fees Payable..................... (107)
Custodian Fees Payable.......................... (34)
Directors' Fees and Expenses Payable............ (1)
Other Liabilities............................... (43) (2,664)
---------- ----------
NET ASSETS (100%)............................................. $ 826,990
----------
----------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 827,005,487 outstanding $.001 par value shares
(authorized 1,000,000,000 shares).......................... $1.00
----------
----------
</TABLE>
- ------------------------------------------------------------
Floating Rate Notes. The interest rate changes on these instruments are based on
changes in a designated base rate. The rates shown were those in effect at June
30, 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.
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Money Market Portfolio
109
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
TAX-EXEMPT INSTRUMENTS (95.2%)
FIXED RATE INSTRUMENTS (43.0%)
NOTES (2.2%)
$ 2,000 Indiana Bond Bank, Advanced Funding Program,
Series A-1 5.25%, 7/10/95....................... $ 2,000
5,000 New York State Urban Development Correctional
Facilities, 8.00%, 1/01/15 Prerefunded 1/01/96
at 102.......................................... 5,184
500 Triborough Bridge & Tunnel Authority, New York,
Convention Center Project, Series 85D, 9.00%,
7/01/95......................................... 512
----------
7,696
----------
PUT OPTION BONDS (0.3%)
1,000 Putnam County, Florida, Development Authority,
Pollution Control Revenue, Seminole Electric
Series H-3, 4.30%, 3/15/14 (Putable 9/15/95).... 1,000
----------
TAX & REVENUE ANTICIPATION NOTES (2.5%)
4,000 Texas State, 5.00%, 8/31/95, TRANS................ 4,001
5,000 Texas State, 5.00%, 8/31/95, TRANS................ 5,007
----------
9,008
----------
COMMERCIAL PAPER (38.0%)
3,000 Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light 4.30%,
7/27/95......................................... 3,000
1,100 Brazos River, Texas, Harbor & Navigation District,
Series 90, 4.15%, 8/14/95....................... 1,100
1,500 Burke County, Georgia, Development Authority,
Oglethorpe, Series 92A, 3.90%, 8/21/95.......... 1,500
2,500 Burke County, Georgia, Development Authority,
Oglethorpe, Series 92A, 3.95%, 8/22/95.......... 2,500
2,600 Burlington, Kansas, Kansas City Power & Light Co.,
4.10%, 9/11/95.................................. 2,600
2,000 Burlington, Kansas, Kansas City Power & Light Co.,
Series 87A, 4.10%, 9/11/95...................... 2,000
3,500 City of Austin, Texas, Series A, 4.20%,
10/05/95........................................ 3,500
4,530 City of Dallas, Texas, Series A, 4.15%, 7/13/95... 4,530
1,200 Connecticut State Health & Education Facilities
Authority, Yale University Series N, 3.05%,
7/17/95......................................... 1,200
1,000 Converse County, Wyoming, Pacificorp Series 88,
4.15%, 8/10/95.................................. 1,000
1,000 Delta County, Michigan, Pollution Control Revenue,
Mead Corp., 3.85%, 8/21/95...................... 1,000
4,500 Emery County, Utah, Pacificorp Series 91, 4.30%,
7/27/95......................................... 4,500
2,525 Gainesville, Florida, Series C, 4.25%, 7/28/95.... 2,525
1,000 Houston, Texas, Water & Sewer, 4.05%, 7/13/95..... 1,000
2,000 Illinois Development Finance Authority, Series
93A, 4.00%, 7/25/95............................. 2,000
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 1,000 Illinois Health & Education, Series 89A, 4.25%,
8/09/95......................................... $ 1,000
4,400 Intermountain Power Agency, Utah, Series E, 4.10%,
8/15/95......................................... 4,400
3,100 Intermountain Power Agency, Utah, Series E, 4.15%,
9/07/95......................................... 3,100
700 Intermountain Power Agency, Utah, Series F2,
4.30%, 7/14/95.................................. 700
1,500 Intermountain Power Agency, Utah, Series 85F,
4.30%, 7/14/95.................................. 1,500
7,700 Jacksonville, Florida, Electric Authority, 4.00%,
7/25/95......................................... 7,700
3,600 Jasper County, Indiana, Series 88B, 4.15%,
8/17/95......................................... 3,600
2,000 Jasper County, Indiana, Series 88C, 4.15%,
8/17/95......................................... 2,000
1,100 Lehigh County, Pennsylvania, General Purpose
Authority, Series A, 4.25%, 7/28/95............. 1,100
6,600 Massachusetts Health & Education Facilities
Authority, Harvard University, 4.05%, 8/04/95... 6,600
1,500 Michigan State Strategic Fund, Dow Chemical
Series, 4.25%, 8/09/95.......................... 1,500
6,020 Montgomery, Alabama, Industrial Development Board,
General Electric Series, 3.95%, 10/10/95........ 6,020
4,000 Mount Vernon, Indiana, General Electric Series
89A, 4.05%, 8/15/95............................. 4,000
4,000 Mount Vernon, Indiana, General Electric Series
89A, 4.10%, 8/18/95............................. 4,000
4,025 North Carolina Eastern Municipal Power, 3.32%,
9/12/95......................................... 4,025
300 Northeastern Pennsylvania Hospital Authority,
Series B, 4.15%, 8/18/95........................ 300
3,290 Omaha, Nebraska, Public Power District, 4.15%,
8/18/95......................................... 3,290
2,000 Petersburg, Indiana, Indiana Power & Light, Series
91, 4.15%, 8/11/95.............................. 2,000
1,000 Petersburg, Indiana, Indiana Power & Light, Series
91, 3.85%, 8/14/95.............................. 1,000
2,200 Platte River Authority, Colorado, 4.20%,
8/17/95......................................... 2,200
1,000 Rochester, Minnesota, Health Facilities, Mayo
Clinic, Series B, 4.20%, 8/16/95................ 1,000
1,500 Rochester, Minnesota, Health Facilities, Mayo
Clinic, Series C, 4.15%, 8/11/95................ 1,500
1,065 Rochester, Minnesota, Health Facilities, Mayo
Clinic, Series E, 4.15%, 8/11/95................ 1,065
1,500 Rochester, Minnesota, Health Facilities, Mayo
Clinic, Series F 4.15%, 9/12/95................. 1,500
2,000 Salt River, Arizona, 4.30%, 7/27/95............... 2,000
6,000 Salt River, Arizona, 4.00%, 10/12/95.............. 6,000
2,000 Sunshine State, Florida, Government Finance
Authority, Series 86, 4.20%, 7/28/95............ 2,000
2,000 Texas Municipal Power Agency, 4.25%, 8/09/95...... 2,000
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
112
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
COMMERCIAL PAPER (CONT.)
$ 6,600 Texas Municipal Power Agency, 3.30%, 9/19/95...... $ 6,600
1,000 Trimble County, Kentucky, Louisville Gas &
Electric Series, 3.85%, 8/14/95................. 1,000
5,000 Trimble County, Kentucky, Louisville Gas &
Electric Series, 4.10%, 9/11/95................. 5,000
5,500 University of Minnesota, Series A, 4.00%,
8/08/95......................................... 5,500
3,000 University of Texas, Series A, 4.10%, 7/26/95..... 3,000
2,500 Vanderbilt University, Tennessee, Series 89A,
4.25%, 8/09/95.................................. 2,500
----------
134,655
----------
TOTAL FIXED RATE INSTRUMENTS............................ 152,359
----------
VARIABLE/FLOATING RATE INSTRUMENTS (52.2%)
DAILY VARIABLE RATE BONDS (29.6%)
1,500 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Shell Oil Project, 4.35%,
9/01/23......................................... 1,500
4,000 Chattanooga-Hamilton County, Tennessee, Hospital
Authority Revenue, Erlanger Medical Center,
4.60%, 10/01/17................................. 4,000
3,000 Chicago, Illinois, O'Hare International Airport
Special Facilities Revenue Bonds, American
Airlines, Series A, 4.50%, 12/01/17............. 3,000
700 Delaware County, Pennsylvania, Industrial
Development Authority, Series 95, 4.35%,
12/01/09........................................ 700
1,700 Delta County, Michigan, Pollution Control Revenue,
Mead Corp., 4.25%, 12/01/23..................... 1,700
5,700 East Baton Rouge Parish, Louisiana, Pollution
Control Revenue, Exxon Project, 4.35%,
3/01/22......................................... 5,700
4,900 Hapeville, Georgia, Industrial Development
Authority, Series 85, 4.35%, 11/01/15........... 4,900
10,600 Harris County, Texas, Health Facilities
Development Corp., Methodist Hospital, 4.50%,
12/01/25........................................ 10,600
2,500 Hurley, New Mexico, Pollution Control Revenue
Bonds, 4.20%, 12/01/15.......................... 2,500
5,300 Jackson County, Mississippi, Port Facility,
Chevron Project, Series 93, 4.20%, 6/01/23...... 5,300
900 Kansas City, Kansas, Industrial Development
Authority, PQ Corp., 4.35%, 8/01/15............. 900
1,900 Lake Charles, Louisiana, Harbor & Terminal
District Port Facilities, Series 84, 4.25%,
11/01/11........................................ 1,900
2,000 Lincoln County, Wyoming, Pollution Control
Revenue, Exxon Project Series 84B, 4.25%,
11/01/14........................................ 2,000
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 1,600 Lincoln County, Wyoming, Pollution Control
Revenue, Exxon Project Series 84D, 4.25%,
11/01/14........................................ $ 1,600
3,500 Lincoln County, Wyoming, Pollution Control
Revenue, Exxon Project Series 85, 4.20%,
8/01/15......................................... 3,500
3,120 Louisiana Public Facilities Authority, Industrial
Development, Kenner Hotel Series, 4.35%,
12/01/15........................................ 3,120
4,500 Maricopa County, Arizona, Pollution Control
Revenue, Series 94B, 4.20%, 5/01/29............. 4,500
2,600 Maricopa County, Arizona, Public Services, Series
94C, 4.50%, 5/01/29............................. 2,600
6,700 Michigan State Strategic Fund, Consumers Power
Series 88A, 4.25%, 4/15/18...................... 6,700
1,570 Missouri State Health & Educational Facilities
Authority Revenue, Washington University, Series
89A, 4.60%, 3/01/17............................. 1,570
500 New York City, New York, Water Finance Authority,
Water and Sewer System Revenue, Series 92C,
4.25%, 6/15/22.................................. 500
2,000 New York City, New York, Water Finance Authority,
Water and Sewer System Revenue, Series 94C,
4.25%, 6/15/23.................................. 2,000
1,000 Nueces River Authority, Texas, Pollution Control
Revenue, Series 85, 4.55%, 12/01/99............. 1,000
700 Peninsula Ports Authority, Virginia, Coal Revenue,
4.25%, 7/01/16.................................. 700
6,200 Philadelphia, Pennsylvania, Childrens Hospital,
Series 92B, 4.35%, 3/01/27...................... 6,200
3,900 Phoenix, Arizona, Series 94-1, 4.50%, 6/01/18..... 3,900
3,800 Platte County, Wyoming, Pollution Control Revenue,
Series A, 4.35%, 7/01/14........................ 3,800
1,000 Platte County, Wyoming, Pollution Control Revenue,
Series B, 4.35%, 7/01/14........................ 1,000
2,000 Port of Saint Helens, Oregon, Pollution Control
Revenue, Portland General Electric Co. Series A,
4.25%, 4/01/10.................................. 2,000
1,600 Port of Saint Helens, Oregon, Pollution Control
Revenue, Portand General Electric Co., Series B,
4.25%, 6/01/10.................................. 1,600
1,400 Saint Charles Parish, Louisiana, Pollution Control
Revenue, Shell Oil Project, 4.20%, 10/01/22..... 1,400
4,900 Southwest, Texas, Higher Education Authority
Revenue, Southern Methodist University Series
85, 4.20%, 7/01/15.............................. 4,900
4,700 Valdez, Alaska, Marine Terminal Authority, Exxon,
Series 85, 4.20%, 10/01/25...................... 4,700
3,000 West Side Calhoun County, Texas, Pollution Control
Revenue, 4.50%, 12/01/15........................ 3,000
----------
104,990
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
113
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
WEEKLY VARIABLE RATE BONDS (22.6%)
$ 1,000 Albuquerque, New Mexico, Revenue Bond, Series A,
4.20%, 7/01/22.................................. $ 1,000
1,000 Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light Series,
4.15%, 8/01/09.................................. 1,000
1,000 Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light Series,
4.15%, 8/01/20.................................. 1,000
1,000 Brunswick & Glynn County, Georgia, Development
Authority, Series 85, 4.25%, 12/01/15........... 1,000
7,000 Burke County, Georgia, Development Authority,
Oglethorpe, Series 93A, 4.20%, 1/01/16.......... 7,000
5,900 Charlotte, North Carolina, Airport, Series 93A,
4.20%, 7/01/16.................................. 5,900
2,500 City of Columbia, Missouri, Special Revenue Bonds,
Series 88A, 4.25%, 6/01/08...................... 2,500
1,500 City of Columbia, Missouri, Water & Electric
Revenue Bonds, Series 85B, 4.25%, 12/01/15...... 1,500
300 City of Forsyth, Montana, Pollution Control
Revenue, Series B, 4.15%, 6/01/13............... 300
700 City of Forsyth, Montana, Pollution Control
Revenue, Series D, 4.15%, 6/01/13............... 700
2,600 City of Midlothian, Texas, Industrial Development
Corp., Pollution Control Revenue, Box-Crow
Cement Co., 4.80%, 12/01/09..................... 2,600
7,900 Clark County, Nevada, Airport Revenue Bonds,
Series 93A, 4.40%, 7/01/12...................... 7,900
2,700 Clark County, Nevada, Airport Revenue Bonds,
Series 95-A1, 4.15%, 7/01/25.................... 2,700
305 Clear Creek County, Colorado, Revenue Bonds,
Colorado Finance Pool Program, 4.30%, 6/01/98... 305
600 Colorado Student Obligation Bond Authority,
Student Loan Revenue, Series 91C1, 4.50%,
8/01/00......................................... 600
7,300 Dade County, Florida, Water & Sewer Revenue Bonds,
4.35%, 10/05/22................................. 7,300
1,200 Delaware County, Pennsylvania, Industrial
Development Authority, Scott Paper Series D,
4.15%, 12/01/18................................. 1,200
500 Delaware County, Pennsylvania, Industrial
Development Authority, Scott Paper Series E,
4.15%, 12/01/18................................. 500
3,000 Foothill/Eastern California Toll Road Revenue,
TRANS Series 95C, 4.20%, 1/02/35................ 3,000
5,000 Harris County, Texas, Series 94G, 3.90%,
8/01/26......................................... 5,000
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
<C> <S> <C>
$ 5,000 Harris County, Texas, Series 94H, 3.90%,
8/01/20......................................... $ 5,000
300 Illinois Development Finance Authority, A.E.
Staley Manufacturing Series 85, 4.25%,
12/01/05........................................ 300
1,000 Lehigh County, Pennsylvania, Allegheny Electric
Cooperative, 4.25%, 12/01/15.................... 1,000
2,600 Louisiana Public Facilities Authority, Hospital
Revenue, Series 85, 4.25%, 12/01/00............. 2,600
1,000 Massachusetts Health & Education Facilities
Authority, Series G-1, 3.75%, 1/01/19........... 1,000
1,100 Mobile, Alabama, Industrial Development Board,
Scott Paper Series A, 4.15%, 12/01/19........... 1,100
1,500 Mobile, Alabama, Industrial Development Board,
Scott Paper Series B, 4.15%, 12/01/19........... 1,500
3,900 Nueces County, Texas, Health Facilities, Driscoll
Childrens' Foundation, 4.30%, 7/01/15........... 3,900
1,500 Person County, North Carolina, Carolina Power &
Light, 4.30%, 11/01/19.......................... 1,500
235 Pinellas County, Florida, Health Facilities,
Bayfront Medical Center, Series 89, 4.20%,
6/01/98......................................... 235
1,000 Pinellas County, Florida, Health Facilities,
Bayfront Medical Center, Series 89, 4.20%,
6/01/09......................................... 1,000
500 Polk County, Iowa, Hospital Equipment &
Improvement Authority, 4.25%, 12/01/05.......... 500
800 Port Development Corporation Marine Terminal,
Texas, Series 89, 4.15%, 1/15/14................ 800
1,500 Port of Corpus Christi, Texas, Marine Terminal,
R.J. Reynolds Metals Series, 4.25%, 9/01/14..... 1,500
600 Putnam County, Florida, Development Authority,
Seminole Electric Series 84 H1, 4.30%,
3/15/14......................................... 600
1,000 Rapides Parish, Louisiana, Central Louisiana
Electric Series, 3.95%, 7/01/18................. 1,000
700 Sheboygan, Wisconsin, Wisconsin Power & Light
Series, 4.25%, 8/01/14.......................... 700
1,100 University of North Carolina, Chapel Hill Fund
Inc., Certificates of Participation, 4.30%,
10/01/09........................................ 1,100
2,000 Washington Public Power, Series 93-1A3, 4.15%,
7/01/17......................................... 2,000
----------
80,340
----------
TOTAL VARIABLE/FLOATING RATE INSTRUMENTS.................... 185,330
----------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $337,689).................. 337,689
----------
</TABLE>
The accompanying notes are an integral part of the financial statements. (Pages
144-152)
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
114
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1995
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------
TAXABLE INSTRUMENTS (4.3%)
<C> <S> <C>
US GOVERNMENT & AGENCY OBLIGATIONS (4.3%)
Federal Home Loan Bank
$ 5,200 Discount Note, 6.00%, 7/06/95................... $ 5,196
10,000 Discount Note, 5.95%, 7/31/95................... 9,951
----------
TOTAL TAXABLE INSTRUMENTS (Cost $15,147)...................... 15,147
----------
TOTAL INVESTMENTS (99.5%) (Cost $352,836)..................... 352,836
----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
----------
<S> <C> <C>
OTHER ASSETS (0.7%)
Cash............................................ $ 13
Interest Receivable............................. 2,514
Other........................................... 20 2,547
----------
LIABILITIES (-0.2%)
Dividends Payable............................... (487)
Investment Advisory Fees Payable................ (259)
Administrative Fees Payable..................... (61)
Custodian Fees Payable.......................... (19)
Director's Fees and Expenses Payable............ (1)
Other Liabilities............................... (8) (835)
---------- ----------
NET ASSETS (100%)............................................. $ 354,548
----------
----------
<CAPTION>
VALUE
(000)
- ------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 354,531,447 outstanding $.001 par value shares
(authorized 1,000,000,000 shares)........................... $1.00
----------
----------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<S> <C>
TRANS -- Tax & Revenue Anticipation Notes
</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.
Interest rates disclosed for US Government & Agency Obligations represent
effective yields at June 30, 1995.
At June 30, 1995, approximately 19% of the net assets were invested in Texas
municipal securities. Economic changes affecting the state and certain of its
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
144-152)
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
115
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE
COUNTRY ASIAN EMERGING EUROPEAN GLOBAL
ALLOCATION EQUITY MARKETS EQUITY EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE ENDED JUNE ENDED JUNE ENDED JUNE
30, 1995 30, 1995 30, 1995 30, 1995 30, 1995
(000) (000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 2,400 $ 3,380 $ 10,644 $ 719 $ 1,207
Interest 113 492 2,491 96 15
Less Foreign Taxes Withheld (345) (305) (1,253) (101) (123)
------------ ----------- ----------- ------ ------
Total Income 2,168 3,567 11,882 714 1,099
------------ ----------- ----------- ------ ------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 535 1,105 5,433 155 328
Less: Fees Waived (306) (228) (447) (62) (72)
------------ ----------- ----------- ------ ------
Investment Advisory Fees -- Net 229 877 4,986 93 256
Administrative Fees 157 223 690 39 71
Sub-Administrative Fees -- -- 93 -- --
Custodian Fees 187 197 1,497 18 26
Filing and Registration Fees 19 23 49 16 23
Insurance 10 12 39 1 2
Directors' Fees and Expenses 2 2 2 2 2
Legal Fees 5 8 28 1 3
Audit Fees 21 20 74 19 19
Shareholder Reports 24 15 47 4 7
Brazilian Tax Expense -- -- 5 -- --
Other Expenses 5 6 67 1 2
------------ ----------- ----------- ------ ------
Total Expenses 659 1,383 7,577 194 411
------------ ----------- ----------- ------ ------
NET INVESTMENT INCOME 1,509 2,184 4,305 520 688
------------ ----------- ----------- ------ ------
NET REALIZED GAIN (LOSS):
Investments Sold (53) 4,322 (15,596) 79 4,168
Foreign Currency Transactions (6,542) 145 (193) 308 (61)
------------ ----------- ----------- ------ ------
Total Net Realized Gain (Loss) (6,595) 4,467 (15,789) 387 4,107
------------ ----------- ----------- ------ ------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 2,751 16,643 (54,529) 3,390 4,554
------------ ----------- ----------- ------ ------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED
APPRECIATION (DEPRECIATION) (3,844) 21,110 (70,318) 3,777 8,661
------------ ----------- ----------- ------ ------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ (2,335) $ 23,294 $ (66,013) $ 4,297 $ 9,349
------------ ----------- ----------- ------ ------
------------ ----------- ----------- ------ ------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
116
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL JAPANESE
EQUITY SMALL CAP EQUITY LATIN AMERICAN
GOLD PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
PORTFOLIO SIX SIX MONTHS SIX MONTHS SIX MONTHS JANUARY 18,
MONTHS ENDED ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 1995* TO JUNE
JUNE 30, 1995 1995 1995 30, 1995 30, 1995
(000) (000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 49 $ 23,057 $ 3,633 $ 187 $ 132
Interest 69 1,853 328 2 33
Less Foreign Taxes Withheld (3) (3,035) (445) (28) (12)
------ ------- ------ ------------ -----
Total Income 115 21,875 3,516 161 153
------ ------- ------ ------------ -----
EXPENSES:
Investment Advisory Fees
Basic Fees -- Adviser 84 5,326 842 136 57
Basic Fees -- Sub Adviser 56 -- -- -- --
Less: Fees Waived -- Adviser (31) (195) (91) (56) (57)
Fees Waived -- Sub Adviser (21) -- -- -- --
------ ------- ------ ------------ -----
Investment Advisory Fees -- Net 88 5,131 751 80 --
Administrative Fees 24 1,057 145 31 10
Sub-Administrative Fees -- -- -- -- 4
Custodian Fees 7 241 59 11 39
Filing and Registration Fees 18 25 22 16 21
Insurance 1 56 6 2 --
Directors' Fees and Expenses 2 2 2 2 2
Legal Fees 1 38 5 1 --
Audit Fees 20 31 17 21 19
Shareholder Reports 12 55 10 4 --
Brazilian Tax Expense -- -- -- -- 45
Other Expenses 3 25 3 1 8
Expenses Reimbursed by Adviser -- -- -- -- (16)
------ ------- ------ ------------ -----
Total Expenses 176 6,661 1,020 169 132
------ ------- ------ ------------ -----
NET INVESTMENT INCOME (LOSS) (61) 15,214 2,496 (8) 21
------ ------- ------ ------------ -----
NET REALIZED GAIN (LOSS):
Investments Sold 268 49,958 4,341 (2,999) (747)
Foreign Currency Transactions (1) (7,755) (320) (1,570) (7)
------ ------- ------ ------------ -----
Total Net Realized Gain (Loss) 267 42,203 4,021 (4,569) (754)
------ ------- ------ ------------ -----
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 1,862 7,737 (2,754) (2,373) 24
------ ------- ------ ------------ -----
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED
APPRECIATION (DEPRECIATION) 2,129 49,940 1,267 (6,942) (730)
------ ------- ------ ------------ -----
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 2,068 $ 65,154 $ 3,763 $ (6,950) $ (709)
------ ------- ------ ------------ -----
------ ------- ------ ------------ -----
<FN>
- ---------------
*Commencement of operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
117
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGRESSIVE EMERGING EQUITY SMALL CAP U.S. REAL VALUE
EQUITY GROWTH GROWTH VALUE EQUITY ESTATE EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
MARCH 8, SIX MONTHS SIX MONTHS SIX MONTHS FEBRUARY 24, SIX MONTHS SIX MONTHS
1995* TO ENDED ENDED ENDED 1995* TO ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1995 1995 1995 1995 1995 1995 1995
(000) (000) (000) (000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 79 $ 115 $ 1,083 $ 768 $ 742 $ 1,616 $ 180
Interest 36 242 404 51 59 113 321
------ ----------- ----------- ------ ------ ----------- ------
Total Income 115 357 1,487 819 801 1,729 501
------ ----------- ----------- ------ ------ ----------- ------
EXPENSES:
Investment Advisory
Fees:
Basic Fees -- Adviser 29 623 356 182 68 223 51
Less: Fees Waived (29) (19) (61) (58) (58) (52) (43)
------ ----------- ----------- ------ ------ ----------- ------
Investment Advisory
Fees -- Net -- 604 295 124 10 171 8
Administrative Fees 6 101 96 38 13 72 19
Custodian Fees 5 14 20 11 9 14 6
Filing and Registration
Fees 15 18 22 14 23 18 14
Insurance -- 5 4 1 -- 3 1
Directors' Fees and
Expenses 2 2 2 2 2 2 2
Legal Fees 11 3 3 1 11 2 --
Audit Fees 8 13 13 13 8 13 13
Shareholder Reports 7 16 16 8 9 14 6
Other Expenses 1 4 3 2 1 3 2
Expenses Reimbursed by
Adviser (18) -- -- -- -- -- --
------ ----------- ----------- ------ ------ ----------- ------
Total Expenses 37 780 474 214 86 312 71
------ ----------- ----------- ------ ------ ----------- ------
NET INVESTMENT INCOME
(LOSS) 78 (423) 1,013 605 715 1,417 430
------ ----------- ----------- ------ ------ ----------- ------
NET REALIZED GAIN (LOSS):
Investments Sold 716 2,535 6,369 (4) 310 2,940 412
Written Options (3) -- -- -- -- -- --
Securities Sold Short (2) -- -- -- -- -- --
------ ----------- ----------- ------ ------ ----------- ------
Total Net Realized
Gain (Loss) 711 2,535 6,369 (4) 310 2,940 412
------ ----------- ----------- ------ ------ ----------- ------
CHANGE IN UNREALIZED
APPRECIATION
(DEPRECIATION) 1,154 13,677 17,570 4,111 1,300 11,254 1,872
------ ----------- ----------- ------ ------ ----------- ------
TOTAL NET REALIZED GAIN
AND CHANGE IN
UNREALIZED APPRECIATION
(DEPRECIATION) 1,865 16,212 23,939 4,107 1,610 14,194 2,284
------ ----------- ----------- ------ ------ ----------- ------
Net Increase in Net
Assets Resulting from
Operations $ 1,943 $ 15,789 $ 24,952 $ 4,712 $ 2,325 $ 15,611 $ 2,714
------ ----------- ----------- ------ ------ ----------- ------
------ ----------- ----------- ------ ------ ----------- ------
<FN>
- ---------------
*Commencement of operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
118
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING GLOBAL MUNICIPAL
MARKETS FIXED FIXED BOND MONEY MUNICIPAL
DEBT INCOME INCOME HIGH YIELD PORTFOLIO MARKET MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO JANUARY 18, PORTFOLIO PORTFOLIO
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS 1995* TO SIX MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE ENDED JUNE ENDED JUNE JUNE 30, ENDED JUNE ENDED JUNE
30, 1995 30, 1995 30, 1995 30, 1995 1995 30, 1995 30, 1995
(000) (000) (000) (000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ -- $ -- $ -- $ 49 $ -- $ -- $ --
Interest 14,720 7,084 3,659 4,262 990 24,336 7,333
----------- ----------- ----------- ------------ ------ ----------- ------
Total Income 14,720 7,084 3,659 4,311 990 24,336 7,333
----------- ----------- ----------- ------------ ------ ----------- ------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 814 333 188 178 69 1,218 557
Less: Fees Waived -- (142) (115) (43) (62) -- --
----------- ----------- ----------- ------------ ------ ----------- ------
Investment Advisory
Fees --- Net 814 191 73 135 7 1,218 557
Administrative Fees 131 155 77 63 32 631 301
Custodian Fees 82 15 28 13 5 34 29
Filing and Registration Fees 22 13 14 20 20 22 9
Insurance 5 9 6 6 -- 44 19
Directors' Fees and Expenses 2 2 2 2 2 2 2
Legal Fees 5 6 3 2 1 16 10
Audit Fees 49 13 18 16 10 8 11
Shareholder Reports 12 15 11 8 11 19 13
Other Expenses 69 9 4 3 1 18 9
----------- ----------- ----------- ------------ ------ ----------- ------
Total Expenses 1,191 428 236 268 89 2,012 960
----------- ----------- ----------- ------------ ------ ----------- ------
NET INVESTMENT INCOME 13,529 6,656 3,423 4,043 901 22,324 6,373
----------- ----------- ----------- ------------ ------ ----------- ------
NET REALIZED GAIN (LOSS):
Investments Sold (4,292) 1,372 (2,954) (3,196) 178 79 (1)
Foreign Currency
Transactions (65) 43 202 -- -- -- --
Written Options 532 -- -- -- -- -- --
Securities Sold Short 957 -- -- -- -- -- --
----------- ----------- ----------- ------------ ------ ----------- ------
Total Net Realized Gain
(Loss) (2,868) 1,415 (2,752) (3,196) 178 79 (1)
----------- ----------- ----------- ------------ ------ ----------- ------
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) 13,649 12,075 10,244 8,636 739 -- --
----------- ----------- ----------- ------------ ------ ----------- ------
TOTAL NET REALIZED GAIN (LOSS)
AND CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) 10,781 13,490 7,492 5,440 917 79 (1)
----------- ----------- ----------- ------------ ------ ----------- ------
Net Increase in Net Assets
Resulting
from Operations $ 24,310 $ 20,146 $ 10,915 $ 9,483 $ 1,818 $ 22,403 $ 6,372
----------- ----------- ----------- ------------ ------ ----------- ------
----------- ----------- ----------- ------------ ------ ----------- ------
<FN>
- ---------------
*Commencement of operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
119
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 2,652 $ 1,509
Net Realized Gain (Loss) 8,147 (6,595)
Change in Unrealized Appreciation (Depreciation) (12,455) 2,751
-------------- --------------
Net Decrease in Net Assets Resulting from Operations (1,656) (2,335)
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (1,773) --
Net Realized Gain (4,419) (6,990)
-------------- --------------
Total Distributions (6,192) (6,990)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 169,994 53,802
Distributions Reinvested 5,395 6,629
Redeemed (135,418) (79,836)
-------------- --------------
Net Increase (Decrease) from Capital Share Transactions 39,971 (19,405)
-------------- --------------
Total Increase (Decrease) in Net Assets 32,123 (28,730)
NET ASSETS:
Beginning of Period 150,854 182,977
-------------- --------------
End of Period (2) $ 182,977 $ 154,247
-------------- --------------
-------------- --------------
<FN>
- --------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 14,259 4,939
Shares Issued on Distributions Reinvested 458 594
Shares Redeemed (11,357) (7,224)
-------------- --------------
Net Increase (Decrease) in Capital Shares Outstanding 3,360 (1,691)
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 168,882 $ 149,477
Undistributed Net Investment Income 1,418 2,927
Accumulated Net Realized Gain (Loss) 7,989 (5,596)
Unrealized Appreciation 4,688 7,439
-------------- --------------
$ 182,977 $ 154,247
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,397 $ 2,184
Net Realized Gain 32,848 4,467
Change in Unrealized Appreciation (Depreciation) (80,975) 16,643
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from
Operations (46,730) 23,294
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (972) (1,879)
Net Realized Gain (5,840) (29,033)
-------------- --------------
Total Distributions (6,812) (30,912)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 213,200 351,505
Distributions Reinvested 6,036 28,066
Redeemed (175,924) (358,462)
-------------- --------------
Net Increase from Capital Share Transactions 43,312 21,109
-------------- --------------
Total Increase (Decrease) in Net Assets (10,230) 13,491
NET ASSETS:
Beginning of Period 287,136 276,906
-------------- --------------
End of Period (2) $ 276,906 $ 290,397
-------------- --------------
-------------- --------------
<FN>
- --------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 9,345 18,577
Shares Issued on Distributions Reinvested 233 1,481
Shares Redeemed (7,685) (18,717)
-------------- --------------
Net Increase in Capital Shares Outstanding 1,893 1,341
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 207,594 $ 228,703
Undistributed Net Investment Income 1,886 2,191
Accumulated Net Realized Gain 32,350 7,784
Unrealized Appreciation 35,076 51,719
-------------- --------------
$ 276,906 $ 290,397
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
120
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (2,302) $ 4,305
Net Realized Gain (Loss) (Net of India tax of $1,159 and
$725 on net realized gains for the Year Ended December
31, 1994 and the period ended June 30, 1995,
respectively.) 66,824 (15,789)
Change in Unrealized Appreciation (Depreciation) (168,042) (54,529)
-------------- --------------
Net Decrease in Net Assets Resulting from Operations (103,520) (66,013)
-------------- --------------
DISTRIBUTIONS:
Net Realized Gain (37,393) (52,592)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 579,390 249,111
Distributions Reinvested 35,730 50,609
Redeemed (279,921) (141,122)
-------------- --------------
Net Increase from Capital Share Transactions 335,199 158,598
-------------- --------------
Total Increase in Net Assets 194,286 39,993
NET ASSETS:
Beginning of Period 735,352 929,638
-------------- --------------
End of Period (2) $ 929,638 $ 969,631
-------------- --------------
-------------- --------------
<FN>
- --------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 32,685 18,239
Shares Issued on Distributions Reinvested 1,974 3,374
Shares Redeemed (16,342) (10,416)
-------------- --------------
Net Increase in Capital Shares Outstanding 18,317 11,197
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 818,267 $ 976,865
Accumulated Net Investment Income (Loss) (785) 3,520
Accumulated Net Realized Gain (Loss) 65,253 (3,128)
Unrealized Appreciation (Depreciation) (Net of India tax
of $4,779 and $771 on unrealized appreciation on
investments at December 31, 1994 and at June 30, 1995,
respectively.) 46,903 (7,626)
-------------- --------------
$ 929,638 $ 969,631
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 159 $ 520
Net Realized Gain 2,606 387
Change in Unrealized Appreciation (Depreciation) (1,886) 3,390
-------------- --------------
Net Increase in Net Assets Resulting from Operations 879 4,297
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (87) (6)
Net Realized Gain (251) (2,445)
-------------- --------------
Total Distributions (338) (2,451)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 39,425 29,087
Distributions Reinvested 337 2,269
Redeemed (25,350) (12,212)
-------------- --------------
Net Increase from Capital Share Transactions 14,412 19,144
-------------- --------------
Total Increase in Net Assets 14,953 20,990
NET ASSETS:
Beginning of Period 12,681 27,634
-------------- --------------
End of Period (2) $ 27,634 $ 48,624
-------------- --------------
-------------- --------------
<FN>
- --------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,791 2,194
Shares Issued on Distributions Reinvested 27 177
Shares Redeemed (1,818) (910)
-------------- --------------
Net Increase in Capital Shares Outstanding 1,000 1,461
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 25,071 $ 44,215
Undistributed Net Investment Income 31 545
Accumulated Net Realized Gain 2,731 673
Unrealized Appreciation (Depreciation) (199) 3,191
-------------- --------------
$ 27,634 $ 48,624
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
121
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 450 $ 688
Net Realized Gain 1,493 4,107
Change in Unrealized Appreciation (Depreciation) (1,816) 4,554
-------------- --------------
Net Increase in Net Assets Resulting from Operations 127 9,349
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (170) (330)
Net Realized Gain (1,756) (1,103)
-------------- --------------
Total Distributions (1,926) (1,433)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 72,166 18,390
Distributions Reinvested 1,926 1,398
Redeemed (13,276) (24,954)
-------------- --------------
Net Increase (Decrease) from Capital Share Transactions 60,816 (5,166)
-------------- --------------
Total Increase in Net Assets 59,017 2,750
NET ASSETS:
Beginning of Period 19,918 78,935
-------------- --------------
End of Period (2) $ 78,935 $ 81,685
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 5,281 1,342
Shares Issued on Distributions Reinvested 154 106
Shares Redeemed (982) (1,799)
-------------- --------------
Net Increase (Decrease) in Capital Shares Outstanding 4,453 (351)
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 75,435 $ 70,269
Undistributed Net Investment Income 373 731
Accumulated Net Realized Gain 1,568 4,572
Unrealized Appreciation 1,559 6,113
-------------- --------------
$ 78,935 $ 81,685
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1, SIX MONTHS
1994* ENDED
TO DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 77 $ (61)
Net Realized Gain 971 267
Change in Unrealized Appreciation (Depreciation) (2,809) 1,862
------- --------------
Net Increase (Decrease) in Net Assets Resulting from
Operations (1,761) 2,068
------- --------------
DISTRIBUTIONS:
Net Investment Income (38) (37)
Net Realized Gain -- (805)
------- --------------
Total Distributions (38) (842)
------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 40,892 16,036
Distributions Reinvested 32 750
Redeemed (8,882) (27,701)
------- --------------
Net Increase (Decrease) from Capital Share Transactions 32,042 (10,915)
------- --------------
Total Increase (Decrease) in Net Assets 30,243 (9,689)
NET ASSETS:
Beginning of Period -- 30,243
------- --------------
End of Period (2) $ 30,243 $ 20,554
------- --------------
------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 4,264 1,816
Shares Issued on Distributions Reinvested 3 87
Shares Redeemed (954) (3,059)
------- --------------
Net Increase (Decrease) in Capital Shares Outstanding 3,313 (1,156)
------- --------------
------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 32,042 $ 21,127
Accumulated Net Investment Income (Loss) 36 (62)
Accumulated Net Realized Gain 974 436
Unrealized Depreciation (2,809) (947)
------- --------------
$ 30,243 $ 20,554
------- --------------
------- --------------
- -----------------
* Commencement of operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
122
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 13,406 $ 15,214
Net Realized Gain 64,532 42,203
Change in Unrealized Appreciation (Depreciation) 46,399 7,737
------------ --------------
Net Increase in Net Assets Resulting from Operations 124,337 65,154
------------ --------------
DISTRIBUTIONS:
Net Investment Income (11,956) --
Net Realized Gain (18,019) (68,023)
------------ --------------
Total Distributions (29,975) (68,023)
------------ --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 330,843 142,813
Distributions Reinvested 25,762 66,422
Redeemed (93,242) (72,833)
------------ --------------
Net Increase from Capital Share Transactions 263,363 136,402
------------ --------------
Total Increase in Net Assets 357,725 133,533
NET ASSETS:
Beginning of Period 947,045 1,304,770
------------ --------------
End of Period (2) $ 1,304,770 $ 1,438,303
------------ --------------
------------ --------------
<FN>
- -----------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 22,148 142,813
Shares Issued on Distributions Reinvested 1,872 66,422
Shares Redeemed (6,156) (72,833)
------------ --------------
Net Increase in Capital Shares Outstanding 17,864 136,402
------------ --------------
------------ --------------
(2) Net Assets were comprised of:
Paid in Capital $ 1,001,514 $ 1,137,916
Undistributed Net Investment Income 7,083 22,297
Accumulated Net Realized Gain 70,335 44,515
Unrealized Appreciation 225,838 233,575
------------ --------------
$ 1,304,770 $ 1,438,303
------------ --------------
------------ --------------
</TABLE>
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,413 $ 2,496
Net Realized Gain (Loss) (2,342) 4,021
Change in Unrealized Appreciation (Depreciation) (5,180) (2,754)
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (6,109) 3,763
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (96) (280)
In Excess of Net Investment Income (794) --
-------------- --------------
Total Distributions (890) (280)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 132,287 37,771
Distributions Reinvested 763 211
Redeemed (18,784) (14,548)
-------------- --------------
Net Increase from Capital Share Transactions 114,266 23,434
-------------- --------------
Total Increase in Net Assets 107,267 26,917
NET ASSETS:
Beginning of Period 52,834 160,101
-------------- --------------
End of Period (2) $ 160,101 $ 187,018
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 8,068 2,492
Shares Issued on Distributions Reinvested 52 14
Shares Redeemed (1,164) (955)
-------------- --------------
Net Increase in Capital Shares Outstanding 6,956 1,551
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 162,928 $ 186,362
Undistributed Net Investment Income 703 2,919
Accumulated Net Realized Gain (Loss) (1,989) 2,032
Unrealized Depreciation (1,541) (4,295)
-------------- --------------
$ 160,101 $ 187,018
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
123
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 25, SIX MONTHS
1994* TO ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Loss $ (31) $ (8)
Net Realized Loss (527) (4,569)
Change in Unrealized Appreciation (Depreciation) (215) (2,373)
-------------- --------------
Net Decrease in Net Assets Resulting from Operations (773) (6,950)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 69,015 33,525
Redeemed (17,910) (55,161)
-------------- --------------
Net Increase (Decrease) from Capital Share Transactions 51,105 (21,636)
-------------- --------------
Total Increase (Decrease) in Net Assets 50,332 (28,586)
NET ASSETS:
Beginning of Period -- 50,332
-------------- --------------
End of Period (2) $ 50,332 $ 21,746
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 6,910 3,855
Shares Redeemed (1,789) (6,321)
-------------- --------------
Net Increase (Decrease) in Capital Shares Outstanding 5,121 (2,466)
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 50,808 $ 29,172
Accumulated Net Investment Loss (261) (269)
Accumulated Net Realized Loss -- (4,569)
Unrealized Depreciation (215) (2,588)
-------------- --------------
$ 50,332 $ 21,746
-------------- --------------
-------------- --------------
- -----------------
*Commencement of operations.
</TABLE>
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 18,
1995*
TO JUNE 30,
1995
(UNAUDITED)
(000)
- -------------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 21
Net Realized Loss (754)
Change in Unrealized Appreciation 24
-------
Net Decrease in Net Assets Resulting from Operations (709)
-------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 17,894
Redeemed (3,232)
-------
Net Increase from Capital Share Transactions 14,662
-------
Total Increase in Net Assets 13,953
NET ASSETS:
Beginning of Period --
-------
End of Period (2) $ 13,953
-------
-------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,956
Shares Redeemed (370)
-------
Net Increase in Capital Shares Outstanding 1,586
-------
-------
(2) Net Assets were comprised of:
Paid in Capital $ 14,662
Undistributed Net Investment Income 21
Accumulated Net Realized Loss (754)
Unrealized Appreciation 24
-------
$ 13,953
-------
-------
- -----------------
*Commencement of operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
124
<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 JUNE 30,
1995
(UNAUDITED)
(000)
- -------------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 78
Net Realized Gain 711
Change in Unrealized Appreciation 1,154
-------
Net Increase in Net Assets Resulting from Operations 1,943
-------
DISTRIBUTIONS:
Net Investment Income (16)
-------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 16,751
Distributions Reinvested 15
Redeemed (438)
-------
Net Increase from Capital Share Transactions 16,328
-------
Total Increase in Net Assets 18,255
NET ASSETS:
Beginning of Period --
-------
End of Period (2) $ 18,255
-------
-------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 1,584
Shares Issued on Distributions Reinvested 1
Shares Redeemed (39)
-------
Net Increase in Capital Shares Outstanding 1,546
-------
-------
(2) Net Assets were comprised of:
Paid in Capital $ 16,328
Undistributed Net Investment Income 62
Accumulated Net Realized Gain 711
Unrealized Appreciation 1,154
-------
$ 18,255
-------
-------
- -----------------
*Commencement of operations.
</TABLE>
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Loss $ (673) $ (423)
Net Realized Gain 1,331 2,535
Change in Unrealized Appreciation (Depreciation) (891) 13,677
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (233) 15,789
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 85,970 80,818
Redeemed (71,689) (70,690)
-------------- --------------
Net Increase from Capital Share Transactions 14,281 10,128
-------------- --------------
Total Increase in Net Assets 14,048 25,917
NET ASSETS:
Beginning of Period 103,621 117,669
-------------- --------------
End of Period (2) $ 117,669 $ 143,586
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 5,433 4,765
Shares Redeemed (4,522) (4,196)
-------------- --------------
Net Increase in Capital Shares Outstanding 911 569
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 103,598 $ 113,726
Accumulated Net Investment Loss -- (423)
Accumulated Net Realized Loss (10,925) (8,390)
Unrealized Appreciation 24,996 38,673
-------------- --------------
$ 117,669 $ 143,586
-------------- --------------
-------------- --------------
</TABLE>
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 EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,293 $ 1,013
Net Realized Gain 3,710 6,369
Change in Unrealized Appreciation (Depreciation) (2,690) 17,570
-------------- --------------
Net Increase in Net Assets Resulting from Operations 2,313 24,952
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (952) (841)
Net Realized Gain (2,220) (3,382)
-------------- --------------
Total Distributions (3,172) (4,223)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 47,456 51,425
Distributions Reinvested 3,096 3,894
Redeemed (26,223) (26,534)
-------------- --------------
Net Increase from Capital Share Transactions 24,329 28,785
-------------- --------------
Total Increase in Net Assets 23,470 49,514
NET ASSETS:
Beginning of Period 73,789 97,259
-------------- --------------
End of Period (2) $ 97,259 $ 146,773
-------------- --------------
-------------- --------------
<FN>
- ---------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 3,964 4,036
Shares Issued on Distributions Reinvested 267 335
Shares Redeemed (2,218) (2,098)
-------------- --------------
Net Increase in Capital Shares Outstanding 2,013 2,273
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 92,584 $ 121,369
Undistributed Net Investment Income 461 633
Accumulated Net Realized Gain 3,459 6,446
Unrealized Appreciation 755 18,325
-------------- --------------
$ 97,259 $ 146,773
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 951 $ 605
Net Realized Gain (Loss) 1,484 (4)
Change in Unrealized Appreciation (Depreciation) (1,598) 4,111
-------------- -------
Net Increase in Net Assets Resulting from Operations 837 4,712
-------------- -------
DISTRIBUTIONS:
Net Investment Income (831) (547)
Net Realized Gain (720) (1,214)
-------------- -------
Total Distributions (1,551) (1,761)
-------------- -------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 25,447 12,793
Distributions Reinvested 1,464 1,568
Redeemed (12,939) (8,533)
-------------- -------
Net Increase from Capital Share Transactions 13,972 5,828
-------------- -------
Total Increase in Net Assets 13,258 8,779
NET ASSETS:
Beginning of Period 26,775 40,033
-------------- -------
End of Period (2) $ 40,033 $ 48,812
-------------- -------
-------------- -------
<FN>
- ----------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,358 1,171
Shares Issued on Distributions Reinvested 137 150
Shares Redeemed (1,200) (789)
-------------- -------
Net Increase in Capital Shares Outstanding 1,295 532
-------------- -------
-------------- -------
(2) Net Assets were comprised of:
Paid in Capital $ 39,194 $ 45,022
Undistributed Net Investment Income 281 339
Accumulated Net Realized Gain 1,484 266
Unrealized Appreciation (Depreciation) (926) 3,185
-------------- -------
$ 40,033 $ 48,812
-------------- -------
-------------- -------
</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 U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 24,
1995* TO
JUNE 30 1995
(UNAUDITED)
(000)
- -------------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 715
Net Realized Gain 310
Change in Unrealized Appreciation 1,300
-------
Net Increase in Net Assets Resulting from Operations 2,325
-------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 39,627
Redeemed (2,032)
-------
Net Increase from Capital Share Transactions 37,595
-------
Total Increase in Net Assets 39,920
NET ASSETS:
Beginning of Period --
-------
End of Period (2) $ 39,920
-------
-------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 3,882
Shares Redeemed (197)
-------
Net Increase in Capital Shares Outstanding 3,685
-------
-------
(2) Net Assets were comprised of:
Paid in Capital $ 37,595
Undistributed Net Investment Income 715
Accumulated Net Realized Gain 310
Unrealized Appreciation 1,300
-------
$ 39,920
-------
-------
- -----------------
*Commencement of operations.
</TABLE>
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 2,376 $ 1,417
Net Realized Gain 2,378 2,940
Change in Unrealized Appreciation (Depreciation) (6,089) 11,254
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (1,335) 15,611
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (2,189) (1,300)
Net Realized Gain (2,504) (2,460)
-------------- --------------
Total Distributions (4,693) (3,760)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 45,372 33,076
Distributions Reinvested 4,395 3,395
Redeemed (24,931) (13,648)
-------------- --------------
Net Increase from Capital Share Transactions 24,836 22,823
-------------- --------------
Total Increase in Net Assets 18,808 34,674
NET ASSETS:
Beginning of Period 54,598 73,406
-------------- --------------
End of Period (2) $ 73,406 $ 108,080
-------------- --------------
-------------- --------------
<FN>
- ---------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 3,798 2,733
Shares Issued on Distributions Reinvested 372 302
Shares Redeemed (2,109) (1,144)
-------------- --------------
Net Increase in Capital Shares Outstanding 2,061 1,891
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 72,751 $ 95,574
Undistributed Net Investment Income 643 760
Accumulated Net Realized Gain 2,307 2,787
Unrealized Appreciation (Depreciation) (2,295) 8,959
-------------- --------------
$ 73,406 $ 108,080
-------------- --------------
-------------- --------------
</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 BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 987 $ 430
Net Realized Gain 496 412
Change in Unrealized Appreciation (Depreciation) (1,998) 1,872
-------------- -------
Net Increase (Decrease) in Net Assets Resulting from Operations (515) 2,714
-------------- -------
DISTRIBUTIONS:
Net Investment Income (1,257) (420)
Net Realized Gain (3,880) (530)
-------------- -------
Total Distributions (5,137) (950)
-------------- -------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 4,396 2,448
Distributions Reinvested 4,725 779
Redeemed (14,661) (2,170)
-------------- -------
Net Increase (Decrease) from Capital Share Transactions (5,540) 1,057
-------------- -------
Total Increase (Decrease) in Net Assets (11,192) 2,821
NET ASSETS:
Beginning of Period 29,684 18,492
-------------- -------
End of Period (2) $ 18,492 $ 21,313
-------------- -------
-------------- -------
<FN>
- --------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 470 270
Shares Issued on Distributions Reinvested 502 89
Shares Redeemed (1,574) (234)
-------------- -------
Net Increase (Decrease) in Capital Shares Outstanding (602) 125
-------------- -------
-------------- -------
(2) Net Assets were comprised of:
Paid in Capital $ 18,279 $ 19,336
Undistributed Net Investment Income 214 224
Accumulated Net Realized Gain 495 377
Unrealized Appreciation (Depreciation) (496) 1,376
-------------- -------
$ 18,492 $ 21,313
-------------- -------
-------------- -------
</TABLE>
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1, SIX MONTHS
1994* TO ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,511 $ 13,529
Net Realized Loss (2,516) (2,868)
Change in Unrealized Appreciation (Depreciation) (9,457) 13,649
--------------- --------------
Net Increase (Decrease) in Net Assets Resulting from
Operations (3,462) 24,310
--------------- --------------
DISTRIBUTIONS:
Net Investment Income -- (8,182)
--------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 190,661 124,700
Distributions Reinvested -- 6,054
Redeemed (42,250) (112,288)
--------------- --------------
Net Increase from Capital Share Transactions 148,411 18,466
--------------- --------------
Total Increase in Net Assets 144,949 34,594
NET ASSETS:
Beginning of Period -- 144,949
--------------- --------------
End of Period (2) $ 144,949 $ 179,543
--------------- --------------
--------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 21,753 16,070
Shares Issued on Distributions Reinvested -- 751
Shares Redeemed (4,872) (13,800)
--------------- --------------
Net Increase in Capital Shares Outstanding 16,881 3,021
--------------- --------------
--------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 148,411 $ 166,877
Undistributed Net Investment Income 8,322 13,669
Accumulated Net Realized Loss (2,327) (5,195)
Unrealized Appreciation (Depreciation) (9,457) 4,192
--------------- --------------
$ 144,949 $ 179,543
--------------- --------------
--------------- --------------
- -----------------
*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 FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 12,421 $ 6,656
Net Realized Gain (Loss) (14,879) 1,415
Change in Unrealized Appreciation (Depreciation) (5,219) 12,075
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (7,677) 20,146
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (11,181) (6,774)
Net Realized Gain (8,092) --
In Excess of Net Realized Gain (22) --
-------------- --------------
Total Distributions (19,295) (6,774)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 91,618 41,730
Distributions Reinvested 16,756 5,299
Redeemed (112,739) (103,714)
-------------- --------------
Net Decrease from Capital Share Transactions (4,365) (56,685)
-------------- --------------
Total Decrease in Net Assets (31,337) (43,313)
NET ASSETS:
Beginning of Period 240,668 209,331
-------------- --------------
End of Period (2) $ 209,331 $ 166,018
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscriptions 9,049 4,187
Shares Issued on Distributions Reinvested 1,625 528
Shares Redeemed (11,150) (10,276)
-------------- --------------
Net Decrease in Capital Shares Outstanding (476) (5,561)
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 227,051 $ 170,366
Undistributed Net Investment Income 1,274 1,156
Accumulated Net Realized Loss (14,154) (12,739)
Unrealized Appreciation (Depreciation) (4,840) 7,235
-------------- --------------
$ 209,331 $ 166,018
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 9,291 $ 3,423
Net Realized Loss (9,075) (2,752)
Change in Unrealized Appreciation (Depreciation) (10,682) 10,244
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (10,466) 10,915
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (5,595) (4,056)
Net Realized Gain (4,564) --
-------------- --------------
Total Distributions (10,159) (4,056)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 96,510 18,656
Distributions Reinvested 9,111 3,500
Redeemed (126,789) (70,824)
-------------- --------------
Net Decrease from Capital Share Transactions (21,168) (48,668)
-------------- --------------
Total Decrease in Net Assets (41,793) (41,809)
NET ASSETS:
Beginning of Period 172,468 130,675
-------------- --------------
End of Period (2) $ 130,675 $ 88,866
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 8,912 1,727
Shares Issued on Distributions Reinvested 833 339
Shares Redeemed (11,801) (6,799)
-------------- --------------
Net Decrease in Capital Shares Outstanding (2,056) (4,733)
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 141,657 $ 92,989
Undistributed Net Investment Income 1,613 980
Accumulated Net Realized Loss (5,933) (8,685)
Unrealized Appreciation (Depreciation) (6,662) 3,582
-------------- --------------
$ 130,675 $ 88,866
-------------- --------------
-------------- --------------
</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 HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 9,341 $ 4,043
Net Realized Loss (1,581) (3,196)
Change in Unrealized Appreciation (Depreciation) (12,785) 8,636
-------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations (5,025) 9,483
-------------- --------------
DISTRIBUTIONS:
Net Investment Income (9,097) (4,383)
Net Realized Gain (1,413) --
-------------- --------------
Total Distributions (10,510) (4,383)
-------------- --------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 72,764 41,311
Distributions Reinvested 8,869 3,305
Redeemed (43,375) (83,658)
-------------- --------------
Net Increase (Decrease) from Capital Share Transactions 38,258 (39,042)
-------------- --------------
Total Increase (Decrease) in Net Assets 22,723 (33,942)
NET ASSETS:
Beginning of Period 74,500 97,223
-------------- --------------
End of Period (2) $ 97,223 $ 63,281
-------------- --------------
-------------- --------------
<FN>
- -------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 6,882 4,134
Shares Issued on Distributions Reinvested 858 339
Shares Redeemed (4,235) (8,509)
-------------- --------------
Net Increase (Decrease) in Capital Shares Outstanding 3,505 (4,036)
-------------- --------------
-------------- --------------
(2) Net Assets were comprised of:
Paid in Capital $ 108,726 $ 69,684
Undistributed Net Investment Income 731 391
Accumulated Net Realized Loss (1,581) (4,777)
Unrealized Depreciation (10,653) (2,017)
-------------- --------------
$ 97,223 $ 63,281
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 18,
1995*
TO JUNE 30, 1995
(UNAUDITED)
(000)
- ------------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 901
Net Realized Gain 178
Change in Unrealized Appreciation 739
--------
Net Increase in Net Assets Resulting from Operations 1,818
--------
DISTRIBUTIONS:
Net Investment Income (705)
--------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 55,060
Distributions Reinvested 672
Redeemed (13,015)
--------
Net Increase from Capital Share Transactions 42,717
--------
Total Increase in Net Assets 43,830
NET ASSETS:
Beginning of Period --
--------
End of Period (2) $ 43,830
--------
--------
<FN>
- ------------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 5,480
Shares Issued on Distributions Reinvested 66
Shares Redeemed (1,273)
--------
Net Increase in Capital Shares Outstanding 4,273
--------
--------
(2) Net Assets were comprised of:
Paid in Capital $ 42,717
Undistributed Net Investment Income 196
Accumulated Net Realized Gain 178
Unrealized Appreciation 739
--------
$ 43,830
--------
--------
- -----------------
*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 MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 26,880 $ 22,324
Net Realized Gain (Loss) (26) 79
------------- -------------
Net Increase in Net Assets Resulting from Operations 26,854 22,403
------------- -------------
DISTRIBUTIONS:
Net Investment Income (26,888) (22,324)
------------- -------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 4,547,025 3,669,165
Distributions Reinvested 24,451 20,718
Redeemed (4,538,102) (3,553,475)
------------- -------------
Net Increase from Capital Share Transactions 33,374 136,408
------------- -------------
Total Increase in Net Assets 33,340 136,487
NET ASSETS:
Beginning of Period 657,163 690,503
------------- -------------
End of Period (2) $ 690,503 $ 826,990
------------- -------------
------------- -------------
<FN>
- -----------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 4,547,025 3,669,165
Shares Issued on Distributions Reinvested 24,451 20,718
Shares Redeemed (4,538,102) (3,553,475)
------------- -------------
Net Increase in Capital Shares Outstanding 33,374 136,408
------------- -------------
------------- -------------
(2) Net Assets were comprised of:
Paid in Capital $ 690,595 $ 827,003
Accumulated Net Realized Loss (92) (13)
------------- -------------
$ 690,503 $ 826,990
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
(000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,186 $ 6,373
Net Realized Loss (6) (1)
------------- -------------
Net Increase in Net Assets Resulting from Operations 8,180 6,372
------------- -------------
DISTRIBUTIONS:
Net Investment Income (8,186) (6,373)
------------- -------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 2,267,352 1,326,626
Distributions Reinvested 7,587 6,320
Redeemed (2,182,013) (1,337,841)
------------- -------------
Net Increase (Decrease) from Capital Share Transactions 92,926 (4,895)
------------- -------------
Total Increase (Decrease) in Net Assets 92,920 (4,896)
NET ASSETS:
Beginning of Period 266,524 359,444
------------- -------------
End of Period (2) $ 359,444 $ 354,548
------------- -------------
------------- -------------
<FN>
- -----------------------------------------------------------------------------------------------
(1) Capital Share Transactions:
Shares Subscribed 2,267,352 1,326,626
Shares Issued on Distributions Reinvested 7,587 6,320
Shares Redeemed (2,182,013) (1,337,841)
------------- -------------
Net Increase (Decrease) in Capital Shares Outstanding 92,926 (4,895)
------------- -------------
------------- -------------
(2) Net Assets were comprised of:
Paid in Capital $ 359,452 $ 354,557
Accumulated Net Realized Loss (8) (9)
------------- -------------
$ 359,444 $ 354,548
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
131
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
JANUARY 17, 1992* TWO MONTHS ENDED
TO ENDED YEAR ENDED YEAR ENDED JUNE 30,
OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995
1992 1992 1993 1994 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
<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 0.12
Net Realized and Unrealized Gain
(Loss) on Investments (0.74) 0.20 2.75 (0.25) (0.33)
------ ----- ------ ------ ------
Total from Investment Operations (0.63) 0.22 2.88 (0.06) (0.21)
------ ----- ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- -- (0.09) (0.14) --
In Excess of Net Investment Income -- -- (0.08) -- --
Net Realized Gain -- -- -- (0.36) (0.44)
In Excess of Net Realized Gain -- -- (0.09) -- --
------ ----- ------ ------ ------
Total Distributions -- -- (0.26) (0.50) (0.44)
------ ----- ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.37 $ 9.59 $ 12.21 $ 11.65 $ 11.00
------ ----- ------ ------ ------
------ ----- ------ ------ ------
TOTAL RETURN (6.30)% 2.35% 30.72% (0.52)% (1.81)%
------ ----- ------ ------ ------
------ ----- ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $47,534 $50,234 $150,854 $182,977 $154,247
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% 1.83%**
Portfolio Turnover Rate 62% 2% 53% 51% 37%
<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 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.58%** 1.70%** 1.33% 1.00% 1.17%**
Net Investment Income to Average
Net Assets 1.62%** 0.32%** 0.76% 1.23% 1.46%**
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
JULY 1, TWO MONTHS ENDED
1991* TO YEAR ENDED ENDED YEAR ENDED YEAR ENDED JUNE 30,
OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995
1991 1992 1992 1993 1994 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
<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 0.16
Net Realized and Unrealized Gain
(Loss) on Investments (0.36) 3.86 (0.53) 13.38 (4.15) 1.17
----- ------ ------ ------ ------ ------
Total from Investment
Operations (0.33) 4.00 (0.52) 13.48 (4.04) 1.33
----- ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.04) -- (0.01) (0.09) (0.15)
In Excess of Net Investment
Income -- -- -- (0.13) -- --
Net Realized Gain -- -- -- (0.12) (0.53) (2.26)
In Excess of Net Realized Gain -- -- -- (0.13) -- --
----- ------ ------ ------ ------ ------
Total Distributions -- (0.04) -- (0.39) (0.62) (2.41)
----- ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.67 $ 13.63 $ 13.11 $ 26.20 $ 21.54 $ 20.46
----- ------ ------ ------ ------ ------
----- ------ ------ ------ ------ ------
TOTAL RETURN (3.30)% 41.50% (3.82)% 105.71% (15.81)% 7.04%
----- ------ ------ ------ ------ ------
----- ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $10,719 $41,017 $41,978 $287,136 $276,906 $290,397
Ratio of Expenses to Average Net
Assets 1.00%** 1.00% 1.00%** 1.00% 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets 1.13%** 1.53% 0.61%** 0.83% 0.52% 1.58%**
Portfolio Turnover Rate 2% 33% 10% 18% 47% 29%
<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 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 2.52%** 1.63% 2.02%** 1.38% 1.20% 1.16%**
Net Investment Income (Loss) to
Average Net Assets (0.39)%** 0.90% (0.41)%** 0.45% 0.32% 1.41%**
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
132
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
SEPTEMBER 25, 1992* TWO MONTHS ENDED
TO ENDED YEAR ENDED YEAR ENDED JUNE 30,
OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995
1992 1992 1993 1994 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
<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) 0.07
Net Realized and Unrealized Gain
(Loss) on Investments 0.11 0.11 8.79 (1.69) (1.24)
------ ------ ------ ------ ------
Total from Investment
Operations 0.11 0.11 8.78 (1.73) (1.17)
------ ------ ------ ------ ------
DISTRIBUTIONS
Net Realized Gain -- -- -- (0.97) (0.92)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.11 $ 10.22 $ 19.00 $ 16.30 $ 14.21
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN 1.10% 1.09% 85.91% (9.63)% (7.46)%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $28,806 $74,219 $735,352 $929,638 $969,631
Ratio of Expenses to Average Net
Assets (1) 1.75%** 1.75%** 1.75% 1.75% 1.75%**
Ratio of Net Investment Income
(Loss) to Average Net Assets
(1) (0.53)%** (0.33)%** (0.06)% (0.26)% 0.99%**
Portfolio Turnover Rate 0% 2% 52% 32% 21%
<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 $0.01
Ratios before expense
limitation:
Expenses to Average Net Assets 4.82%** 2.48%** 1.79% N/A 1.85%**
Net Investment Income (Loss)
to Average Net Assets (3.60)%** (1.06)%** (0.10)% N/A 0.89%**
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 2, 1993* SIX MONTHS ENDED
TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, 1995
1993 1994 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------
<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 0.15
Net Realized and Unrealized Gain on Investments 2.83 1.29 1.27
------ ------ ------
Total from Investment Operations 2.91 1.37 1.42
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.09) --
Net Realized Gain -- (0.25) (1.24)
------ ------ ------
Total Distributions -- (0.34) (1.24)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 12.91 $ 13.94 $ 14.12
------ ------ ------
------ ------ ------
TOTAL RETURN 29.10% 10.88% 11.10%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $12,681 $27,634 $48,624
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% 2.68%**
Portfolio Turnover Rate 15% 79% 3%
<FN>
- -----------------
(1)Effect of voluntary expense limitation during the
period:
Per share benefit to net investment income $0.09 $0.06 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 2.43%** 1.62% 1.32%**
Net Investment Income (Loss) to Average Net Assets (0.21)%** 0.25% 2.36%**
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
133
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD FROM TWO MONTHS ENDED
JULY 15, 1992* ENDED YEAR ENDED YEAR ENDED JUNE 30,
TO OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995
1992 1992 1993 1994 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
<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 0.13
Net Realized and Unrealized Gain
(Loss) on Investments (0.67) 0.39 4.18 0.79 1.47
------- ----- ------------- ------------- -------------
Total from Investment
Operations (0.65) 0.40 4.26 0.87 1.60
------- ----- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income -- -- (0.02) (0.12) (0.06)
In Excess of Net Investment
Income -- -- (0.03) -- --
Net Realized Gain -- -- (0.09) (1.22) (0.19)
------- ----- ------------- ------------- -------------
Total Distributions -- -- (0.14) (1.34) (0.25)
------- ----- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 9.35 $ 9.75 $ 13.87 $ 13.40 $ 14.75
------- ----- ------------- ------------- -------------
------- ----- ------------- ------------- -------------
TOTAL RETURN (6.50)% 4.28% 44.24% 6.95% 12.11%
------- ----- ------------- ------------- -------------
------- ----- ------------- ------------- -------------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $11,257 $11,739 $19,918 $78,935 $81,685
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% 1.68%**
Portfolio Turnover Rate 10% 5% 42% 12% 19%
<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 $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets 5.22%** 2.49%** 1.66% 1.24% 1.18%**
Net Investment Income (Loss) to
Average Net Assets (3.22)%** (0.80)%** 0.18% 0.63% 1.50%**
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
FEBRUARY 1, 1994* JUNE 30,
TO DECEMBER 31, 1995
1994 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.13
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.03 (0.03)
Net Realized and Unrealized Gain (Loss) on Investments (0.88) 0.68
------- -------
Total from Investment Operations (0.85) 0.65
------- -------
DISTRIBUTIONS
Net Investment Income (0.02) (0.01)
Net Realized Gain -- (0.24)
------- -------
Total Distributions (0.02) (0.25)
------- -------
NET ASSET VALUE, END OF PERIOD $ 9.13 $ 9.53
------- -------
------- -------
TOTAL RETURN (8.49)% 7.47%
------- -------
------- -------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $30,243 $20,554
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%** (0.43)%**
Portfolio Turnover Rate 56% 10%
<FN>
- -----------------
(1)Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $ 0.04 $ 0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.72%** 1.63%**
Net Investment Loss to Average Net Assets (0.06)%** (0.81)%**
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
134
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS SIX MONTHS
ENDED YEAR ENDED YEAR ENDED ENDED
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER DECEMBER DECEMBER JUNE 30,
OCTOBER 31, OCTOBER 31, OCTOBER 31, 31, 31, 31, 1995
1990 1991 1992 1992 1993 1994 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.72 $ 10.05 $ 10.52 $ 9.83 $ 9.98 $ 14.09 $ 15.34
----------- ----------- ----------- ----- ---------- ---------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.19 0.12 0.12 0.01 0.15 0.16 0.15
Net Realized and Unrealized
Gain (Loss) on Investments 0.20 0.58 (0.59) 0.14 4.36 1.54 0.56
----------- ----------- ----------- ----- ---------- ---------- -----------
Total from Investment
Operations 0.39 0.70 (0.47) 0.15 4.51 1.70 0.71
----------- ----------- ----------- ----- ---------- ---------- -----------
DISTRIBUTIONS
Net Investment Income (0.06) (0.15) (0.17) -- (0.01) (0.18) --
In Excess of Net Investment
Income -- -- -- -- (0.13) -- --
Net Realized Gain -- (0.08) (0.05) -- (0.26) (0.27) (0.80)
----------- ----------- ----------- ----- ---------- ---------- -----------
Total Distributions (0.06) (0.23) (0.22) -- (0.40) (0.45) (0.80)
----------- ----------- ----------- ----- ---------- ---------- -----------
NET ASSET VALUE, END OF PERIOD $ 10.05 $ 10.52 $ 9.83 $ 9.98 $ 14.09 $ 15.34 $ 15.25
----------- ----------- ----------- ----- ---------- ---------- -----------
----------- ----------- ----------- ----- ---------- ---------- -----------
TOTAL RETURN 3.99% 7.17% (4.56)% 1.53% 46.50% 12.39% 4.88%
----------- ----------- ----------- ----- ---------- ---------- -----------
----------- ----------- ----------- ----- ---------- ---------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $110,716 $283,776 $486,836 $510,727 $947,045 $1,304,770 $1,438,303
Ratio of Expenses to Average Net
Assets (1) 1.03% 1.00% 1.00% 1.00%** 1.00% 1.00% 1.00%**
Ratio of Net Investment Income
to Average Net Assets (1) 3.51% 2.27% 1.46% 0.68%** 1.25% 1.12% 2.28%**
Portfolio Turnover Rate 38% 22% 12% 5% 23% 16% 13%
<FN>
- -----------------
(1)Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $ 0.01 $ 0.01 $ 0.00 $ 0.00 $ 0.01 $0.004 $0.002
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.24% 1.09% 1.02% 1.14%** 1.06% 1.03% 1.03%**
Net Investment Income to
Average Net Asset 3.30% 2.18% 1.44% 0.54%** 1.19% 1.09% 2.25%**
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
DECEMBER 15, 1992* YEAR ENDED YEAR ENDED JUNE 30,
TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995
1992 1993+ 1994 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
<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 0.20
Net Realized and Unrealized Gain on
Investments (2) 0.08 4.48 0.62 0.11
------ ------ ------ ------
Total from Investment Operations 0.09 4.57 0.76 0.31
------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- 0.00 (0.03) (0.03)
In Excess of Net Investment Income -- (0.02) -- --
Net Realized Gain -- -- (0.22) --
------ ------ ------ ------
Total Distributions -- (0.02) (0.25) (0.03)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.09 $ 14.64 $ 15.15 $ 15.43
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN 0.90% 45.34% 5.25% 2.03%
------ ------ ------ ------
------ ------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $3,824 $52,834 $160,101 $187,018
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% 2.81%**
Portfolio Turnover Rate 0% 14% 8% 14%
<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% 1.25%**
Net Investment Income (Loss) to
Average Net Assets (19.15)%** (0.05)% 1.04% 2.71%**
(2)Reflects 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 the financial statements.
- --------------------------------------------------------------------------------
135
<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*
TO DECEMBER SIX MONTHS ENDED
31, JUNE 30, 1995
1994 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.83
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (1) (0.01) (0.05)
Net Realized and Unrealized Loss on Investments (0.16) (1.59)
------ ------
Total from Investment Operations (0.17) (1.64)
------ ------
NET ASSET VALUE, END OF PERIOD $ 9.83 $ 8.19
------ ------
------ ------
TOTAL RETURN (1.70)% (16.68)%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $50,332 $21,746
Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00%**
Ratio of Net Investment Loss to Average Net Assets (1) (0.10)%** (0.05)%**
Portfolio Turnover Rate 1% 11%
<FN>
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $ 0.02 $ 0.35
Ratios before expense limitation:
Expenses to Average Net Assets 1.27%** 1.33%**
Net Investment Loss to Average Net Assets (0.37)%** (0.38)%**
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 18, 1995*
TO JUNE 30,
1995
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.01
Net Realized and Unrealized Loss on Investments (1.21)
------
Total from Investment Operations (1.20)
------
NET ASSET VALUE, END OF PERIOD $ 8.80
------
------
TOTAL RETURN (12.00)%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $13,953
Ratio of Expenses to Average Net Assets (1) 2.56%**+
Ratio of Net Investment Income to Average Net Assets (1) 0.41%**
Portfolio Turnover Rate 62%
<FN>
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $ 0.05
Ratios before expense limitation:
Expenses to Average Net Assets 3.97%**
Net Investment Loss to Average Net Assets (1.01)%**
*Commencement of operations.
**Annualized
+The ratio of expenses to average net assets includes Brazilian tax expense.
Without the effect of the Brazilian tax expense, the ratio of expenses to
average net assets would have been 1.70%**.
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
136
<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 JUNE 30,
1995
(UNAUDITED)
- ------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.06
Net Realized and Unrealized Gain on Investments 1.77
------
Total from Investment Operations 1.83
------
DISTRIBUTIONS
Net Investment Income (0.02)
------
NET ASSET VALUE, END OF PERIOD $ 11.81
------
------
TOTAL RETURN 18.33%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $18,255
Ratio of Expenses to Average Net Assets (1) 1.00%**
Ratio of Net Investment Income to Average Net
Assets (1) 2.10%**
Portfolio Turnover Rate 80%
<FN>
- ---------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $ 0.04
Ratios before expense limitation:
Expenses to Average Net Assets 2.26%**
Net Investment Income to Average Net Assets 0.83%**
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1, SIX MONTHS
1989* TWO MONTHS ENDED
TO OCTOBER YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED JUNE 30,
31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995
1990 1991+ 1992 1992 1993 1994 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.00 $ 9.03 $ 16.18 $ 14.97 $ 16.22 $ 16.22 $ 16.12
------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss) (1) 0.08 -- (0.09) (0.01) (0.11) (0.09) (0.05)
Net Realized and
Unrealized Gain (Loss)
on Investments (1.00) 7.19 (1.12) 1.26 0.11 (0.01) 2.17
------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations (0.92) 7.19 (1.21) 1.25 0.00 (0.10) 2.12
------ ------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.05) (0.04) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $ 9.03 $ 16.18 $ 14.97 $ 16.22 $ 16.22 $ 16.12 $ 18.24
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
TOTAL RETURN (9.27)% 79.84% (7.48)% 8.35% 0.00% (0.62)% 13.15%
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $11,261 $54,364 $80,156 $94,161 $103,621 $117,669 $143,586
Ratio of Expenses to
Average Net Assets (1) 1.26%** 1.25% 1.25% 1.25%** 1.25% 1.25% 1.25%**
Ratio of Net Investment
Income (Loss) to Average
Net Assets (1) 0.64%** 0.00% (0.66)% (0.68)%** (0.77)% (0.61)% (0.68)%**
Portfolio Turnover Rate 19% 2% 17% 1% 25% 24% 17%
<FN>
- ---------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income $ 0.01 $ 0.02 $ 0.01 $ 0.00 $ 0.01 $ 0.002 $ 0.002
Ratios before expense
limitation:
Expenses to Average
Net Assets 1.64%** 1.39% 1.29% 1.36%** 1.31% 1.26% 1.28%**
Net Investment Income
(Loss) to
Average Net Assets 0.24%** (0.14)% (0.71)% (0.79)%** (0.83)% (0.62)% (0.71)%**
+Per share amounts for the year ended October 31, 1991 are based on average
outstanding shares.
*Commencement of
operations.
**Annualized
</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 EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 2, SIX MONTHS
1991* TWO MONTHS ENDED
TO OCTOBER YEAR ENDED ENDED YEAR ENDED YEAR ENDED JUNE 30,
31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995
1991 1992 1992 1993 1994 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
<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 0.10
Net Realized and Unrealized Gain on
Investments 0.61 0.82 0.41 0.28 0.21 2.56
----------- ----------- ------ ------ ------ -----------
Total from Investment Operations 0.66 0.98 0.44 0.50 0.38 2.66
----------- ----------- ------ ------ ------ -----------
DISTRIBUTIONS
Net Investment Income -- (0.20) -- (0.23) (0.13) (0.10)
In Excess of Net Investment Income -- -- -- (0.01) -- --
Net Realized Gain -- -- -- -- (0.37) (0.42)
----------- ----------- ------ ------ ------ -----------
Total Distributions -- (0.20) -- (0.24) (0.50) (0.52)
----------- ----------- ------ ------ ------ -----------
NET ASSET VALUE, END OF PERIOD $ 10.66 $ 11.44 $ 11.88 $ 12.14 $ 12.02 $ 14.16
----------- ----------- ------ ------ ------ -----------
----------- ----------- ------ ------ ------ -----------
TOTAL RETURN 6.60% 9.26% 3.85% 4.33% 3.26% 23.05%
----------- ----------- ------ ------ ------ -----------
----------- ----------- ------ ------ ------ -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $18,139 $36,558 $45,985 $73,789 $97,259 $146,773
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% 1.71%**
Portfolio Turnover Rate 3% 38% 1% 172% 146% 77%
<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% 0.90%**
Net Investment Income to Average
Net Assets 1.77%** 1.52% 1.62%** 1.46% 1.35% 1.60%**
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 17, SIX MONTHS
1992* ENDED
TO DECEMBER YEAR ENDED YEAR ENDED JUNE 30,
31, DECEMBER 31, DECEMBER 31, 1995
1992 1993 1994 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
<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 0.15
Net Realized and Unrealized Gain (Loss) on
Investments 0.13 0.90 (0.01) 1.03
------------ ------ ------ ------
Total from Investment Operations 0.14 1.14 0.27 1.18
------------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.18) (0.27) (0.14)
Net Realized Gain -- -- (0.30) (0.33)
------------ ------ ------ ------
Total Distributions -- (0.18) (0.57) (0.47)
------------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.14 $ 11.10 $ 10.80 $ 11.51
------------ ------ ------ ------
------------ ------ ------ ------
TOTAL RETURN 1.40% 11.33% 2.53% 11.44%
------------ ------ ------ ------
------------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $5,974 $26,775 $40,033 $48,812
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% 2.82%**
Portfolio Turnover Rate 0% 29% 22% 17%
<FN>
- ------------------------------
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment income $ 0.13 $ 0.06 $ 0.03 $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets 23.14%** 1.68% 1.26% 1.27%**
Net Investment Income (Loss) to Average
Net Assets (20.50)%** 1.88% 2.41% 2.55%**
*Commencement of operations.
**Annualized
</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 U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 24, 1995*
TO JUNE 30, 1995
(UNAUDITED)
- ------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.19
Net Realized and Unrealized Gain on Investments 0.64
------
Total from Investment Operations 0.83
------
NET ASSET VALUE, END OF PERIOD $ 10.83
------
------
TOTAL RETURN 8.30%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $39,920
Ratio of Expenses to Average Net Assets (1) 1.00%**
Ratio of Net Investment Income to Average Net
Assets (1) 8.34%**
Portfolio Turnover Rate 41%
<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 1.68%**
Net Investment Income to Average Net Assets 7.66%**
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 31, SIX MONTHS
1990* TWO MONTHS ENDED
TO OCTOBER YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED JUNE 30,
31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995
1990 1991 1992 1992 1993 1994 (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.00 $ 8.59 $ 10.24 $ 10.71 $ 11.31 $ 12.63 $ 11.50
------------ ------ ------ ------ ------ ------------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.37 0.46 0.38 0.08 0.37 0.40 0.18
Net Realized and
Unrealized Gain (Loss)
on Investments (1.45) 1.67 0.48 0.52 1.31 (0.55) 1.95
------------ ------ ------ ------ ------ ------------ ------
Total from Investment
Operations (1.08) 2.13 0.86 0.60 1.68 (0.15) 2.13
------------ ------ ------ ------ ------ ------------ ------
DISTRIBUTIONS
Net Investment Income (0.33) (0.48) (0.39) -- (0.36) (0.40) (0.19)
Net Realized Gain -- -- -- -- -- (0.58) (0.38)
------------ ------ ------ ------ ------ ------------ ------
Total Distributions (0.33) (0.48) (0.39) -- (0.36) (0.98) (0.57)
------------ ------ ------ ------ ------ ------------ ------
NET ASSET VALUE, END OF
PERIOD $ 8.59 $ 10.24 $ 10.71 $ 11.31 $ 12.63 $ 11.50 $ 13.06
------------ ------ ------ ------ ------ ------------ ------
------------ ------ ------ ------ ------ ------------ ------
TOTAL RETURN (11.05)% 25.34% 8.51% 5.60% 15.14% (1.29)% 19.41%
------------ ------ ------ ------ ------ ------------ ------
------------ ------ ------ ------ ------ ------------ ------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $18,178 $16,304 $25,013 $27,541 $54,598 $73,406 $108,080
Ratio of Expenses to
Average Net Assets (1) 0.70%** 0.70% 0.70% 0.70%** 0.70% 0.70% 0.70%**
Ratio of Net Investment
Income to Average Net
Assets (1) 5.46%** 4.57% 3.72% 4.41%** 3.23% 3.37% 3.18%**
Portfolio Turnover Rate 70% 90% 56% 9% 51% 33% 18%
<FN>
- ---------------
(1) Effect of voluntary
expense
limitation during the
period:
Per share benefit to
net
investment income $ 0.01 $ 0.02 $ 0.01 $ 0.01 $ 0.03 $ 0.01 $ 0.01
Ratios before expense
limitation:
Expenses to Average
Net Assets 0.88%** 0.87% 0.84% 1.20%** 0.95% 0.80% 0.82%**
Net Investment Income
to
Average Net Assets 5.28%** 4.40% 3.58% 3.91%** 2.98% 3.27% 3.06%**
*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 BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 20, TWO MONTHS SIX MONTHS
1990* ENDED YEAR ENDED YEAR ENDED ENDED
TO OCTOBER YEAR ENDED YEAR ENDED DECEMBER DECEMBER DECEMBER JUNE 30,
31, OCTOBER 31, OCTOBER 31, 31, 31, 31, 1995
1990 1991 1992 1992 1993 1994 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.00 $ 9.62 $ 10.61 $ 11.00 $ 11.31 $ 11.13 $ 8.96
------ ----------- ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.40 0.59 0.58 0.10 0.44 0.42 0.19
Net Realized and
Unrealized Gain (Loss)
on Investments (0.46) 1.03 0.42 0.21 0.79 (0.64) 1.03
------ ----------- ----------- ----------- ----------- ----------- -----------
Total from Investment
Operations (0.06) 1.62 1.00 0.31 1.23 (0.22) 1.22
------ ----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.32) (0.63) (0.58) -- (0.41) (0.49) (0.19)
In Excess of Net
Investment Income -- -- -- -- (0.08) -- --
Net Realized Gain -- -- (0.03) -- (0.06) (1.46) (0.26)
In Excess of Net
Realized Gain -- -- -- -- (0.86) -- --
------ ----------- ----------- ----------- ----------- ----------- -----------
Total Distributions (0.32) (0.63) (0.61) -- (1.41) (1.95) (0.45)
------ ----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 9.62 $ 10.61 $ 11.00 $ 11.31 $ 11.13 $ 8.96 $ 9.73
------ ----------- ----------- ----------- ----------- ----------- -----------
------ ----------- ----------- ----------- ----------- ----------- -----------
TOTAL RETURN (0.63)% 17.31% 9.57% 2.82% 12.09% (2.32)% 14.25%
------ ----------- ----------- ----------- ----------- ----------- -----------
------ ----------- ----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $37,444 $51,334 $40,332 $39,984 $29,684 $18,492 $21,313
Ratio of Expenses to
Average Net Assets (1) 0.70%** 0.70% 0.70% 0.70%** 0.70% 0.70% 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1) 6.81%** 5.99% 5.21% 5.29%** 3.88% 4.13% 4.23%**
Portfolio Turnover Rate 19% 67% 40% 4% 136% 44% 14%**
<FN>
- ---------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.04 $ 0.03 $ 0.02
Ratios before expense
limitation:
Expenses to Average
Net Assets 0.90%** 0.78% 0.79% 1.00%** 1.02% 0.95% 1.12%**
Net Investment Income
to Average Net
Assets 6.61%** 5.91% 5.12% 4.99%** 3.56% 3.88% 3.81%**
*Commencement of
operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1, SIX MONTHS ENDED
1994* JUNE 30,
TO DECEMBER 31, 1995
1994 (UNAUDITED)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 8.59
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.50 0.67
Net Realized and Unrealized Gain (Loss) on Investments (1.91) 0.24
------ ------
Total from Investment Operations (1.41) 0.91
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.48)
------ ------
NET ASSET VALUE, END OF PERIOD $ 8.59 $ 9.02
------ ------
------ ------
TOTAL RETURN (14.10)% 11.32%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $144,949 $179,543
Ratio of Expenses to Average Net Assets 1.49%** 1.46%**
Ratio of Net Investment Income to Average Net Assets 9.97%** 16.61%**
Portfolio Turnover Rate 273% 201%
<FN>
- ---------------
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
140
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
MAY 15, TWO MONTHS ENDED
1991* YEAR ENDED ENDED YEAR ENDED YEAR ENDED JUNE 30,
TO OCTOBER OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995
31, 1991 1992 1992 1993 1994 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
<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 0.36
Net Realized and Unrealized
Gain (Loss) on Investments 0.49 0.39 0.01 0.41 (0.92) 0.71
------ ------ ------ ------ ------ ------
Total from Investment
Operations 0.71 1.08 0.11 0.95 (0.33) 1.07
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.16) (0.69) (0.10) (0.56) (0.53) (0.35)
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) (0.35)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.55 $ 10.92 $ 10.93 $ 11.05 $ 9.82 $ 10.54
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 7.12% 10.61% 1.02% 9.07% (3.10)% 11.14%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $72,326 $146,546 $154,210 $240,668 $209,331 $166,018
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% 7.00%**
Portfolio Turnover Rate 48% 105% 15% 240% 388% 109%
<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% 0.60%**
Net Investment Income to
Average
Net Assets 6.93%** 6.45% 5.26%** 4.82% 5.60% 6.85%**
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
MAY 1, 1991* TWO MONTHS ENDED
TO OCTOBER YEAR ENDED ENDED YEAR ENDED YEAR ENDED JUNE 30,
31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995
1991 1992 1992 1993 1994 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
<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 0.39
Net Realized and Unrealized
Gain (Loss) on Investments 0.45 0.55 (0.29) 0.90 (1.38) 0.87
------ ------ ------ ------ ------ ------
Total from Investment
Operations 0.61 1.08 (0.15) 1.59 (0.68) 1.26
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.27) -- (0.79) (0.40) (0.40)
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) (0.40)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.61 $ 11.41 $ 11.26 $ 11.68 $ 10.29 $ 11.15
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 6.10% 10.29% (1.31)% 15.34% (6.08)% 12.55%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $28,236 $94,847 $92,897 $172,468 $130,675 $88,866
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% 7.27%**
Portfolio Turnover Rate 20% 144% 9% 108% 171% 97%
<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 $ 0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.62%** 0.86% 0.90%** 0.70% 0.66% 0.75%**
Net Investment Income to
Average
Net Assets 6.12%** 6.56% 6.59%** 5.79% 6.18% 7.03%**
*Commencement of operations.
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
141
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
SEPTEMBER 28, 1992* TWO MONTHS ENDED YEAR ENDED YEAR ENDED JUNE 30,
TO OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995
1992 1992 1993 1994 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
<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 0.57
Net Realized and Unrealized
Gain (Loss) on Investments (0.31) 0.19 1.21 (1.40) 0.76
------- ------ ------------ ------------ -------
Total from Investment
Operations (0.23) 0.33 2.11 (0.43) 1.33
------- ------ ------------ ------------ -------
DISTRIBUTIONS
Net Investment Income -- (0.15) (0.90) (0.97) (0.58)
Net Realized Gain -- -- -- (0.21) --
------- ------ ------------ ------------ -------
-- (0.15) (0.90) (1.18) (0.58)
------- ------ ------------ ------------ -------
NET ASSET VALUE, END OF PERIOD $ 9.77 $ 9.95 $ 11.16 $ 9.55 $ 10.30
------- ------ ------------ ------------ -------
------- ------ ------------ ------------ -------
TOTAL RETURN (2.30)% 3.41% 22.11% (4.18)% 14.43%
------- ------ ------------ ------------ -------
------- ------ ------------ ------------ -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $16,950 $20,194 $74,500 $97,223 $63,281
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% 11.33%**
Portfolio Turnover Rate 9% 24% 104% 74% 40%
<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% 0.87%**
Net Investment Income to
Average Net Assets 9.41%** 8.09%** 8.49% 9.41% 11.21%**
*Commencement of operations.
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 18, 1995*
TO JUNE 30, 1995
(UNAUDITED)
- ------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.21
Net Realized and Unrealized Gain on Investments 0.21
-------
Total from Investment Operations 0.42
-------
DISTRIBUTIONS
Net Investment Income (0.16)
-------
NET ASSET VALUE, END OF PERIOD $ 10.26
-------
-------
TOTAL RETURN 4.22%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $43,830
Ratio of Expenses to Average Net Assets (1) 0.45%**
Ratio of Net Investment Income to Average Net
Assets (1) 4.55%**
Portfolio Turnover Rate 124%
<FN>
- -----------------
(1)Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets 0.76%**
Net Investment Income to Average Net Assets 4.24%**
*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 MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS SIX MONTHS
ENDED YEAR ENDED YEAR ENDED ENDED
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER DECEMBER DECEMBER JUNE 30,
OCTOBER 31, OCTOBER 31, OCTOBER 31, 31, 31, 31, 1995
1990 1991 1992 1992 1993 1994 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------- ----------- ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.079 0.062 0.039 0.005 0.027 0.040 0.030
----------- ----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.079) (0.062) (0.039) (0.005) (0.027) (0.040) (0.030)
In Excess of Net
Investment Income -- -- -- -- (0.000) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Distributions (0.079) (0.062) (0.039) (0.005) (0.027) (0.040) (0.030)
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL RETURN 8.16% 6.37% 3.77% 0.50% 2.76% 3.84% 2.75%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $516,182 $607,087 $612,968 $599,172 $657,163 $690,503 $826,990
Ratio of Expenses to
Average Net Assets (1) 0.55% 0.53% 0.52% 0.55%** 0.53% 0.49% 0.49%**
Ratio of Net Investment
Income to Average Net
Assets (1) 7.87% 6.11% 3.74% 3.11%** 2.71% 3.77% 5.49%**
<FN>
- ---------------
(1)Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income $ 0.000 N/A N/A $ 0.000 $ 0.000 N/A N/A
Ratios before expense
limitation:
Expenses to Average
Net Assets 0.58% N/A N/A 0.59%** 0.54% N/A N/A
Net Investment Income
to Average Net
Assets 7.85% N/A N/A 3.07%** 2.70% N/A N/A
**Annualized
</TABLE>
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS SIX MONTHS
ENDED YEAR ENDED YEAR ENDED ENDED
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER DECEMBER DECEMBER JUNE 30,
OCTOBER 31, OCTOBER 31, OCTOBER 31, 31, 31, 31, 1995
1990 1991 1992 1992 1993 1994 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------- ----------- ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.054 0.043 0.026 0.004 0.019 0.020 0.020
----------- ----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.054) (0.043) (0.026) (0.004) (0.019) (0.020) (0.020)
In Excess of Net
Investment Income -- -- -- -- (0.000) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Distributions (0.054) (0.043) (0.026) (0.004) (0.019) (0.020) (0.020)
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL RETURN 5.51% 4.35% 2.74% 0.37% 1.91% 2.44% 1.72%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $102,195 $166,953 $206,691 $208,866 $266,524 $359,444 $354,548
Ratio of Expenses to
Average Net Assets (1) 0.51% 0.56% 0.55% 0.57%** 0.54% 0.51% 0.52%**
Ratio of Net Investment
Income to Average Net
Assets (1) 5.38% 4.18% 2.66% 2.31%** 1.89% 2.42% 3.43%**
<FN>
- ---------------
(1)Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income $ 0.001 N/A N/A $ 0.000 $ 0.000 N/A N/A
Ratios before expense
limitation:
Expenses to Average
Net Assets 0.63% N/A N/A 0.67%** 0.56% N/A N/A
Net Investment Income
to Average Net
Assets 5.26% N/A N/A 2.21%** 1.87% N/A N/A
**Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
143
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 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 June 30, 1995, the Fund was comprised of 24 separate active, diversified and
non-diversified portfolios (each referred to as the "Portfolio"). During the six
months ended June 30, 1995, the following Portfolios commenced operations: Latin
American and Municipal Bond Portfolios on January 18, 1995, the U.S. Real Estate
Portfolio on February 24, 1995, and the Aggressive Equity Portfolio on March 8,
1995.
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.
1. SECURITY VALUATION: Equity securities listed on an 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. Money market and municipal
money market securities 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.
The Portfolios 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 Indian securities a capital gains tax is accrued based on the
relative amounts of net realized gains and net unrealized appreciation of such
securities. The Brazilian government assesses 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 net investment income (loss) and accumulated gain
(loss) are adjusted for permanent book-tax differences.
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 principal amount of the
repurchase transaction, including 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. 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 US dollars at the mean of the bid and asked prices of such
currencies against US dollars last quoted by a major US 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 and balances. However, pursuant to US Federal income tax
regulations, gains and losses from certain foreign currency transactions are
treated as ordinary income for US Federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from forward foreign currency 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 US dollar equivalent amounts actually received or
paid and
- --------------------------------------------------------------------------------
144
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
JUNE 30, 1995
- --------------------------------------------------------------------------------
certain currency related amounts of realized gains or losses from the sale of
foreign denominated debt securities.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of US 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.
5. FORWARD FOREIGN CURRENCY 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 contracts to attempt to protect
securities and related receivables and payables against changes in future
foreign exchange rates. A forward currency 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 US
dollar.
6. 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 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.
7. 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.
8. SHORT SALES: The Latin American, 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
- --------------------------------------------------------------------------------
145
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
JUNE 30, 1995
- --------------------------------------------------------------------------------
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.
9. PURCHASED AND WRITTEN OPTIONS: The Active Country Allocation, Gold, Latin
American, Aggressive Equity, Equity Growth, U.S. Real Estate, and Emerging
Markets Debt Portfolios may write covered call options. 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 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. Possible losses from written
options may be unlimited.
The Active Country Allocation, Gold, Latin American, Aggressive Equity, Equity
Growth and U.S. Real Estate Portfolios may also purchase call options on their
portfolio securities. Each portfolio may purchase call options to close out
covered call positions or to protect against an increase in the price of the
security it anticipates purchasing. Possible losses from purchased options
cannot exceed the total amount invested.
10. 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 the
Portfolios based upon relative net assets. Dividends from 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 tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
mortgage-backed securities, foreign currency transactions, net operating losses,
deferral of wash sales and post October losses and realization of gains and
losses on certain investments including forward foreign currency contracts,
options and futures contracts.
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 six
months ended June 30, 1995, such transaction fees totaled approximately
$518,000.
B. Morgan Stanley Asset Management Inc. ("MSAM") 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
- --------------------------------------------------------------------------------
146
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
JUNE 30, 1995
- --------------------------------------------------------------------------------
expenses, expressed as a percentage of average daily net assets, exceed the
maximum ratios indicated below:
<TABLE>
<CAPTION>
MAXIMUM
ADVISORY EXPENSE
PORTFOLIO FEE 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 from MSAM 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 United States
Trust Company of New York ("US Trust"), Mutual Funds Service Company ("MFSC"), a
wholly-owned subsidiary of US Trust, provides certain administrative services to
the Fund. For such services, MSAM pays US Trust a portion of the fee MSAM
receives from the Fund.
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.
US Trust acts as custodian for the Fund's assets held in the United States.
During the six months ended June 30, 1995, the following Portfolios incurred
custody fees and had amounts due to MSTC at June 30, 1995 as follow:
<TABLE>
<CAPTION>
MSTC CUSTODY
FEES FEES PAYABLE TO
INCURRED MSTC
(000) (000)
--------------- -----------------
<S> <C> <C>
Active Country Allocation.... $ 183 $ 85
Asian Equity................. 192 102
Emerging Markets............. 1,491 1,152
European Equity.............. 15 5
Global Equity................ 25 14
Gold......................... 1 1
International Equity......... 233 118
International Small Cap...... 54 26
Japanese Equity.............. 9 7
Latin American............... 36 21
Emerging Markets Debt........ 78 144
Global Fixed Income.......... 23 15
</TABLE>
E. During the six months ended June 30, 1995, purchases and sales of investment
securities other than long-term US Government securities and short-term
investments were:
<TABLE>
<CAPTION>
(000)
----------------------
PORTFOLIO PURCHASES SALES
----------- ---------
<S> <C> <C>
Active Country Allocation............... $ 61,153 $ 102,313
Asian Equity............................ 77,607 77,168
Emerging Markets........................ 267,479 173,947
European Equity......................... 15,981 925
Global Equity........................... 15,874 21,800
Gold.................................... 2,718 13,837
International Equity.................... 192,269 169,640
International Small Cap................. 39,203 23,761
Japanese Equity......................... 3,939 29,606
Latin American.......................... 20,744 6,992
Aggressive Equity....................... 24,134 9,273
Emerging Growth......................... 24,855 20,486
Equity Growth........................... 104,577 81,713
Small Cap Value Equity.................. 10,805 6,972
U.S. Real Estate........................ 48,607 11,450
Value Equity............................ 34,602 15,281
Balanced................................ 2,123 2,609
Emerging Markets Debt................... 312,740 313,825
Fixed Income............................ 23,523 9,040
Global Fixed Income..................... 51,243 94,505
High Yield.............................. 27,469 62,732
Municipal Bond.......................... 99,205 56,492
</TABLE>
- --------------------------------------------------------------------------------
147
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
JUNE 30, 1995
- --------------------------------------------------------------------------------
Purchases and sales during the six months ended June 30, 1995 of long-term US
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............................ 168,430 197,800
Global Fixed Income..................... 33,415 26,895
</TABLE>
During the six months ended June 30, 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................................... $ 78
Emerging Markets............................... 17
European Equity................................ 3
Global Equity.................................. 1
International Equity........................... 59
International Small Cap........................ 1
Japanese Equity................................ 42
Latin American................................. 1
Equity Growth.................................. 1
U.S. Real Estate............................... 2
</TABLE>
F. At June 30, 1995, cost and unrealized appreciation (depreciation) for 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............... $ 161,688 $ 11,290 $ (4,588) $ 6,702
Asian Equity.............. 234,054 59,594 (7,871) 51,723
Emerging Markets.......... 983,422 132,266 (139,039) (6,773)
European Equity........... 44,028 4,618 (1,300) 3,318
Global Equity............. 75,279 9,705 (3,583) 6,122
Gold...................... 21,348 709 (1,656) (947)
International Equity...... 1,097,153 283,779 (26,644) 257,135
International Small Cap... 184,134 16,832 (18,758) (1,926)
Japanese Equity........... 23,876 286 (2,596) (2,310)
Latin American............ 13,606 1,004 (978) 26
Aggressive Equity......... 16,722 1,222 (55) 1,167
Emerging Growth........... 104,964 41,714 (3,041) 38,673
Equity Growth............. 126,248 18,928 (603) 18,325
Small Cap Value Equity.... 45,637 4,711 (1,526) 3,185
U.S. Real Estate.......... 39,216 1,373 (73) 1,300
Value Equity.............. 104,047 10,653 (1,694) 8,959
Balanced.................. 19,792 1,663 (287) 1,376
Emerging Markets Debt..... 163,213 8,530 (4,298) 4,232
Fixed Income.............. 159,244 7,454 (219) 7,235
Global Fixed Income....... 83,741 4,503 (796) 3,707
High Yield................ 63,971 1,809 (3,826) (2,017)
Municipal Bond............ 42,728 763 (24) 739
Money Market.............. 827,358 -- -- --
Municipal Money Market.... 352,836 -- -- --
</TABLE>
At December 31, 1994, the following Portfolios had available capital loss
carryforwards to offset future net capital gains, to the extent provided by
regulation, through the indicated expiration dates:
<TABLE>
<CAPTION>
EXPIRATION DATE
DECEMBER 31,
(000)
-----------------------------------------------------
PORTFOLIO 1998 1999 2000 2001 2002 TOTAL
- ----------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
International
Small Cap....... $ -- $ -- $ -- $ -- $ 1,764 $ 1,764
Emerging Growth.. 441 360 1,838 7,476 746 10,861
Emerging Markets
Debt............ -- -- -- -- 531 531
Fixed Income..... -- -- -- -- 13,870 13,870
High Yield....... -- -- -- -- 497 497
Global Fixed..... -- -- -- -- 5,293 5,293
Money Market..... -- 66 -- -- 26 92
Municipal Money
Market.......... -- -- -- 1 7 8
</TABLE>
To the extent that capital loss carryovers are used to offset any future net
capital gains realized during the carryover period as provided by 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 because such distributions may be taxable
to Portfolio shareholders as ordinary income.
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, 1994 to December 31, 1994 the
Portfolio's incurred and elected to defer to January 1, 1995 for Federal income
tax purposes net capital and net currency losses of approximately:
<TABLE>
<CAPTION>
CAPITAL
LOSSES CURRENCY
PORTFOLIO (000) LOSSES (000)
- ------------------------------------------- ----------- -------------
<S> <C> <C>
Emerging Markets........................... $ -- $ 393
Global Equity.............................. -- 5
Gold....................................... -- 1
European Equity............................ -- 4
International Small Cap.................... 225 --
Balanced................................... 12 --
Emerging Markets Debt...................... -- 7
Fixed Income............................... 269 --
Global Fixed Income........................ 429 897
High Yield................................. 1,084 --
</TABLE>
- --------------------------------------------------------------------------------
148
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
JUNE 30, 1995
- --------------------------------------------------------------------------------
G. During the six months ended June 30, 1995, the following Portfolios
participated in writing covered call and put options. The Portfolios had option
activity as follows:
<TABLE>
<CAPTION>
NUMBER OF PREMIUM
AGGRESSIVE EQUITY PORTFOLIO CONTRACTS (000)
- ----------------------------------- --------------- -------------
<S> <C> <C>
Options outstanding at December 31,
1994.............................. -- $ --
Options written during the
period............................ 446 53
Options cancelled in closing
transactions during the period.... (354) (44)
--- ---
Options outstanding at June 30,
1995.............................. 92 $ 9
--- ---
--- ---
</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............................ 37,900 582
Options cancelled in closing
transactions during the period.... (3,000) (60)
Options expired during the
period............................ (43,900) (508)
Options exercised during the
period............................ (2,000) (32)
------------- -----
Options outstanding at June 30,
1995.............................. $ 4,000 $ 87
------------- -----
------------- -----
</TABLE>
H. OTHER. At June 30, 1995, the net assets of certain Portfolios were
substantially comprised of foreign denominated securities and currency. Changes
in currency exchange rates will affect the US dollar value of and investment
income from such securities.
Portfolio securities and foreign currency holdings were translated at the
following exchange rates as of June 30, 1995:
<TABLE>
<S> <C> <C> <C>
Argentine Peso....................... 0.999750 = $ 1.00
Australian Dollar.................... 1.407360 = 1.00
Belgian Franc........................ 28.460000 = 1.00
Brazilian Real....................... 0.920500 = 1.00
British Pound Sterling............... 0.628540 = 1.00
Colombian Peso....................... 880.600000 = 1.00
Deutsche Mark........................ 1.383950 = 1.00
Finnish Markka....................... 4.274500 = 1.00
French Franc......................... 4.850750 = 1.00
Greek Drachma........................ 225.040000 = 1.00
Hong Kong Dollar..................... 7.737800 = 1.00
Hungarian Forint..................... 123.025000 = 1.00
Indian Rupee......................... 31.400000 = 1.00
Indonesian Rupiah.................... 2,227.000000 = 1.00
Irish Punt........................... 0.610820 = $ 1.00
Italian Lira......................... 1,635.500000 = 1.00
Japanese Yen......................... 84.825000 = 1.00
Korean Won........................... 758.250000 = 1.00
Malaysian Ringgit.................... 2.438000 = 1.00
Mexican New Peso..................... 6.250000 = 1.00
Netherlands Guilder.................. 1.549400 = 1.00
New Zealand Dollar................... 1.496890 = 1.00
Pakistani Rupee...................... 30.979000 = 1.00
Peruvian Sol......................... 2.224500 = 1.00
Philippine Peso...................... 25.540000 = 1.00
Polish Zloty......................... 2.341000 = 1.00
Portuguese Escudo.................... 146.300000 = 1.00
Singapore Dollar..................... 1.397500 = 1.00
South African Rand................... 3.636250 = 1.00
Spanish Peseta....................... 121.050000 = 1.00
Swedish Krona........................ 7.276850 = 1.00
Swiss Franc.......................... 1.151500 = 1.00
Taiwan Dollar........................ 25.828000 = 1.00
Thai Baht............................ 24.685000 = 1.00
Turkish Lira......................... 44,215.000000 = 1.00
</TABLE>
During June 1995, the Board of Directors of the Fund declared dividends and
capital gain distributions payable on July 14, 1995 to shareholders of record on
July 3, 1995 as follows:
<TABLE>
<CAPTION>
SHORT- LONG-
NET TERM TERM
INVESTMENT REALIZED REALIZED
PORTFOLIO INCOME GAINS GAINS
- --------------------------- ------------- ----------- -----------
<S> <C> <C> <C>
Active Country
Allocation................ $ -- $ 0.01 $ 0.07
Asian Equity............... -- 0.08 0.18
Emerging Markets........... -- 0.02 0.19
European Equity............ -- 0.02 0.08
Global Equity.............. -- 0.03 0.06
Gold....................... -- 0.11 --
International Small Cap.... 0.02 -- --
Aggressive Equity.......... 0.03 -- --
Equity Growth.............. 0.06 0.05 0.01
Small Cap Value Equity..... 0.07 0.01 0.05
Value Equity............... 0.09 -- --
Balanced................... 0.10 -- --
Emerging Markets Debt...... 0.01 -- --
Fixed Income............... 0.07 -- --
Global Fixed Income........ 0.21 -- --
High Yield................. 0.10 -- --
Municipal Bond............. 0.05 -- --
</TABLE>
- --------------------------------------------------------------------------------
149
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
JUNE 30, 1995
- --------------------------------------------------------------------------------
I. SUPPLEMENTAL PROXY INFORMATION
On February 1, 1995, a special meeting of the stockholders of Morgan Stanley
Institutional Fund, Inc. (the "Fund") was held for the purpose of voting on the
following matters:
<TABLE>
<S> <C>
Proposal 1: To elect a Board of Directors (voted on by the stockholders of the Fund as a whole).
Proposal 2: To approve or disapprove the amendment of the Fund's Bylaws (voted on by the
stockholders of the Fund as a whole).
Proposal 3: To approve or disapprove the amendment of each Portfolio's fundamental limitation
concerning investments in commodities.
Proposal 4: To approve or disapprove the amendment of each Portfolio's fundamental limitation
concerning loans.
Proposal 5: To approve or disapprove the reclassification as nonfundamental of each Portfolio's
limitation concerning purchases on margin and short sales and to amend certain
language.
Proposal 6: To approve or disapprove the amendment of each Portfolio's fundamental limitation
concerning diversification.
Proposal 7: To approve or disapprove the amendment of each Portfolio's fundamental limitation
concerning borrowing and the issuance of senior securities.
Proposal 8: To approve or disapprove the reclassification as nonfundamental of each Portfolio's
limitation concerning pledging, mortgaging or hypothecating its assets.
Proposal 9: To approve or disapprove the amendment of each Portfolio's fundamental limitation
concerning underwriting the securities of other issuers.
Proposal To approve or disapprove the reclassification as nonfundamental of each Portfolio's
10: limitation concerning investment in restricted securities and illiquid securities.
Proposal To approve or disapprove the reclassification as nonfundamental of each Portfolio's
11: limitation concerning investment in securities of an issuer whose securities are owned
to a certain extent by officers and directors of the Fund.
Proposal To approve or disapprove the reclassification as nonfundamental of each Portfolio's
12: limitation concerning investment in securities for the purpose of exercising control
over management of any company.
Proposal To approve or disapprove the reclassification as nonfundamental of each Portfolio's
13: limitation concerning investment in securities of any investment company.
Proposal To approve or disapprove the reclassification as nonfundamental of each Portfolio's
14: limitation concerning investment of more than 5% of total assets in securities of
companies with less than three years of operating history.
Proposal To approve or disapprove the reclassification as nonfundamental of the limitation
15: applicable to each of the Global Fixed Income, Emerging Markets, Emerging Markets Debt
and Gold Portfolios, concerning diversification of the Portfolio's holdings.
Proposal To approve or disapprove the reclassification as nonfundamental of each Portfolio's
16: limitation concerning investments in repurchase agreements with more than seven days
to maturity.
Proposal To approve or disapprove the reclassification as nonfundamental of each Portfolio's
17: limitation concerning investments in fixed time deposits.
Proposal To approve or disapprove the reclassification as nonfundamental of the limitation
18: applicable to the Money Market Portfolio concerning investments in reverse repurchase
agreements.
Proposal To approve or disapprove the reclassification as nonfundamental of the limitation
19: applicable to the Municipal Money Market Portfolio concerning investments in private
activity bonds.
Proposal To approve or disapprove the voting, in the discretion of the person or persons named
20: as proxy or proxies on any other matters that may properly come before the meeting and
that are deemed appropriate.
</TABLE>
- --------------------------------------------------------------------------------
150
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
JUNE 30, 1995
- --------------------------------------------------------------------------------
The results of the vote on Proposal 1 were as follows:
<TABLE>
<CAPTION>
TOTAL
VOTES VOTES SHARES
FOR WITHHELD VOTED
(000) (000) (000)
--------- --------- -----------
<S> <C> <C> <C>
John P. Britton................................................................. 620,489 124,140 744,629
George R. Bunn Jr............................................................... 620,474 124,155 744,629
A. Macdonald Caputo............................................................. 620,480 124,149 744,629
Peter E. deSvastich............................................................. 620,489 124,140 744,629
Gerard E. Jones................................................................. 620,362 124,267 744,629
Warren J. Olsen................................................................. 620,440 124,189 744,629
Frederick B. Whittemore......................................................... 620,489 124,140 744,629
</TABLE>
The results of the vote on Proposal 2 were as follows:
<TABLE>
<CAPTION>
TOTAL
VOTES VOTES SHARES
FOR AGAINST ABSTAIN VOTED
(000) (000) (000) (000)
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
605,829 10,327 127,421 743,577
</TABLE>
The results of the vote on Proposals 3 through 20 are as follows:
<TABLE>
<CAPTION>
TOTAL TOTAL
SHARES SHARES
VOTED NOT VOTING
VOTES (PER (PER
VOTES AGAINST ABSTAIN PROPOSAL) PROPOSAL)
FOR (%) (%) (%) (000) (000)
-------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ACTIVE COUNTRY ALLOCATION
PORTFOLIO
Proposals: 3, 4, 6-14, 16,
17......................... 97% 1% 2% 11,331 --
Proposal: 5................. 89% 9% 2% 11,331 --
Proposal: 20................ 85% 13% 2% 11,331 --
ASIAN EQUITY PORTFOLIO
Proposals: 3, 4, 9, 17...... 97% 1% 2% 6,999 211
Proposals: 5, 8, 10, 11, 13,
14......................... 95% 2% 3% 6,999 211
Proposals: 6, 7, 12, 16,
20......................... 96% 1% 3% 6,999 211
BALANCED PORTFOLIO PORTFOLIO
Proposals: 3-14, 16, 17,
20......................... 100% -- -- 1,201 --
EMERGING GROWTH PORTFOLIO
Proposals: 3-14, 16, 17,
20......................... 98% -- 2% 4,710 --
EMERGING MARKETS PORTFOLIO
Proposals: 3, 5, 7, 8, 10,
11-15...................... 79% 10% 11% 30,255 811
Proposals: 4, 6, 9.......... 88% 1% 11% 30,255 811
Proposals: 16, 17........... 80% 9% 11% 30,255 811
Proposal: 20................ 80% 9% 11% 31,066 --
EMERGING MARKETS DEBT
PORTFOLIO
Proposals: 3, 5, 7, 8,
10-17, 20.................. 64% 33% 3% 12,524 --
Proposals: 4, 6, 9.......... 97% -- 3% 12,524 --
EQUITY GROWTH PORTFOLIO
Proposals: 3-7, 9, 11-13,
16, 17, 20................. 97% -- 3% 5,448 --
Proposals: 8, 10, 14........ 94% 3% 3% 5,448 --
EUROPEAN EQUITY PORTFOLIO
Proposals: 3-14, 16, 17,
20......................... 94% 1% 5% 1,039 --
FIXED INCOME PORTFOLIO
Proposals: 3-14, 16, 17,
20......................... 96% -- 4% 12,924 --
GLOBAL EQUITY PORTFOLIO
Proposals: 3-14, 16, 17,
20......................... 100% -- -- 3,910 --
GLOBAL FIXED INCOME PORTFOLIO
Proposals: 3, 4, 6-14, 20... 87% -- 13% 7,549 --
Proposals: 5, 15-17......... 86% 1% 13% 7,549 --
GOLD PORTFOLIO PORTFOLIO
Proposals: 3-17, 20......... 94% -- 6% 1,869 --
</TABLE>
- --------------------------------------------------------------------------------
151
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
JUNE 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL TOTAL
SHARES SHARES
VOTED NOT VOTING
VOTES (PER (PER
VOTES AGAINST ABSTAIN PROPOSAL) PROPOSAL)
FOR (%) (%) (%) (000) (000)
-------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
HIGH YIELD PORTFOLIO
Proposals: 3-7, 9, 11-13,
16, 17, 20................. 94% -- 6% 7,506 --
Proposals: 8, 10, 14........ 91% 3% 6% 7,506 --
INTERNATIONAL EQUITY PORTFOLIO
Proposals: 3, 5............. 89% 9% 2% 49,791 --
Proposals: 4, 6, 9.......... 95% 3% 2% 49,791 --
Proposals: 7, 16............ 93% 5% 2% 49,791 --
Proposals: 8, 10, 11, 14.... 90% 8% 2% 49,791 --
Proposals: 12, 13, 17, 20... 92% 6% 2% 49,791 --
INTERNATIONAL SMALL CAP
PORTFOLIO
Proposals: 3, 5, 7, 8, 10,
11, 14..................... 92% 4% 4% 6,913 29
Proposals: 4, 6, 9, 12, 13,
16, 17..................... 93% 3% 4% 6,913 29
Proposal: 20................ 93% 3% 4% 6,942 --
JAPANESE EQUITY PORTFOLIO
Proposals: 3-7, 9, 11-13,
16, 17, 20................. 94% -- 6% 2,965 --
Proposals: 8, 10, 14........ 92% 3% 5% 2,965 --
MONEY MARKET PORTFOLIO
Proposals: 3-14, 16-18,
20......................... 79% 2% 19% 388,882 --
MUNICIPAL MONEY MARKET
Proposals: 3-7, 9, 12, 13,
16, 17, 20................. 75% -- 25% 181,245 --
Proposals: 8, 10, 11, 14,
19......................... 74% 1% 25% 181,245 --
SMALL CAP VALUE EQUITY
PORTFOLIO
Proposals: 3-14, 16, 17,
20......................... 97% -- 3% 2,426 --
VALUE EQUITY PORTFOLIO
Proposals: 3-14, 16, 17,
20......................... 91% -- 9% 4,088 --
</TABLE>
On June 28, 1995, a special meeting of the stockholders of Morgan Stanley
Institutional Fund, Inc. (the "Fund") was held for the purpose of voting to
elect a Board of Directors (voted on by the shareholders of the Fund as a
whole).
The results are as follows:
<TABLE>
<CAPTION>
TOTAL
VOTES VOTES SHARES
FOR WITHHELD VOTED
(000) (000) (000)
--------- --------- -----------
<S> <C> <C> <C>
John D. Barrett II.............................................................. 748,645 2,701 751,346
Barton M. Biggs................................................................. 749,800 1,546 751,346
Gerard E. Jones................................................................. 749,800 1,546 751,346
Andrew McNally, IV.............................................................. 746,835 4,511 751,346
Warren J. Olsen................................................................. 749,766 1,580 751,346
Samuel T. Reeves................................................................ 749,847 1,499 751,346
Fergus Reid..................................................................... 749,097 2,249 751,346
Frederick O. Robertshaw......................................................... 747,361 3,985 751,346
Frederick B. Whittemore......................................................... 747,888 3,458 751,346
</TABLE>
- --------------------------------------------------------------------------------
152
