<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Barton M. Biggs James W. Grisham
CHAIRMAN OF THE BOARD VICE PRESIDENT
Frederick B. Whittemore Michael F. Klein
VICE-CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND DIRECTOR Joseph P. Stadler
John D. Barrett II VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
Gerard E. Jones SECRETARY
DIRECTOR Karl O. Hartmann
Andrew McNally, IV ASSISTANT SECRETARY
DIRECTOR James R. Rooney
Samuel T. Reeves TREASURER
DIRECTOR Joanna M. Haigney
Fergus Reid ASSISTANT TREASURER
DIRECTOR
Frederick O. Robertshaw
DIRECTOR
- --------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------
DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------
CUSTODIANS
The Chase Manhattan Bank, N.A.
770 Broadway
New York, New York 10003
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
- --------------------------------------------------
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
- --------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------
For current performance, current net asset value, or for assistance with your
account, please contact the Fund at (800) 548-7786. This report is authorized
for distribution only when preceded or acccompanied by prospectuses of the
Morgan Stanley Institutional Fund, Inc.
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. Box 2798
Boston, MA 02208-2798
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
LATIN AMERICAN PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1996
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The investment objective of the Latin American Portfolio is long-term capital
appreciation through investment, primarily, in equity securities of Latin
American issuers. The Portfolio may also invest in debt securities issued or
guaranteed by a Latin American government or governmental entity.
For the three month period ended March 31, 1996, the Portfolio had a total
return of 16.23% for the Class A shares and 11.55% for the Class B shares, as
compared to a total return of 5.35% for the Morgan Stanley Capital International
(MSCI) Emerging Markets Global Latin America Index. The average annual total
return for the twelve months ended March 31, 1996 and for the period from
inception on January 18, 1995 through March 31, 1996 was 46.19% and 5.09%,
respectively, for the Class A shares, as compared to 25.35% and -2.61%,
respectively, for the Index.
PERFORMANCE COMPARED TO MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING
MARKETS GLOBAL LATIN AMERICA INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN(2)
---------------------------------------
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
--------- --------- -----------------
<S> <C> <C> <C>
PORTFOLIO--CLASS A................ 16.23% 46.19% 5.09%
PORTFOLIO--CLASS B(3)............. 11.55 N/A N/A
INDEX............................. 5.35 25.35 -2.61
</TABLE>
1. The MSCI Emerging Markets Global Latin America Index is a broad based market
cap weighted composite index covering at least 60% of markets in Mexico,
Argentina, Brazil, Chile, Colombia, Peru and Venezuela (assumes dividends
reinvested).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING.
The two biggest markets in Latin America, Brazil and Mexico, rebounded nicely to
start 1996 after a dismal 1995. Improving economic growth, declining inflation,
falling interest rates, and steady currencies all led to improved investor
sentiment and return of capital inflows. The Portfolio benefited as Brazil and
Mexico were the biggest positions in the Portfolio in both absolute terms and
relative to the MSCI Index.
BRAZIL
The Brazil market rose 11% in the first quarter driven primarily by lower
interest rates. President Cardoso had a bumpy quarter on the political front.
While trying to shepherd various reform measures through congress, he has been
beset with different scandals which have put him on the defensive and used up
scarce political capital. This quarter he narrowly avoided a potentially time-
consuming investigation into a banking crisis. He also recovered from a defeat
of the social security reform amendment in mid-February by massaging a watered-
down version through the first stage of congressional approval three weeks
later. In the process, the President has demonstrated his renowned negotiating
skills, but the latent fear is that he is perpetually reacting to, rather than
leading, events. Constitutional revision in Brazil is a five step process. The
two most important reforms-- the social security and administrative
reforms--need to make meaningful progress before congress gets distracted by
municipal elections scheduled for October.
The wage bill is the single largest expense in the government budget--in some of
the more profligate state government budgets, wages are over 100% of revenues--
and passage of the administrative reform is vital to reversing the untenable
trend in which public sector wages are spiraling out of control. Administrative
reform would give much more latitude to the government to sack workers and would
set maximum salary levels based on the President's salary. More immediately, we
expect the government to hold the line on wage increases in May to around 10%, a
number below accumulated inflation.
Interest rates, as expected, are trending down. Inflation has behaved very well
for the first part of the year-- averaging roughly 0.6% per month--and this has
2
<PAGE>
allowed the monetary authorities to guide interest rates down from real levels
of 25-30% in 1995 to levels of 15-20%. Real interest rates should continue to
decline and we expect economic growth of around 3% for 1996.
In Brazil we are relatively overweight companies which we feel will grow their
earnings at a faster rate than their peers. An example of this is Lojas Renner.
A small but fast-growing department store in the south of the country, Lojas
Renner has grown its sales at a rate three times as fast as the industry due to
its superior management strategy which targets the working woman and places a
high emphasis on customer satisfaction. It has a proprietary credit card which
is a valuable franchise in itself that boosts sales and provides additional
financial income. The company has recently announced an expansion plan into the
populous, yet competitive, Sao Paulo region, and we are certain that their
pioneering retail strategy will prevail there. The company generated a 30%
return on its equity last year, has doubled profits each year for the last two
years, should increase profits 25% in 1996, and trades at 8 times this year's
estimated earnings.
Another of our favorite stocks, which has been a great performer for the
Portfolio, is the beer company Brahma. Brahma is the leading beer company in
Brazil, with close to 50% market share, and doubled its earnings in 1995 on
sales growth of 20%. The brand franchise that Brahma possesses has few peers in
the country and enables it to generate enormous free cash flow in a fast growing
market. The company is investing over $1 billion to increase its brewing
capacity by 40%, and it generates a return on equity of 25%. Further, management
has recently embarked on an internal reorganization to focus its line managers
on maximizing economic value-added (EVA), a management technique whose driving
orientation is superior returns on investment and, thus, enhanced shareholder
value. Brahma should grow its earnings 20% this year, and trades on 11 times
estimated 1996 earnings.
In the state company sector, we continue to heavily favor Telebras. Telebras has
a regulated monopoly over the telecommunications sector in Brazil, and should
enjoy outstanding secular growth through the decade. With an increase in tariffs
granted at the end of last year, the company should easily double earnings in
1996. Although its stock price is influenced by macro events in Brazil because
of its bellwether status for the market, it is our contention that throughout
1996 the stock will increasingly trade on the company's own fundamentals and
less on speculation surrounding the fate of macro events in the country. To that
extent, given that the stock trades at 8 times estimated 1996 earnings and 2.5
times cash flow, we are very confident that its true value will be recognized
and it will be a strong outperformer.
MEXICO
The MSCI Mexico Index rose 10% in the first quarter. The market behaved
disparately throughout the period, benefiting from the flow of funds into
emerging markets at the beginning of the year, slipping as U.S. interest rates
rose in February and recuperating with a shift in sentiment in March.
The market trend mimicked local interest rates, falling in January, rising in
February and settling back to lower levels in March. The 28-day CETES rate (the
local equivalent of a treasury bill) ended the quarter at 39.5%, significantly
below the 45% level at year-end. The currency strengthened in real terms during
the quarter as it hovered around Np$7.5 to the dollar after closing December at
the Np$7.7 level. Given inflation differentials, the peso strengthened by 10% in
real terms against the U.S. dollar. While a strong move, the peso is still down
almost 25% in real terms over the last two years.
The government continued to manage economic variables with discipline, holding
back spending, maintaining tight monetary policy and keeping inflation under
control. Some of the more difficult adjustments, including a raise in the
minimum wage and an increase in the prices of tortillas and milk were
accomplished during March. Corporate fourth quarter results, released during
this period, confirmed that the economy had bottomed out in the third quarter.
An agreement through which Bank of Montreal took an important stake in Grupo
Financiero Bancomer, the nation's second largest bank, signaled improving
confidence in the banking system.
During the first three months of the year, we increased our weighting in the
Mexican market and will maintain this overweight position anticipating positive
economic news in the coming quarters as a result of government commitment to the
economic program. Industrial production and retail sales estimates for the first
quarter show signs of recovery. We believe the recovery will be gradual, but
will show strong year over year numbers in
3
<PAGE>
the second half of 1996 and into 1997, lifting the market to higher levels. We
are overweight the interest sensitive and consumer sectors which suffered the
most after the devaluation and which should rebound the most in the recovery.
ARGENTINA
The Argentine market finished the first quarter flat. A strong outperformance in
the last quarter of 1995, a continuation of the tension between President Menem
and Economic Minister Cavallo, and an increase in U.S. interest rates all
combined to take the wind out of an early quarter rally.
Argentina continues to be bedeviled by a slower than expected recovery in
economic activity. The return of deposits to the banking system has not yet
translated into an increase in domestic lending to spur investment activity, in
large part because demand for loans continues to be anemic. With unemployment at
stubbornly high levels, approximately 15-16%, consumer confidence is low and
this has delayed a recovery. Additionally, because of the country's fixed
exchange rate, the back-up in U.S. interest rates had an additional dampening
effect on the market.
Nevertheless, we are increasingly confident that a recovery is underway.
Telephone traffic is up year over year, loan growth is rising on a sequential
basis, and auto sales are up sequentially. Although we do not expect the
recovery to be robust until the latter part of the year, we are still encouraged
by the momentum and are taking an increasingly constructive stance toward the
market, especially the telecommunications sector.
CHILE
Chile dramatically underperformed the region, as the MSCI Chile Index posted a
9% decline for the first quarter of 1996. Being the most insulated from foreign
capital flows, Chile did not benefit from the increase in foreign portfolio
investment that lifted the regional markets in the early part of the quarter.
Further depressing the market were concerns about forced liquidation of large
blocks of shares on the market as a result of a proxy battle for control of the
GT Chile Fund.
More fundamentally, the most important issue which depressed the market was
tight monetary policy. The economy has been growing at an unsustainably fast
pace at the same time that monetary authorities have upped the ante in their
effort to squelch inertial inflation. The authorities have taken a public
posture in articulating a 6.5% inflation target (1995 inflation was just above
8%), which, given the overheated economy, will be difficult to achieve. Thus, we
expect monetary conditions to continue to be tight through the second quarter,
and for this to continue to depress equity market performance. Nevertheless, as
valuations pull in to reasonable levels we will likely warm up to the market.
COLOMBIA
The Colombian market fell prey to political turmoil over the tenure of President
Samper during the first quarter of 1995, as the MSCI Colombia Index shed 4%. A
high interest rate environment prevailed and concern over the economic effects
of the political crisis pushed the market lower.
Allegations that the President knowingly received illegal campaign contributions
from a drug cartel resurfaced in January (after a November exoneration), as the
defense minister resigned and came forth with new evidence. In a related act,
the United States decertified Colombia as an ally in the fight against drugs in
early March, imposing minor economic restrictions and hurting its international
reputation. In 1996, the economy will feel the effects of monetary tightness,
high interest rates and decreased activity linked to political concerns, growing
at a slower yet respectable 4% after 5.7% and 5.3% in 1994 and 1995,
respectively.
PERU
The Peruvian market had a lackluster performance during the first quarter,
ending the period flat. The market soared in January alongside the entire
region, but lost all of its gains throughout the remainder of the quarter.
Economic performance figures for December and the first two months of the year
were disappointing, as effects of the government's efforts to slow down the
economy were felt and the country's accounts recorded sizable deficits.
Concern over the trade and current account deficits, which closed 1995 at 3.7%
and 6.5% of GDP, respectively, escalated during the quarter. Negative GDP growth
numbers for December and January coupled with higher-than-expected inflation
figures exacerbated the
4
<PAGE>
preoccupation over the state of the economy. 1996 real GDP growth is expected
around 4%, against 6.9% in 1995 and 13.0% in 1994. The Peruvian government,
however, has responded prudently, tightening monetary policy and cutting fiscal
spending. President Fujimori realigned his cabinet during the quarter,
installing supporters of his disciplined economic approach in key positions. The
President's popularity, while still high at 66%, dropped in the period from 75%
at year-end.
We remain underweight in the Peruvian market, waiting for a better adjustment of
the economy to a slower growth environment and further progress in the trade and
current account deficits. In addition, an expected oversupply of stock resulting
from upcoming equity issues, including the sale of the government's billion-
dollar stake in CPT, the telephone monopoly, has kept market activity and prices
depressed.
VENEZUELA
Venezuela seems to be finally taking the necessary steps to restore its economic
health. Gasoline prices will be raised and interest rates and the exchange rate
will be deregulated. Our position in fixed income has worked well and we will
begin to examine the prospects for local stocks.
SUMMARY
Overall we believe that the Latin markets should perform well over the course of
the year as macroeconomic trends continue to improve and the negative sentiment
that had gripped the region since the Mexican devaluation dissipates.
Robert L. Meyer
PORTFOLIO MANAGER
April 1996
5
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------- ---------
<C> <S> <C>
COMMON STOCKS (66.0%)
ARGENTINA (6.2%)
82,605 Banco del Suquia, Class B $ 120
2,295 Buenos Aires Embotelladora S.A.
ADR 38
6,730 Capex S.A. ADR 99
11,429 Quilmes Industrial S.A. 137
24,470 Quilmes Industrial S.A. ADR 263
24,350 Telefonica de Argentina S.A. ADR 624
---------
1,281
---------
BRAZIL (15.2%)
31,203 Cia Brasileira ADR 456
4,424 Cia Energetica de Minas Gerais ADR 124
1,792 Cia Energetica de Minas Gerais GDR 50
2,525,000 Eletrobras 660
27,650 Eletrobras ADR 361
3,930 Lojas Americanas S.A. ADR 38
3,944,000 Telebras 156
24,530 Telebras ADR 1,220
538,500 Telecomunicacoes de Sao Paulo 82
---------
3,147
---------
CHILE (6.0%)
3,640 Cia de Telecomunicaciones de Chile
S.A. ADR 309
10,170 Embotelladora Andina S.A. ADR 351
9,770 Empresa Nacional Electricidad S.A.
ADR 188
3,630 Enersis S.A. ADR 103
2,558 Maderas y Sinteticos S. A. ADR 46
9,960 Santa Isabel S.A. ADR 253
---------
1,250
---------
COLOMBIA (2.8%)
1,087,000 Banco de Colombia 427
20,030 Banco de Colombia GDR 150
---------
577
---------
MEXICO (35.2%)
15,270 Alfa S.A. de C.V., Class A 203
99,300 Apasco S.A., Class A 501
228,980 Banacci, Class B 488
68,329 Banacci, Class L 131
23,950 Cemex CPO ADR 173
<CAPTION>
VALUE
SHARES (000)
- ----------------------- ---------
<C> <S> <C>
181,218 Cemex S.A., Class A $ 645
208,880 Cifra S.A. de C.V., Class B 277
140,700 Comerci 117
22,215 Empresas ICA S.A. ADR 289
31,800 Farmacias Benavides S.A., Series B 44
341,970 FEMSA, Class B 968
11,090 Grupo Carso S.A. GDR 172
600 Grupo Casa Autrey S.A. de C.V. ADR 11
116,137 Grupo Financiero Bancomer ADR 936
237,010 Grupo Financiero Bancomer, Class B 95
15,320 Grupo Televisa S.A. ADR 381
12,610 Kimberly Clark de Mexico S.A. de
C.V., Class A 241
7,060 Panamerican Beverages, Inc., Class
A 285
7,140 Sears Roebuck de Mexico S.A. de
C.V., Class B1 19
40,665 Telefonos de Mexico S.A. ADR,
Class L 1,337
---------
7,313
---------
PERU (0.6%)
7,050 Banco Wiese ADR 48
1,945 Credicorp. Ltd. 35
17,700 Telefonica del Peru S.A., Class B 35
---------
118
---------
TOTAL COMMON STOCKS (Cost $12,130) 13,686
---------
PREFERRED STOCKS (27.6%)
ARGENTINA (0.3%)
5,715 Quilmes Industrial S.A. ADR 61
---------
BRAZIL (NON-VOTING STOCKS) (27.3%)
64,315,181 Banco Bradesco S.A. 674
2,874,000 Banco do Brasil 29
11,847,000 Banco Nacional S.A. 1
1,862,173 Brahma 899
9,616,000 Cia Energetica de Minas Gerais 270
9,189,000 Cia Paulista de Forca E Luz 312
1,217,000 Cia Vale Do Rio Doce 191
3,566,000 Continental 2001 61
479,000 Coteminas 199
137,211 Dixie Toga S.A. 133
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------- ---------
<C> <S> <C>
BRAZIL (NON-VOTING STOCKS) (CONTINUED)
1,400 Eletrobras ADR $ 19
1,351,000 Eletrobras, Class B 369
1,176,400 Itaubanco 418
156,000 Itausa Investimentos Itau S.A. 106
11,440,000 Lojas Renner 396
37,000 Multibras S.A. 39
5,688,000 Petrobras 679
17,011,000 Refrigeracao Parana S.A. 45
13,150,000 Telebras 655
222,000 Telecomunicacoes de Sao Paulo 38
274,000 WEG S.A. 125
---------
5,658
---------
TOTAL PREFERRED STOCKS (Cost $5,227) 5,719
---------
<CAPTION>
NO. OF
RIGHTS
- -----------------------
<C> <S> <C>
RIGHTS (0.2%)
BRAZIL (0.2%)
515,000 Light (Cost $39) 37
---------
<CAPTION>
FACE
AMOUNT
(000)
- -----------------------
<C> <S> <C>
FIXED INCOME SECURITIES (5.5%)
BONDS (1.1%)
COLOMBIA (1.1%)
$ 270 Banco de Colombia 5.20%, 2/01/99 240
---------
CONVERTIBLE DEBENTURES (4.4%)
VENEZUELA (4.4%)
1,500 Republic of Venezuela Debt
Conversion Bonds, Series DL,
(Floating Rate), 6.563%, 12/18/07 909
---------
TOTAL FIXED INCOME SECURITIES (Cost $1,058) 1,149
---------
TOTAL FOREIGN SECURITIES (99.3%) (Cost $18,454) 20,591
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------- ---------
<C> <S> <C>
SHORT-TERM INVESTMENT (1.7%)
REPURCHASE AGREEMENT (1.7%)
$ 362 The Chase Manhattan Bank, N.A.,
5.15%, dated 3/29/96, due
4/01/96, to be repurchased at
$362, collateralized by $245
United States Treasury Bonds,
11.25%, due 2/15/15, valued at
$373 (Cost $362) $ 362
---------
FOREIGN CURRENCY (0.6%)
ARP 98 Argentine Peso 98
BRC 19 Brazilian Real 19
MXP 13 Mexican Peso 2
PSS 6 Peruvian New Sol 2
---------
TOTAL FOREIGN CURRENCY (Cost $121) 121
---------
TOTAL INVESTMENTS (101.6%) (Cost $18,937) 21,074
---------
OTHER ASSETS AND LIABILITIES (-1.6%)
Other Assets 1,505
Liabilities (1,838)
---------
(333)
---------
NET ASSETS (100%) $ 20,741
---------
---------
CLASS A SHARES:
Net Assets $20,229
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 1,920
Net Asset Value, Offering and Redemption Price
Per Share $10.53
---------
---------
CLASS B SHARES:
Net Assets $512
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 49
Net Asset Value, Offering and Redemption Price
Per Share $10.53
---------
---------
</TABLE>
- ----------------------------------
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
7
