<PAGE>
- --------------------------------------------------
OFFICERS AND DIRECTORS
Barton M. Biggs James W. Grisham
CHAIRMAN OF THE BOARD VICE PRESIDENT
Frederick B. Whittemore Michael F. Klein
VICE-CHAIRMAN OF THE VICE PRESIDENT
BOARD Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND DIRECTOR Joseph P. Stadler
John D. Barrett II VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
Gerard E. Jones SECRETARY
DIRECTOR Karl O. Hartmann
Andrew McNally, IV ASSISTANT SECRETARY
DIRECTOR James R. Rooney
Samuel T. Reeves TREASURER
DIRECTOR Joanna M. Haigney
Fergus Reid ASSISTANT TREASURER
DIRECTOR
Frederick O. Robertshaw
DIRECTOR
- --------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------
DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------
CUSTODIANS
The Chase Manhattan Bank, N.A.
770 Broadway
New York, New York 10003
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
- --------------------------------------------------
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
- --------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------
For current performance, current net asset value, or for assistance with your
account, please contact the Fund at (800) 548-7786. This report is authorized
for distribution only when preceded or accompanied by prospectuses of the Morgan
Stanley Institutional Fund, Inc.
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. Box 2798
Boston, MA 02208-2798
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
INTERNATIONAL MAGNUM PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1996
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The investment objective of the International Magnum Portfolio is long-term
capital appreciation by investing primarily in equity securities of non-U.S.
issuers in accordance with the EAFE country weightings determined by the
Adviser. The EAFE countries in which the Portfolio will invest are those
comprising the Morgan Stanley Capital International (MSCI) EAFE Index, which
includes Australia, Japan, New Zealand, most nations located in Western Europe,
and certain developed countries in Asia.
For the period from inception on March 15, 1996 through March 31, 1996, the
Portfolio had a total return of 0.90% for the Class A shares and Class B shares,
as compared to a total return of 2.11% for the MSCI EAFE Index.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE
INDEX COMPOSITE INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------
SINCE
INCEPTION
-------------------
<S> <C>
PORTFOLIO--CLASS A............................... 0.90%
PORTFOLIO--CLASS B............................... 0.90%
MSCI EAFE INDEX.................................. 2.11%
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australia and the Far East (assumes dividends reinvested net of
withholding taxes).
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.
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.
Against a soaring backdrop for international equities, the Portfolio got off to
a strong start. Although cash was invested quickly, we could not buy securities
nearly fast enough to catch up to the rising Index.
With a mere two weeks of performance before quarter-end, it is not meaningful to
provide much more in terms of analysis of first quarter results. While future
quarterly reports will look both back on the quarter and ahead to the future,
the balance of this report will focus exclusively on our outlook for the
remainder of 1996.
OUTLOOK FOR 1996
The quarter's volatility provided a signal for what we expect will be a more
difficult year ahead in U.S. financial markets. We believe the U.S. market will
ruminate for a while on the news of increasing labor costs, rising interest
rates and their resultant squeeze on corporate profits. In contrast, we expect
the news from the non-U.S. markets (i.e., an economic pick-up in Japan,
declining inflation and interest rates in Europe, and strong growth with
contained inflation in Asia) to provide a more favorable investment environment
in the international equity markets.
Overall, the major industrial economies of the world are on the cusp of a
critical inflection point, with economic growth surprises about to shift from
weakness to strength. We expect this transformation to begin playing out
immediately in the U.S., with Japan and then Europe following, but by no later
than the end of 1996, setting the stage for an increasingly synchronous rebound
in worldwide economic activity in 1997. All in all, we look for global GDP to
increase 3.3% in 1996, and 4.0% in 1997. If correct, 1997 will mark the
strongest gain in global growth since 1988.
Stronger growth expectations have led us to increase our global inflation
forecasts. The aggressive reflationary monetary policies and competitive
currency devaluations being pursued by the world's major central banks,
especially Germany and Japan, in hopes of stimulating their respective economies
often lead to inflation--an outcome we may not know until it is too late. Our
economists are currently forecasting the following
2
<PAGE>
rates of inflation growth for 1996 and 1997, respectively: U.S. 3.2% and 4.0%,
Europe 2.4% and 2.8%, Japan 0.0% and 0.8%, and Asia 9.2% and 8.4%.
A second major force driving the potential global recovery in 1997 is the strong
dollar policy of the G-7 aimed at alleviating the pressures of the overvalued
yen and Deutschemark. Although the dollar already has appreciated significantly
since its lows in 1995, we expect the dollar to rise another 5%-10% over the
next 12-18 months, as U.S. official rates are likely to be biased upward and the
U.S. current account and budget deficits trend lower.
Turning to Europe, following a disappointing year in 1995, which ended with a
quarter of slowing or negative GDP growth across all countries, market
conditions finally are beginning to improve, especially for value stocks. Growth
in Europe, though still weak, should tip upward in the months ahead, with the
lagged effects of lower interest rates finally affecting the interest-sensitive
sectors and depreciating currencies helping the competitiveness of European
companies. Continued long term growth and low inflation in Europe suggest that
these markets will outperform the U.S. We are optimistic that the worst of the
economic cycle is past, although high unemployment and low consumer confidence
remain a concern. For now, we will maintain our 40% Europe allocation, which is
10% below our own neutral policy and the EAFE Index, although an increase in
allocation is possible during the next few months.
In Japan, though the economic data remains mixed, we are increasingly confident
that a moderate recovery in Japan is underway, and should be reinforced by
vigorous growth in non-Japan Asia. Three consecutive quarters of 2.8% GDP growth
at the end of calendar 1995 makes Japan one of the fastest growing developed
economies in the world. While the sustainability of the current upturn remains
uncertain once the fiscal stimulus package from September 1995 runs out in the
second half of 1996, we believe Japan offers substantial opportunity and will
maintain our 10% overweight position versus our neutral policy, thereby matching
the EAFE Index.
Looking forward, we continue to like the Asian markets, albeit more cautiously,
and maintain our 20% neutral allocation (a 10% overweight position compared to
the EAFE benchmark). If U.S. interest rates do not rise too quickly, we believe
that Asian markets may be able to decouple from the U.S. markets, with investors
increasingly focused on market fundamentals. Valuations remain relatively
favorable, and growth prospects for the second half of 1996 appear strong,
especially given the expected uptick in economic growth in the U.S. and Japan,
Asia's most important trading partners. The main risks for Asia include the
possibility that China's Most Favored Nation status is not renewed, as well as
the impact of rising U.S. interest rates on the region. If U.S. rates begin to
spike, we may trim back our Asian allocation.
Currencies were volatile during the first quarter of 1996 as many foreign
governments looked to jump-start their respective economies through the
devaluation of their currencies, which had become extremely over-valued versus
the dollar. The dollar has been recovering ever since, and as a result, we have
hedged our yen exposure 75% and our exposure to the Deutschemark block
currencies by 95% to 100%. These hedges are defensive, aimed to protect the
portfolio against losses from depreciation of these currencies.
In summary, the Portfolio has been launched at a very exciting time in the
international equity markets. Although we believe the markets may continue to
experience volatility as the European and Japanese economies continue to improve
and the Asian markets react to fluctuating U.S. interest rates, we believe the
second quarter, and to a greater extent, the second half of 1996 will prove to
be a good time to be in international equities.
Francine J. Bovich
PORTFOLIO MANAGER
May 1996
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCKS (79.2%)
AUSTRALIA (2.7%)
2,480 Broken Hill Proprietary Co., Ltd. $ 35
3,050 National Australia Bank Ltd. 27
5,310 Western Mining Corp. Holdings Ltd. 35
---------
97
---------
BELGIUM (0.5%)
160 Delhaize Freres et Cie, 'Le Lion'
S.A. 7
220 G.I.B. Holdings Ltd. 10
---------
17
---------
DENMARK (0.4%)
300 Unidanmark A/S, Class A
(Registered) 14
---------
FINLAND (1.0%)
870 Amer-Yhtymae Oy, Class A 14
430 Huhtamaki Oy, Series 1 14
190 Nokia AB Oy, Series A 7
---------
35
---------
FRANCE (2.7%)
30 Bongrain S.A. 16
110 Cie de Saint Gobain 14
80 Eridania Beghin-Say S.A. 13
90 Peugeot S.A. 14
620 Thomson CSF 16
320 Total S.A., Class B 22
---------
95
---------
GERMANY (2.6%)
50 BASF AG 13
40 Gerresheimer Glas AG 7
40 Karstadt AG 15
40 Mannesmann AG 15
300 Veba AG 15
80 Volkswagen AG 28
---------
93
---------
HONG KONG (9.0%)
11,000 Cheung Kong Holdings Ltd. 77
5,200 Hong Kong & Shanghai Bank Holdings
plc 78
12,000 Hutchison Whampoa Ltd. 76
5,000 Sun Hung Kai Properties Ltd. 45
5,000 Swire Pacific Ltd., Class A 44
---------
320
---------
ITALY (1.6%)
17,200 Impregilo S.p.A. 15
13,500 Olivetti S.p.A. 7
6,600 Stet Di Risp (NCS) 13
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
10,000 Telecom Italia S.p.A. Di Risp
(NCS) $ 14
1,100 Unicem Di Risp (NCS) 7
---------
56
---------
JAPAN (35.0%)
6,000 Daifuku 90
3,000 Fuji Machine Manufacturing Co. 81
9,000 Hitachi Ltd. 87
1,000 Kyocera Ltd. 68
18,000 Mitsubishi Chemical Corp. 95
7,000 Mitsubishi Estate Co., Ltd. 96
8,000 NEC Corp. 93
13 Nippon Telegraph & Telephone Corp. 95
4,000 Nomura Securities Co. 88
12,000 Obayashi Corp. 103
4,000 Sankyo Co., Ltd. 92
1,700 Square Company Ltd. 94
14,000 Taisei Corp., Ltd. 99
2,000 Tokyo Electron Ltd. 68
---------
1,249
---------
MALAYSIA (4.2%)
3,000 Genting Bhd. 27
4,000 Malayan Banking Bhd 37
5,000 Petronas Gas Bhd 23
9,000 Renong Bhd 15
4,000 Telekom Malaysia Bhd 37
3,000 Tenaga Nasional Bhd 13
---------
152
---------
NETHERLANDS (4.8%)
720 ABN Amro Holdings N.V. 36
190 Akzo Nobel N.V. 21
70 Hollandsche Beton Groep N.V. 12
400 Internationale Nederlanden Groep
N.V. 29
170 Konin Nijverdal -- Ten Carte N.V. 8
340 Koninklijke PTT Nederland N.V. 13
620 Koninklijke Van Ommeren N.V. 21
860 Philips Electronics N.V. 31
---------
171
---------
NORWAY (0.7%)
4,300 Den Norske Bank A/S 13
1,200 Saga Petroleum A/S, Class B 14
---------
27
---------
SINGAPORE (3.4%)
3,000 City Developments Ltd. 27
6,000 DBS Land Ltd. 23
2,000 Oversea-Chinese Banking Corp.
(Foreign) 27
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
SINGAPORE (CONTINUED)
10,000 Singapore Technologies Industrial
Corp. $ 23
2,000 United Overseas Bank Ltd.
(Foreign) 20
---------
120
---------
SPAIN (1.6%)
1,500 Iberdrola S.A. 14
400 Repsol S.A. 15
1,900 Sevillana de Electricidad S.A. 14
1,500 Uralita S.A. 14
---------
57
---------
SWEDEN (1.8%)
270 Electrolux AB, Series B 13
790 Nordbanken AB 13
300 Skandia Forsakrings AB 7
1,170 S.K.F. AB, Class B 26
600 Sparbenken Sverige AB, Class A 7
---------
66
---------
SWITZERLAND (4.4%)
10 Ascom Holdings AG (Bearer) 11
20 Ciba-Geigy AG (Registered) 25
40 Forbo Holding AG (Registered) 16
20 Magazine Globus (Registered) 12
20 Nestle S.A. (Registered) 23
200 Oerlikon-Buehrle Holding AG
(Registered) 21
20 Schweizerische
Industrie-Gesellschaft Holdings
(Registered) 22
40 Sulzer AG (Registered) 27
---------
157
---------
UNITED KINGDOM (2.8%)
2,200 Associated British Foods plc 13
6,800 Christian Salvesen plc 26
2,800 John Mowlem & Co. plc 4
2,000 Reckitt & Colman plc 20
2,500 Royal Insurance Holdings plc 13
900 Tate & Lyle plc 7
1,000 Unilever plc 19
---------
102
---------
TOTAL COMMON STOCKS (Cost $2,810) 2,828
---------
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
PREFERRED STOCKS (0.8%)
GERMANY (0.8%)
30 Dyckerhoff AG $ 7
120 Hornbach Holding AG 7
460 RWE AG 14
---------
TOTAL PREFERRED STOCKS (Cost $28) 28
---------
TOTAL FOREIGN SECURITIES (80.0%) (Cost $2,838) 2,856
---------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENT (18.2%)
U.S. GOVERNMENT AGENCY OBLIGATION (18.2%)
$ 650 United States Treasury Bill,
4/18/96
(Cost $648) 648
---------
FOREIGN CURRENCY (1.8%)
DEM 75 Deutsche Mark 51
FIM 64 Finnish Markka 14
---------
TOTAL FOREIGN CURRENCY (Cost $65) 65
---------
TOTAL INVESTMENTS (100.0%) (Cost $3,551) 3,569
---------
OTHER ASSETS AND LIABILITIES (0.0%)
Other Assets 1,024
Liabilities (1,025)
---------
(1)
---------
NET ASSETS (100%) $ 3,568
---------
---------
CLASS A SHARES:
Net Assets $3,537
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 350
Net Asset Value, Offering and Redemption Price
Per Share $10.09
---------
---------
CLASS B SHARES:
Net Assets $31
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 3
Net Asset Value, Offering and Redemption Price
Per Share $10.09
---------
---------
</TABLE>
- ----------------------------------
NCS -- Non Convertible Shares
5
