<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.
AGGRESSIVE EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1996
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Aggressive Equity Portfolio seeks long-term capital appreciation through a
concentrated, non-diversified portfolio of U.S. equity securities. Short sales
and options can be used to enhance performance, although this strategy was not
being utilized at March 31. It is anticipated that the Portfolio will hold
thirty names or less, although it may hold more from time to time. At March 31,
1996, there were 33 positions in the Portfolio and three small call positions to
augment our exposure to two portfolio names.
For the three month period ended March 31, 1996, the Portfolio had a total
return of 11.75% for the Class A shares and 10.94% for the Class B shares, as
compared to a total return of 5.53% for the Lipper Capital Appreciation Index
and 5.36% for the S&P 500 Index for the same period. The average annual total
return for the twelve months ended March 31, 1996 and for the period from
inception on March 8, 1995 through March 31, 1996 was 51.92% and 53.45%
respectively for the Class A shares, as compared to 29.00% and 30.44%
respectively for the Lipper Capital Appreciation Index and 32.07% and 34.50%,
respectively for the S&P 500 Index.
PERFORMANCE COMPARED TO THE LIPPER CAPITAL APPRECIATION INDEX AND THE S&P 500
INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
--------- --------- -----------------
<S> <C> <C> <C>
PORTFOLIO--CLASS A................ 11.75% 51.92% 53.45%
PORTFOLIO--CLASS B(3)............. 10.94 N/A N/A
LIPPER CAPITAL APPRECIATION
INDEX............................ 5.53 29.00 30.44
S&P 500 INDEX..................... 5.36 32.07 34.50
</TABLE>
1. The Lipper Capital Appreciation Index is a composite of mutual funds managed
for maximum capital gains. The S&P 500 Index is an unmanaged index of common
stocks.
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.
We made two strategic shifts during the quarter, one a reduction of exposure in
finance and the other, an increase in exposure to tobacco. In December and early
January we had built up our exposure to the financial names, largely through our
position in Wells Fargo. Financials, in general, had been weak from October of
1995 through about year-end as fears of rising consumer debt delinquency spooked
investors. We added to our position in Wells Fargo in the belief that the
company's growth initiatives--restructuring the business to focus on fee income,
reducing costs, buying back shares, not to mention the potential acquisition of
First Interstate-- would produce excellent shareholder returns. The stock rose
about 21% in the first quarter and we have subsequently trimmed it and our other
financial holdings to reflect the powerful upward move in the stocks and the
spike up in interest rates.
During the month of March tobacco stocks came under renewed attack in the market
in the wake of new litigation fears. Like the financials in the fourth quarter
of 1995, however, earnings estimates for the tobacco stocks held steady or rose
during this rocky period. Our largest tobacco-related holding (and biggest
single position) is Philip Morris, which we raised to about an 18% position at
the end of March. We added to the stock because the fundamentals remain very
strong--earnings are growing at about a 17% rate, the yield is a substantial
4.6%, and the company is retiring 4% of its shares per year. Valuation (which is
of secondary importance to us) is also compelling at 9.9 times 1997 estimates
versus 15.6 times for the S&P 500. Finally, we expect the dividend to be raised
to $4.80 this August and $5.60 in August, 1997, which suggests the stock could
move from its current price of approximately $90 to $120 in 12-18 months.
Other important holdings include Loews Corporation, HFS, Boston Chicken, United
Technologies and Ralston Purina. We ended the quarter with approximately 10% in
cash. This was less a "market call" than the residual of our day-to-day
investment process and we expect to put the cash to work shortly.
Kurt Feuerman
PORTFOLIO MANAGER
April 1996
2
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCKS (86.5%)
CAPITAL GOODS/CONSTRUCTION (7.2%)
AEROSPACE & DEFENSE (4.7%)
11,400 McDonnell Douglas Corp. $ 1,045
8,100 United Technologies Corp. 909
---------
1,954
---------
BUILDING & CONSTRUCTION (1.5%)
32,500 AMRE, Inc. 605
---------
MACHINERY (1.0%)
10,600 Sundstrand Corp. 432
---------
TOTAL CAPITAL GOODS/CONSTRUCTION 2,991
---------
CONSUMER-CYCLICAL (17.2%)
FOOD SERVICE & LODGING (13.7%)
51,100 Boston Chicken, Inc. 1,741
45,800 HFS, Inc. 2,227
3,700 Hilton Hotels Corp. 348
10,200 ITT Corp. (New) 612
24,500 La Quinta Inns, Inc. 720
---------
5,648
---------
PUBLISHING (1.4%)
49,100 K-III Communications Corp. 571
---------
RETAIL-GENERAL (2.1%)
11,200 AutoZone, Inc. 379
13,500 PetSmart, Inc. 489
---------
868
---------
TOTAL CONSUMER-CYCLICAL 7,087
---------
CONSUMER-STAPLES (30.6%)
BEVERAGES (2.1%)
28,100 Coca Cola Enterprises, Inc. 868
---------
DRUGS (2.2%)
15,800 Schering-Plough Corp. 918
---------
FOOD (2.8%)
17,400 Ralston Purina Group 1,164
---------
HEALTH CARE SUPPLIES & SERVICES (1.3%)
3,200 Aetna Life & Casualty Co. 242
6,000 US Healthcare, Inc. 275
---------
517
---------
PERSONAL CARE PRODUCTS (0.9%)
7,600 Tambrands, Inc. 355
---------
TOBACCO (21.3%)
84,800 Philip Morris Cos., Inc. 7,441
11,600 UST, Inc. 370
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
33,300 RJR Nabisco Holdings Corp. $ 1,007
---------
8,818
---------
TOTAL CONSUMER-STAPLES 12,640
---------
DIVERSIFIED (6.2%)
12,800 AlliedSignal, Inc. 757
24,100 Loews Corp. 1,823
---------
TOTAL DIVERSIFIED 2,580
---------
FINANCE (24.3%)
BANKING (15.7%)
8,700 Chase Manhattan Corp. 639
6,600 First Interstate Bancorp 1,145
18,000 Wells Fargo & Co. 4,698
---------
6,482
---------
FINANCIAL SERVICES (4.0%)
9,700 American Express Co. 479
10,400 CIGNA Corp. 1,188
---------
1,667
---------
INSURANCE (4.6%)
8,800 Ace Ltd. 393
8,200 CMAC Investment Corp. 463
7,000 Partnerre Holdings Ltd. 208
19,000 The PMI Group, Inc. 829
---------
1,893
---------
TOTAL FINANCE 10,042
---------
TECHNOLOGY (1.0%)
COMPUTERS (1.0%)
4,000 Microsoft Corp. 413
---------
TOTAL COMMON STOCKS (Cost $34,006) 35,753
---------
<CAPTION>
NO. OF
CONTRACTS
- ---------------
<C> <S> <C>
PURCHASED CALL OPTIONS (2.2%)
CONSUMER-STAPLES (1.6%)
TOBACCO (1.6%)
13,700 Philip Morris Cos., Inc., expires
1/97, strike price $70 267
25,800 Philip Morris Cos., Inc., expires
1/98, strike price $80 393
---------
660
---------
FINANCE (0.6%)
BANKING (0.6%)
3,500 Wells Fargo & Co., expires 1/98,
strike price $200 258
---------
TOTAL PURCHASED CALL OPTIONS (Cost $860) 918
---------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
SHORT-TERM INVESTMENT (9.2%)
REPURCHASE AGREEMENT (9.2%)
$ 3,780 The Chase Manhattan Bank, N.A.,
5.15%, dated 3/29/96, due
4/01/96, to be repurchased at
$3,782, collateralized by $3,835
United States Treasury Notes,
6.00%, due 8/31/97, valued at
$3,859 (Cost $3,780) $ 3,780
---------
TOTAL INVESTMENTS (97.9%) (Cost $38,646) 40,451
---------
OTHER ASSETS AND LIABILITIES (2.1%)
Other Assets 2,012
Liabilities (1,153)
---------
859
---------
NET ASSETS (100%) $ 41,310
---------
---------
CLASS A SHARES:
Net Assets $37,482
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 2,757
Net Asset Value, Offering and Redemption Price
Per Share $13.60
---------
---------
CLASS B SHARES
Net Assets $3,828
Shares Issued and Outstanding ($0.001 par value)
(Authorized 500,000,000 shares) 282
Net Asset Value, Offering and Redemption Price
Per Share $13.59
---------
---------
</TABLE>
4
