<PAGE>
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MORGAN STANLEY
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
ANNUAL REPORT
DECEMBER 31, 1996
[LOGO]
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
President's Letter.......................... 1
Performance Summary......................... 2
Managers' Reports and Statements of Net
Assets by Portfolio:
Global and International Equity Portfolios:
Active Country Allocation................. 4
Asian Equity.............................. 14
Emerging Markets.......................... 20
European Equity .......................... 30
Global Equity ............................ 36
Gold...................................... 41
International Equity ..................... 44
International Magnum ..................... 53
International Small Cap................... 59
Japanese Equity........................... 64
Latin American............................ 68
U.S. Equity Portfolios:
Aggressive Equity......................... 74
Emerging Growth........................... 78
Equity Growth............................. 82
Small Cap Value Equity.................... 88
Technology................................ 93
U.S. Real Estate.......................... 97
Value Equity.............................. 102
Balanced Portfolio.......................... 107
Fixed Income Portfolios:
Emerging Markets Debt..................... 112
Fixed Income.............................. 118
Global Fixed Income....................... 122
High Yield................................ 128
Municipal Bond............................ 134
Money Market Portfolios:
Money Market.............................. 138
Municipal Money Market.................... 142
Statement of Operations..................... 150
Statement of Changes in Net Assets.......... 154
Statement of Cash Flows..................... 167
Financial Highlights ....................... 168
Notes to Financial Statements............... 193
Report of Independent Accountants........... 201
Federal Tax Information..................... 202
Officers and Directors ..................... 203
</TABLE>
This report is authorized for distribution only when preceded or accompanied by
prospectuses of the Morgan Stanley Institutional Fund, Inc. Prospectuses
describe in detail each of the Portfolio's investment policies to the
prospective investor. Please read the prospectuses carefully before you invest
or send money.
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<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
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PRESIDENT'S LETTER
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FELLOW SHAREHOLDERS:
We are very pleased to present to you the Fund's Annual Report for the year
ended December 31, 1996. Our Fund now offers 26 portfolios, including 11 global
and international portfolios, 7 U.S. equity portfolios, 5 fixed-income
portfolios, a balanced portfolio and 2 money market portfolios.
The performance of each of the portfolios and commentaries by portfolio
managers discussing the results of each portfolio are contained in this Report.
The investment performance of each portfolio relative to its respective
benchmark is summarized in the performance table on pages 2 and 3.
After a very strong performance in 1995, the U.S. equity market continued
its bull run in 1996, despite a large pullback in July followed by increased
volatility. A passive Federal Reserve Bank won a major credibility battle as
inflation risks were tempered by a softening economy. July's panic selling and
steep price declines, followed by the subsequent market rebound seemed once
again to demonstrate the conviction of many investors that it is a good strategy
to buy quality stocks on market dips. Despite its strength, the U.S. equity
market under-performed a number of international markets including, for example,
Spain, Hong Kong and the United Kingdom, among major markets, and Russia,
Hungary, the Czech Republic and Brazil, among emerging markets, according to
Morgan Stanley Capital International (MSCI).
1996 was a year of ups and downs for the bond markets. After an excellent
performance in 1995, the domestic fixed-income market provided rather
disappointing results while international bond markets turned in mixed
performances. The real bright spot was in emerging markets debt, which recorded
its second consecutive year of impressive performance.
We are pleased to report that 18 of our 24 non-money market portfolios
exceeded their benchmarks in 1996. Domestically, our Aggressive Equity and
Equity Growth Portfolios turned in stellar absolute and relative performance,
returning 40.90% and 30.97%, respectively. The U.S. Real Estate Portfolio also
had a very strong year, with a return of 39.56%. Among domestic bond portfolios,
both the Fixed-Income and High Yield Portfolios outperformed their respective
benchmarks.
Among our global and international portfolios, the Latin American Portfolio
returned 48.77% (for Class A shares) against a 21.95% return for the MSCI
Emerging Markets Global Latin America Index. In addition, each of the
International Equity, Global Equity and European Equity Portfolios continued its
impressive absolute and relative performance in 1996. After a difficult 1995,
emerging market equities showed improvement in a number of markets and our
Emerging Markets Portfolio was up 12.19% (for Class A shares). Finally, our
Emerging Markets Debt Portfolio gained an impressive 50.52% (for Class A shares)
in 1996 after returning 28.23% in 1995.
While in overall performance terms, 1996 was a very good year for our Fund,
it should also be stressed that each of our portfolios closely adhered to its
respective investment strategy and style in 1996. It remains our philosophy that
superior long-term results are best achieved by following a well thought out and
consistently applied investment strategy.
We hope you find the enclosed Report informative. We very much appreciate
your support of the Fund.
Sincerely,
(SIGNATURE)
Warren J. Olsen
PRESIDENT
February 18, 1997
AT THIS WRITING, MORGAN STANLEY GROUP INC., THE DIRECT PARENT COMPANY OF THE
FUND'S INVESTMENT ADVISER, MORGAN STANLEY ASSET MANAGEMENT INC., HAD RECENTLY
ANNOUNCED ITS INTENTION TO MERGE WITH DEAN WITTER, DISCOVER & CO. TO FORM MORGAN
STANLEY, DEAN WITTER, DISCOVER & CO. IT CURRENTLY IS ANTICIPATED THAT THE
TRANSACTION WILL CLOSE IN MID-1997. THEREAFTER, MORGAN STANLEY ASSET MANAGEMENT
INC. WILL BE A SUBSIDIARY OF MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
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1
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
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PERFORMANCE SUMMARY (UNAUDITED)
DECEMBER 31, 1996
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<TABLE>
<CAPTION>
NET ASSETS NET ASSET VALUE
INCEPTION DATES (000) PER SHARE
-------------------- ----------------------- --------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
--------- --------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
GLOBAL AND INTERNATIONAL
EQUITY PORTFOLIOS:
Active Country Allocation 1/17/92 1/02/96 $ 183,193 $ 633 $ 11.44 $ 11.44
Asian Equity 7/01/91 1/02/96 363,498 11,002 18.73 18.74
Emerging Markets 9/25/92 1/02/96 1,304,006 14,213 14.66 14.66
European Equity 4/02/93 1/02/96 178,356 2,654 16.70 16.67
Global Equity 7/15/92 1/02/96 80,297 3,928 16.24 16.21
Gold 2/01/94 1/02/96 27,810 1,370 9.30 9.28
International Equity 8/04/89 1/02/96 2,264,424 5,393 16.95 16.93
International Magnum 3/15/96 3/15/96 85,316 23,173 10.66 10.63
International Small Cap 12/15/92 -- 234,743 -- 16.83 --
Japanese Equity 4/25/94 1/02/96 152,229 3,431 7.96 7.94
Latin American 1/18/95 1/02/96 30,409 1,333 11.32 11.31
U.S. EQUITY PORTFOLIOS:
Aggressive Equity 3/08/95 1/02/96 68,480 8,805 14.43 14.42
Emerging Growth 11/01/89 1/02/96 62,793 3,997 13.50 13.45
Equity Growth 4/02/91 1/02/96 352,703 5,498 14.94 14.92
Small Cap Value Equity 12/17/92 1/02/96 23,970 1,689 10.89 10.88
Technology 9/16/96 9/16/96 3,595 1,487 10.71 10.71
U.S. Real Estate 2/24/95 1/02/96 210,368 8,734 14.41 14.39
Value Equity 1/31/90 1/02/96 106,128 2,555 13.89 13.89
BALANCED PORTFOLIO 2/20/90 1/02/96 5,992 2,197 8.19 8.18
FIXED INCOME PORTFOLIOS:
Emerging Markets Debt 2/01/94 1/02/96 152,142 4,253 7.54 7.53
Fixed Income 5/15/91 1/02/96 130,733 1,462 10.58 10.58
Global Fixed Income 5/01/91 1/02/96 112,888 1,559 11.30 11.29
High Yield 9/28/92 1/02/96 95,663 5,665 10.91 10.90
Municipal Bond 1/18/95 1/02/96 40,227 69 10.25 10.24
MONEY MARKET PORTFOLIOS:
Money Market 11/15/88 -- 1,284,633 -- 1.00 --
Municipal Money Market 2/10/89 -- 721,410 -- 1.00 --
</TABLE>
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<TABLE>
<CAPTION>
YIELD INFORMATION AS OF DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
30 DAY
CURRENT YIELD++ 7 DAY 7 DAY 30 DAY 30 DAY
----------------- CURRENT EFFECTIVE CURRENT COMPARABLE
CLASS A CLASS B YIELD+ YIELD+ YIELD++ YIELD
------- ------- ------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Income Portfolios: Money Market Portfolios:
Emerging Markets Debt 10.46% 10.16% Money Market 4.99% 5.11% 4.97% 4.85%(19)
Fixed Income 6.39 6.27 Municipal Money Market 3.38 3.43 3.03 3.06(20)
Global Fixed Income 4.91 4.76
High Yield 9.31 9.05
Municipal Bond 4.35 4.11
</TABLE>
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+ The 7 day current yield and 7 day effective yield assume an annualization of
the current yield at December 31, 1996 with all dividends reinvested. As
with all money market portfolios, yields fluctuate as market conditions
change and the 7 day yields are not necessarily indicative of future
performance.
++ The current 30 day yield reflects the net investment income generated by the
Portfolio over a specified 30-day period expressed as an annual percentage.
Expenses accrued for the 30-day period include any fees charged to all
shareholders. Yields will fluctuate as market conditions change and are not
necessarily indicative of future performance.
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2
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<TABLE>
<CAPTION>
AVERAGE ANNUAL FIVE YEAR AVERAGE ANNUAL TOTAL
ONE YEAR TOTAL RETURN TOTAL RETURN RETURN SINCE INCEPTION
- ----------------------------------------- --------------------------- ---------------------------
COMPARABLE COMPARABLE COMPARABLE
CLASS A CLASS B** INDICES CLASS A INDICES CLASS A INDICES
- ----------- ----------- --------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
9.71% 9.22% 6.05% (1) -- -- 8.71% 9.22%(1)
3.49 2.92 9.18 (2) 19.35% 17.34%(2) 18.28 16.93(2)
12.19 11.04 7.89 (3) -- -- 12.93 12.64(3)
22.29 20.76 21.09 (4) -- -- 19.62 17.45(4)
22.83 22.04 13.48 (5) -- -- 19.22 13.22(5)
16.94 13.21 -2.28 (6) -- -- 6.80 -4.91(6)
19.64 18.58 6.05 (1) 16.41 8.15(1) 11.96 3.88(1)
8.25* 7.90* 5.26 (1) -- -- -- --
16.82 -- 6.05 (1) -- -- 16.42 13.70(1)
-1.40 -1.67 -15.50 (7) -- -- -2.51 -5.00(7)
48.77 42.44 21.95 (8) -- -- 16.98 6.04(8)
40.90 39.72 22.96 (10) -- -- 45.98 29.51(10)
3.72 3.58 22.71 (9) 4.10 17.10(9) 11.96 15.63(9)
30.97 29.92 22.96 (10) 16.99 15.20(10) 17.06 15.86(10)
22.99 22.33 19.05 (11) -- -- 14.32 16.71(11)
7.10* 7.10* 8.88 (10) -- -- -- --
39.56 38.23 36.40 (12) -- -- 32.73 27.19(12)
19.73 18.57 22.96 (10) 14.92 15.20(10) 12.95 15.72(10)
10.93 10.24 14.39 (13) 10.15 11.01(13) 10.39 11.61(13)
50.52 48.52 33.97 (14) -- -- 18.94 11.94(14)
4.61 4.35 3.63 (15) 7.00 7.04(15) 8.35 8.31(15)
6.44 6.12 4.40 (16) 7.17 8.17(16) 8.50 9.84(16)
15.01 14.37 12.40 (17) -- -- 12.91 11.30(17)
3.67 3.55 4.37 (18) -- -- 6.36 8.34(18)
5.03 -- -- -- -- -- --
3.02 -- -- -- -- -- --
</TABLE>
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* Cumulative (unannualized) total return since inception of the Portfolio.
** The Portfolios began offering Class B Shares on January 2, 1996, except for
the International Magnum and Technology Portfolios, which began offering
Class B Shares on March 15, 1996 and September 16, 1996, respectively.
<TABLE>
<C> <S>
INDICES:
(1) MSCI EAFE (Europe, Australia, and Far East)
(2) MSCI Combined Far East Free ex-Japan
(3) IFC Global Total Return Composite
(4) MSCI Europe
(5) MSCI World
(6) Philadelphia Gold and Silver
(7) MSCI Japan
(8) MSCI Emerging Markets Global Latin America
(9) NASDAQ Composite
(10) S&P 500
(11) Russell 2500
(12) NAREIT
(13) Indata Balanced-Median
(14) J.P. Morgan Emerging Markets Bond
(15) Lehman Aggregate Bond
(16) J.P. Morgan Traded Global Bond
(17) CS First Boston High Yield
(18) Lehman 7 Year Municipal Bond
(19) Donaghue's/IBC Money Fund Comparable Yield
(20) Donaghue's/IBC Municipal Money Market Fund Comparable
Yield
</TABLE>
Past performance should not be construed as a guarantee 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.
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. Please read the
Portfolios' prospectuses carefully before you invest or send money.
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3
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
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OVERVIEW
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THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 2.2%
Brazil 1.7%
France 7.2%
Germany 7.9%
Hong Kong 6.7%
Italy 4.0%
Japan 33.8%
Korea 0.8%
Netherlands 3.5%
Singapore 2.7%
Spain 4.4%
Sweden 3.6%
Thailand 1.4%
United Kingdom 11.6%
Other 8.5%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ACTIVE COUNTRY ALLOCATION
MSCI EAFE INDEX (1) PORTFOLIO-CLASS A
<S> <C> <C>
01/17/92* 500,000 500,000
10/31/1992 452,945 468,500
12/31/1992 459,595 479,500
12/31/1993 609,250 626,820
12/31/1994 656,600 623,550
12/31/1995 730,205 689,459
12/31/1996 774,382 756,405
*Commencement of Operations
**Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL
RETURNS(2)
-------------
ONE YEAR
-------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 9.71%
PORTFOLIO -- CLASS B(3)............................................................................ 9.22
INDEX.............................................................................................. 6.05
<CAPTION>
AVERAGE ANNUAL
SINCE INCEPTION
------------------
<S> <C>
PORTFOLIO -- CLASS A............................................................................... 8.71%
PORTFOLIO -- CLASS B(3)............................................................................ N/A
INDEX.............................................................................................. 9.22
</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.
3. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
EAFE INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED
AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE
SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING.
The Active Country Allocation Portfolio invests in international equity markets,
with emphasis placed upon countries, rather than stock selection. This approach
reflects our belief that a diversified selection of securities representing
exposure to countries that we find attractive provides an effective way to
maximize the return and minimize the risk associated with global investing.
For the year ended December 31, 1996, the Portfolio had a total return of 9.71%
for the Class A shares and 9.22% for the Class B shares, as compared to a total
return of 6.05% for the Morgan Stanley Capital International (MSCI) EAFE Index.
The average annual total return for the period from inception on January 17,
1992 through December 31, 1996 was 8.71% for the Class A shares as compared to
9.22% for the Index.
In a volatile year for financial assets, the U.S. equity market continued its
strong performance (+23.2%) but ranked 11th in global markets beaten by fully
half of the international markets (in U.S. dollars), notably, Spain (+40.1%),
Sweden (+37.2%) and Hong Kong (+33.1%). Markets were boosted by abundant
liquidity provided through loose monetary policy, moderate economic growth and a
benign inflation environment.
Portfolio decisions to overweight Hong Kong, Spain, Sweden and Germany and our
hedges out of the Japanese yen and Deutsche mark bloc contributed substantially
to performance. Underweight allocations relative to the benchmark in the U.K.,
the Netherlands and Switzerland detracted from results. Opportunistic
commitments to emerging markets were mixed as Brazil and Indonesia performed
strongly while the developing Asian positions of Korea and Thailand woefully
underperformed. The Japanese market, the single biggest benchmark weight and
portfolio decision, was volatile in 1996 with positive returns in the first half
followed by a market sell off in the second half. On balance, our Japanese
market allocations were slightly positive, aided by our decision in mid-August
to sell all exposure to the bank sector.
After a strong year for global equity markets, we made an interim move to
increase cash in mid-December. Market strength in combination with general
financial market euphoria caused us to pause and take profits by reducing
selected country overweights. We trimmed overweight positions back to moderate
overweights in Germany and Hong Kong
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ACTIVE COUNTRY ALLOCATION PORTFOLIO
4
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
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OVERVIEW
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THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
which had performed well. Germany had discounted much of the good news on
restructuring and European Monetary Union (EMU) while Hong Kong had surged to
new highs as fears of the Chinese takeover subsided.
Currently the Portfolio has 8% in cash with an overweight in Asia ex-Japan, a
neutral stance in Japan ex-banks and an underweight in Europe based on the
following observations.
JAPAN
The Japanese market fell in 1996 as investors downgraded their expectations for
recovery and significant political and economic reform in 1997. The Japanese
authorities now find themselves in a very difficult situation. The structural
problems in the banking and property sectors remain and the consumption tax
hike, needed to reduce the now large budget deficit, is a significant threat to
the economic recovery and to consumer sentiment.
We believe the negative sentiment in the market is overdone with the overall
picture being one of benign inflation and 2.5% to 3.0% GDP growth. Deregulation
measures announced in the retail and telecommunications sectors have already had
positive effects on real spending in the economy and we expect financial
deregulation to go through and have similar positive effects on the economy.
A flight to quality by investors has created a two-tier market. A small number
of high quality (i.e. restructured), attractively valued export-related stocks
have significantly outperformed the broader market. These stocks will benefit
from the weaker yen and a pick up in global growth. Domestic companies will
suffer from increased competition, less government support and a weaker yen.
Reflecting this segmentation, we believe bank stocks will continue to
underperform.
EUROPE
The brightened prospects for economic growth, EMU, and corporate restructuring
underpinned the positive performance of the European markets in 1996. Europe in
local currencies returned 20% for the year with many markets reaching all-time
highs. Investors became less skeptical of the viability of the Union as
governments presented budgets to rein in their fiscal deficits and as progress
was made on the outstanding structural issues for EMU. Bond yields, within the
core markets and the periphery, converged sharply, providing further support for
equities.
We remain positive on the prospects for earnings and economic growth based on
the lagged effects of a weaker Deutsche mark and aggressive monetary
accommodation. However, investors have begun to discount the benefits of
corporate restructuring and an asset allocation shift into equities. In
addition, at current levels many European markets are increasingly sensitive to
events that could upset existing market perception about who will be "in and
out" of monetary union in 1999.
ASIA
In general, Asian markets suffered in 1996 as investors were concerned that the
economic growth and exports slowdown were secular and not cyclical in nature.
Throughout the year, the markets belabored under the fear of an upturn in U.S.
interest rates, concerns about persistent current account deficits and political
turmoil in several Asian countries.
We remain overweight in Asia based on expectations that an upturn in global
economic growth should provide a stimulus to export performance, improve trade
balances and produce momentum for earnings growth. An improvement in the trade
and current accounts, together with reduced inflationary pressures, should
produce a climate for monetary easing following several years of tightening. We
are optimistic about the prospects for the Asian markets in 1997.
Barton M. Biggs
PORTFOLIO MANAGER
Madhav Dhar
PORTFOLIO MANAGER
Francine J. Bovich
PORTFOLIO MANAGER
Ann D. Thivierge
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
5
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (89.9%)
AUSTRALIA (2.0%)
16,300 Amcor Ltd......................................... $ 105
20,600 Australian National Industries Ltd................ 20
26,713 Boral Ltd......................................... 76
6,500 Brambles Industries Ltd........................... 127
46,523 Broken Hill Proprietary Co., Ltd.................. 662
14,300 Burns, Philip & Co., Ltd.......................... 25
12,173 Coca-Cola Amatil Ltd.............................. 130
33,247 Coles Myer Ltd.................................... 137
7,700 CRA Ltd........................................... 121
26,300 CSR Ltd........................................... 92
59,100 Fosters Brewing Corp.............................. 120
12,207 Gio Australia Holdings Ltd........................ 31
33,432 Goodman Fielder Ltd............................... 41
8,337 Highlands Gold Ltd................................ 5
8,400 ICI Australia Ltd................................. 91
7,056 Lend Lease Corp., Ltd............................. 137
41,043 MIM Holdings Ltd.................................. 57
34,980 National Australia Bank Ltd....................... 411
8,137 Newcrest Mining Ltd............................... 32
46,916 News Corp., Ltd................................... 248
40,197 Normandy Mining Ltd............................... 56
18,976 North Ltd......................................... 56
26,700 Pacific Dunlop Ltd................................ 68
25,300 Pioneer International Ltd......................... 75
5,803 Renison Goldfields Consolidated Ltd............... 26
16,100 Santos Ltd........................................ 65
3,500 Sons of Gwalia Ltd................................ 21
19,754 Southcorp Holdings Ltd............................ 63
10,500 TABCORP Holdings Ltd.............................. 50
26,075 Western Mining Corp. Holdings Ltd................. 164
46,000 Westpac Banking Corp.............................. 262
----------
3,574
----------
BRAZIL (0.5%)
(a)495,000 Cia Paulista de Forca E Luz S.A................... 59
1,624,000 Cia Siderurgica Nacional S.A...................... 46
1,783,000 Eletrobras S.A.................................... 638
354,000 Lightpar.......................................... 126
(a)425,000 Lightpar S.A...................................... 103
(a)27,342 TELESP S.A........................................ 6
----------
978
----------
FRANCE (7.2%)
1,133 Accor S.A......................................... 144
3,915 Air Liquide....................................... 611
4,739 Alcatel Alsthom................................... 381
6,577 AXA S.A........................................... 418
6,623 Banque Nationale de Paris......................... 256
1,250 BIC Corp.......................................... 187
1,163 Bouygues.......................................... 121
864 Canal Plus........................................ 191
1,300 Carrefour S.A..................................... 846
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
3,000 Casino Guichard Perrachon......................... $ 140
861 Cie Bancaire S.A.................................. 102
3,339 Cie de Saint Gobain............................... 472
5,963 Cie de Suez S.A................................... 254
3,361 Cie Financiere de Paribas S.A., Class A........... 227
3,583 Cie Generale des Eaux............................. 444
10,000 Elf Aquitaine..................................... 911
1,250 Eridania Beghin-Say S.A........................... 201
400 Essilor International............................. 121
2,733 Groupe Danone..................................... 381
2,246 Havas S.A......................................... 158
3,942 Lafarge S.A....................................... 237
1,080 Legrand........................................... 184
2,335 L'OREAL........................................... 880
3,350 LVMH Moet Hennessy Louis Vuitton.................. 936
2,089 Lyonnaise des Eaux................................ 194
5,764 Michelin Compagnie Generale des Etablissements,
Class B......................................... 311
2,250 Pernod Ricard..................................... 124
2,100 Peugeot Citroen S.A............................... 236
730 Pinault-Printemps S.A............................. 290
670 Promodes.......................................... 189
11,747 Rhone-Poulenc S.A., Class A....................... 401
80 Sagem............................................. 48
360 Saint Louis....................................... 90
3,626 Sanofi S.A........................................ 361
5,141 Schneider S.A..................................... 238
57 Simco S.A. (RFD).................................. 5
1,175 Simco S.A......................................... 103
150 Societe Eurafrance S.A............................ 65
2,724 Societe Generale.................................. 295
250 Sodexho S.A....................................... 139
4,596 Thomson CSF....................................... 149
8,204 Total S.A., Class B............................... 667
11,454 UAP (Compagnie)................................... 286
9,800 Usinor Sacilor.................................... 143
----------
13,137
----------
GERMANY (7.7%)
1,600 Adidas AG......................................... 138
(a)1,500 AGIV AG........................................... 22
750 Allianz AG........................................ 1,350
150 AMB Aachener & Muenchener Beteiligungs AG......... 107
18,400 BASF AG........................................... 705
23,500 Bayer AG.......................................... 954
7,900 Bayerische Hypotheken Bank AG..................... 238
8,250 Bayerische Vereinsbank AG......................... 335
2,750 Beiersdorf AG..................................... 136
1,600 Bilfinger & Berger Bau AG......................... 59
(a)250 Brau Und Brunnen AG............................... 17
900 CKAG Colonia Konzern AG........................... 75
3,100 Continental AG.................................... 56
(a)15,950 Daimler-Benz AG................................... 1,094
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
6
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
GERMANY (CONT.)
<TABLE>
<C> <S> <C>
300 Degussa AG........................................ $ 136
15,900 Deutsche Bank AG.................................. 742
(a)67,306 Deutsche Telekom AG............................... 1,404
13,900 Dresdner Bank AG.................................. 416
1,500 Heidelberger Zement AG............................ 121
2,900 Hochtief AG....................................... 114
300 Karstadt AG....................................... 100
(a)2,000 Kloeckner-Humboldt-Deutz AG....................... 9
300 Linde AG.......................................... 182
12,050 Lufthansa AG...................................... 163
400 MAN AG............................................ 97
1,150 Mannesmann AG..................................... 495
5,050 Merck KGaA........................................ 182
(a)3,215 Metro AG.......................................... 252
259 Muenchener Rueck AG (Registered).................. 629
550 Preussag AG....................................... 124
10,550 RWE AG............................................ 442
1,900 SAP AG............................................ 260
2,250 Schering AG....................................... 190
17,850 Siemens AG........................................ 828
(a)100 STRABAG AG........................................ 6
1,200 Thyssen AG........................................ 213
15,650 VEBA AG........................................... 900
900 Viag AG........................................... 352
(a)256 Viag AG (RFD)..................................... 98
950 Volkswagen AG..................................... 394
----------
14,135
----------
HONG KONG (6.7%)
(a)38,000 Applied International Holdings.................... 2
48,319 Bank of East Asia Ltd............................. 215
181,000 Cathay Pacific Airways Ltd........................ 286
136,000 Cheung Kong Holdings Ltd.......................... 1,209
114,000 China Light & Power Co., Ltd...................... 507
99,985 Chinese Estates Holdings.......................... 111
40,000 Giordano Holdings Ltd............................. 34
77,000 Hang Lung Development Co.......................... 169
118,500 Hang Seng Bank Ltd................................ 1,440
11,200 Hong Kong Aircraft Engineering Co., Ltd........... 34
172,400 Hong Kong & China Gas Co., Ltd.................... 333
79,082 Hong Kong & Shanghai Hotel Ltd.................... 149
691,868 Hong Kong Telecommunications Ltd.................. 1,114
267,198 Hopewell Holdings Ltd............................. 173
208,000 Hutchison Whampoa Ltd............................. 1,634
66,000 Hysan Development Co., Ltd........................ 263
24,500 Johnson Electric Holdings Ltd..................... 68
36,000 Miramar Hotel & Investment Ltd.................... 72
94,228 New World Development Co., Ltd.................... 637
87,000 Oriental Press Group Ltd.......................... 39
24,500 Peregrine Investment Holdings Ltd................. 42
98,340 Shangri-La Asia Ltd............................... 146
102,000 Shun Tak Holdings Ltd............................. 68
114,000 South China Morning Post Holdings Ltd............. 94
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
64,000 Stelux Holdings Ltd............................... $ 17
138,000 Sun Hung Kai Properties Ltd....................... 1,691
96,500 Swire Pacific Ltd., Class A....................... 920
27,000 Television Broadcasts Ltd......................... 108
134,000 Wharf Holdings Ltd................................ 669
9,360 Wing Lung Bank Ltd................................ 64
21,500 Winsor Industrial Corp., Ltd...................... 5
----------
12,313
----------
ITALY (4.0%)
38,512 Assicurazioni Generali S.p.A...................... 730
56,700 Banca Commerciale Italiana........................ 103
22,300 Banco Ambrosiano Veneto S.p.A..................... 54
9,600 Benetton Group S.p.A.............................. 121
6,500 Cartiere Burgo.................................... 30
111,000 Credito Italiano.................................. 122
30,000 Edison S.p.A...................................... 190
350,000 ENI S.p.A......................................... 1,796
4,800 Falck Acciaierie & Ferriere Lombarde.............. 19
139,500 Fiat S.p.A........................................ 422
34,800 Fiat S.p.A. Di Risp (NCS)......................... 61
(a)11,500 Impregilo S.p.A................................... 9
38,000 Istituto Bancario San Paolo....................... 233
27,450 Istituto Mobiliare Italiano S.p.A................. 235
171,900 Istituto Nazionale delle Assicurazioni............ 224
6,300 Italcementi....................................... 15
11,850 Italcementi Di Risp............................... 66
27,800 Italgas........................................... 116
18,900 Magneti Marelli S.p.A............................. 23
(a)53,500 Mediaset S.p.A.................................... 247
20,000 Mediobanca S.p.A.................................. 108
(a)185,574 Montedison S.p.A.................................. 127
(a)41,900 Montedison S.p.A. Di Risp (NCS)................... 27
(a)153,250 Olivetti S.p.A.................................... 54
61,920 Parmalat Finanziaria S.p.A........................ 95
78,000 Pirelli S.p.A..................................... 145
14,265 R.A.S. S.p.A...................................... 133
11,000 Rinascente........................................ 64
(a)2,200 Saffa S.p.A....................................... 4
5,900 SAI............................................... 54
5,900 Sasib S.p.A....................................... 18
12,000 Sirti S.p.A....................................... 73
28,000 Snia BPD S.p.A.................................... 29
293,900 Telecom Italia Mobile S.p.A....................... 743
285,500 Telecom Italia S.p.A.............................. 742
70,500 Telecom Italia S.p.A. Di Risp (NCS)............... 138
----------
7,370
----------
JAPAN (33.8%)
4,100 Advantest Corp.................................... 192
66,000 Ajinomoto Co...................................... 673
(a)33,000 Aoki Corp......................................... 69
3,300 Aoyama Trading Co................................. 88
33,000 Asahi Breweries Ltd............................... 342
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
7
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
100,000 Asahi Chemical Industry Co., Ltd.................. $ 566
95,000 Asahi Glass Co., Ltd.............................. 894
33,000 Bridgestone Co.................................... 627
50,000 Canon, Inc........................................ 1,105
20,000 Casio Computer Co................................. 155
13,000 Chiyoda Corp...................................... 84
33,000 Chugai Pharmaceuticals Co......................... 276
66,000 Dai Nippon Printing Co., Ltd...................... 1,157
46,000 Daiei, Inc........................................ 352
33,000 Daikin Industries Ltd............................. 294
33,000 Daiwa House Industry.............................. 425
66,000 Daiwa Securities Co., Ltd......................... 587
33,000 Denso Corp........................................ 795
22,000 Ebara Corp........................................ 287
14,200 Fanuc............................................. 455
26,000 Fuji Photo Film Ltd............................... 858
107,000 Fujitsu Ltd....................................... 998
54,000 Furukawa Electric Co.............................. 256
66,000 Hankyu Corp....................................... 328
33,000 Hazama Corp....................................... 91
166,000 Hitachi Ltd....................................... 1,548
52,000 Honda Motor Co.................................... 1,486
320 Industrial Bank of Japan.......................... 6
22,000 Ito-Yokado Co., Ltd............................... 957
(a)133,000 Japan Airlines Co................................. 706
83,000 Japan Energy Corp................................. 226
26,000 Jusco Co., Ltd.................................... 882
66,000 Kajima Corp....................................... 472
35,400 Kansai Electric Power Co.......................... 734
61,000 Kao Corp.......................................... 711
171,000 Kawasaki Steel Corp............................... 492
100,000 Kinki Nippon Railway.............................. 624
66,000 Kirin Brewery Co., Ltd............................ 650
66,000 Komatsu Ltd....................................... 541
100,000 Kubota Corp....................................... 483
66,000 Kumagai Gumi Co................................... 164
10,000 Kyocera Corp...................................... 623
33,000 Kyowa Hakko Kogyo................................. 252
100,000 Marubeni Corp..................................... 430
21,000 Marui Co., Ltd.................................... 379
100,000 Matsushita Electric Industries Ltd................ 1,632
100,000 Mitsubishi Chemical Corp.......................... 324
92,000 Mitsubishi Corp................................... 953
117,000 Mitsubishi Electric Corp.......................... 697
71,000 Mitsubishi Estate Co., Ltd........................ 730
182,000 Mitsubishi Heavy Industries Ltd................... 1,446
67,000 Mitsubishi Materials Corp......................... 271
(a)100,000 Mitsui & Co....................................... 812
66,000 Mitsui Engineering & Shipbuilding................. 135
54,000 Mitsui Fudosan Co................................. 541
37,000 Mitsukoshi Ltd.................................... 263
13,000 Murata Manufacturing Co., Ltd..................... 432
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
79,000 NEC Corp.......................................... $ 955
33,000 NGK Insulators.................................... 313
65,000 Nippon Express Co., Ltd........................... 446
33,000 Nippon Fire & Marine Insurance Co................. 150
32,000 Nippon Light Metal Co............................. 132
33,000 Nippon Meat Packers, Inc.......................... 427
100,000 Nippon Oil Co..................................... 514
369,000 Nippon Steel Co................................... 1,090
100,000 Nippon Yusen Kabushiki Kaisha..................... 452
126,000 Nissan Motor Co................................... 731
(a)194,000 NKK Corp.......................................... 437
100,000 Nomura Securities Co., Ltd........................ 1,502
66,000 Odakyu Electric Railway Corp...................... 396
66,000 Oji Paper Co., Ltd. (New)......................... 418
147,000 Osaka Gas Co...................................... 402
33,000 Penta-Ocean Construction.......................... 147
10,000 Pioneer Electric Corp............................. 191
3,000 Rohm Co........................................... 197
33,000 Sankyo Co., Ltd................................... 935
100,000 Sanyo Electric Co., Ltd........................... 414
7,000 Secom Co., Ltd.................................... 424
6,500 Sega Enterprises.................................. 219
33,000 Sekisui House Co., Ltd............................ 336
66,000 Sharp Corp........................................ 940
9,000 Shimano, Inc...................................... 153
47,000 Shimizu Corp...................................... 351
14,000 Shin-Etsu Chemical Co............................. 255
14,000 Shiseido Co., Ltd................................. 162
(a)66,000 Showa Denko....................................... 152
15,200 Sony Corp......................................... 996
133,000 Sumitomo Chemical Co.............................. 527
66,000 Sumitomo Corp..................................... 520
45,000 Sumitomo Electric................................. 629
14,000 Sumitomo Forestry Co., Ltd........................ 170
32,000 Sumitomo Metal & Mining Co........................ 216
233,000 Sumitomo Metal Industries......................... 573
34,000 Sumitomo Osaka Cement Co., Ltd.................... 112
66,000 Taisei Corp., Ltd................................. 342
51,000 Takeda Chemical................................... 1,070
66,000 Teijin Ltd........................................ 288
66,000 Tobu Railway Co................................... 323
23,800 Tohoku Electric Power............................. 473
100,000 Tokio Marine & Fire Insurance Co.................. 941
15,000 Tokyo Dome Corp................................... 262
61,700 Tokyo Electric Power Co........................... 1,353
8,000 Tokyo Electron Ltd................................ 245
96,000 Tokyo Gas Co...................................... 260
66,000 Tokyu Corp........................................ 375
46,000 Toppan Printing Co., Ltd.......................... 576
100,000 Toray Industries, Inc............................. 617
33,000 Toto Ltd.......................................... 376
66,000 Toyoba Co......................................... 198
154,000 Toyota Motor Corp................................. 4,428
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
8
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
66,000 Ube Industries Ltd................................ $ 187
66,000 Yamaichi Securities Co............................ 294
----------
62,148
----------
KOREA (0.8%)
(d)5,770 Cho Hung Bank Co., Ltd. (Foreign)................. 47
5,170 Commercial Bank of Korea.......................... 34
4,000 Daewoo Corp....................................... 31
12,520 Daewoo Heavy Industries........................... 77
(a)1,730 Daewoo Securities Co.............................. 22
(a)1,270 Dong-Ah Construction Industrial Co................ 27
5,880 Hanil Bank........................................ 40
1,740 Hyundai Engineering & Construction Co.
(Foreign)....................................... 41
(d)1,420 Hyundai Motor Co., Ltd............................ 37
17,710 Korea Electric Power.............................. 516
(a)5,310 Korea First Bank.................................. 27
(d)130 Korea Mobile Telecommunications Corp.............. 130
2,730 L.G. Chemical Ltd................................. 26
(d)3,310 Pohang Iron & Steel Co., Ltd...................... 190
(a)2,080 Samsung Corp...................................... 25
870 Samsung Display Devices Co........................ 50
(d)2,460 Samsung Electronics............................... 146
340 Tong Yang Cement Co............................... 6
2,606 Yukong Ltd........................................ 49
----------
1,521
----------
NETHERLANDS (3.5%)
7,774 ABN Amro Holdings N.V............................. 506
1,850 Akzo Nobel N.V.................................... 253
15,600 Elsevier N.V...................................... 264
950 Heineken N.V...................................... 168
17,149 ING Groep N.V..................................... 617
2,156 KLM Royal Dutch Airlines N.V...................... 61
3,166 Koninklijke Ahold N.V............................. 198
750 Koninklijke Hoogovens N.V......................... 31
2,500 Koninklijke KNP BT N.V............................ 54
22,101 Koninklijke PTT Nederland N.V..................... 843
550 Nedlloyd Groep N.V................................ 15
7,900 Philips Electronics N.V........................... 320
12,700 Royal Dutch Petroleum Co.......................... 2,227
721 Stork N.V......................................... 25
3,800 Unilever N.V...................................... 672
1,668 Wolters Kluwer N.V................................ 222
----------
6,476
----------
SINGAPORE (2.7%)
(d)24,000 Amcol Holdings Ltd................................ --
41,000 City Developments Ltd............................. 369
10,000 Cycle & Carriage Ltd.............................. 122
49,000 DBS Land Ltd...................................... 180
34,000 Development Bank of Singapore Ltd. (Foreign)...... 459
12,000 First Capital Corp. Ltd........................... 36
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
15,800 Fraser & Neave Ltd................................ $ 163
20,000 Hai Sun Hup Group Ltd............................. 15
24,000 Hotel Properties Ltd.............................. 39
10,000 Inchcape Bhd...................................... 35
7,000 Jurong Shipyard Ltd............................... 35
27,000 Keppel Corp., Ltd................................. 210
21,000 Natsteel Ltd...................................... 48
42,000 Neptune Orient Lines Ltd. (Foreign)............... 36
50,300 Oversea-Chinese Banking Corp. (Foreign)........... 625
7,000 Overseas Union Enterprise Ltd..................... 35
16,000 Parkway Holdings Ltd.............................. 63
5,000 Robinson & Co. Ltd................................ 20
8,600 Shangri-La Hotel Ltd.............................. 29
65,000 Singapore Airlines Ltd. (Foreign)................. 590
17,800 Singapore Press Holdings (Foreign)................ 351
38,000 Singapore Technologies Industrial Corp............ 95
314,000 Singapore Telecommunications Ltd.................. 741
20,000 Straits Trading Co., Ltd.......................... 49
75,000 United Industrial Corp., Ltd...................... 63
46,000 United Overseas Bank Ltd. (Foreign)............... 513
----------
4,921
----------
SPAIN (4.4%)
735 Acerinox S.A...................................... 106
2,730 Aguas de Barcelona................................ 114
39 Aguas de Barcelona (New).......................... --
7,900 Argentaria S.A.................................... 354
13,369 Autopistas Concesionaria Espanola S.A............. 184
14,100 Banco Bilbao Vizcaya S.A.......................... 761
10,300 Banco Central Hispano Americano S.A............... 265
10,000 Banco Santander S.A............................... 640
1,000 Corporacion Financiera Alba....................... 101
1,700 Corporacion Mapfre................................ 104
(d)145 Corporacion Mapfre (New).......................... 6
3,600 Dragados y Construccion S.A....................... 55
3,050 Ebro Agricolas S.A................................ 54
1,350 ENCE S.A.......................................... 16
16,000 Endesa S.A........................................ 1,139
(a)15,500 Ercros S.A........................................ 10
1,100 FASA Renault S.A.................................. 23
950 Fomento Construction y Contractas S.A............. 88
2,350 Gas Natural SDG S.A............................... 547
58,300 Iberdrola S.A..................................... 826
1,400 Metro Vacesa...................................... 51
500 Portland Valderrivas S.A.......................... 34
18,800 Repsol S.A........................................ 721
2,300 Tabacalera S.A., Class A.......................... 99
58,900 Telefonica de Espana S.A.......................... 1,368
18,300 Union Electrica Fenosa S.A........................ 197
3,250 Uralita S.A....................................... 25
2,700 Vallehermoso S.A.................................. 59
1,450 Viscofan Envolturas Celulosicas S.A............... 21
594 Zardoya Otis S.A.................................. 69
----------
8,037
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
9
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
SWEDEN (3.6%)
3,950 ABB AB, Class A................................... $ 446
2,300 AGA AB, Class A................................... 35
(a)6,500 AGA AB, Class B................................... 97
27,800 Astra AB, Class A................................. 1,374
9,150 Atlas Copco AB, Class A........................... 221
(a)2,600 Autoliv AB........................................ 114
(a)2,600 Diligentia AB..................................... 41
3,600 Electrolux AB, Series B........................... 209
45,400 Ericsson LM, Class B.............................. 1,405
1,800 Esselte AB, Class A............................... 41
2,000 Hennes & Mauritz AB, Class B...................... 277
400 Scancem AB, Class A............................... 15
4,400 Securitas AB, Class B............................. 128
5,600 Skandia Forsakrings AB............................ 159
26,000 Skandinaviska Enskilda Banken, Class A............ 267
6,100 Skanska AB, Class B............................... 270
6,000 S.K.F. AB, Class B................................ 142
6,200 Stadshypotek AB................................... 170
15,050 Stora Kopparbergs Bergslags Aktiebolag, Class A... 208
9,200 Svenska Cellulosa AB, Class B..................... 187
10,000 Svenska Handelsbanken, Class A.................... 287
(a)23,200 Swedish Match AB.................................. 82
6,600 Trelleborg AB, Class B............................ 88
19,250 Volvo AB, Class B................................. 425
----------
6,688
----------
THAILAND (1.4%)
21,500 Advanced Information Services PCL (Foreign)....... 201
(d)32,400 Bangchak Petroleum PCL (Foreign).................. 29
126,809 Bangkok Metropolitan Bank PCL (Foreign)........... 50
14,875 Bank of Ayudhya PCL (Foreign)..................... 35
(d)11,800 CMIC Finance & Securities PCL (Foreign)........... 17
3,600 CP Feedmill PCL (Foreign)......................... 13
23,200 Dhana Siam Finance & Securities PCL (Foreign)..... 55
(d)27,400 General Finance & Securities PCL (Foreign)........ 47
(d)22,900 Italian Thai Development PCL (Foreign)............ 146
(d)20,700 Jasmine International PCL (Foreign)............... 32
127,500 Krung Thai Bank PCL (Foreign)..................... 246
19,600 National Finance & Securities PCL (Foreign)....... 37
(d)19,200 National Petrochemical PCL (Foreign).............. 15
(d)19,800 One Holding PCL (Foreign)......................... 8
16,900 Phatra Thanakit PCL (Foreign)..................... 48
28,400 PTT Exploration & Production PCL (Foreign)........ 410
34,500 Quality House PCL (Foreign)....................... 35
(a,d)46,900 Sahaviriya Steel Industry PCL (Foreign)........... 16
(d)12,700 Shinawatra Computer PCL (Foreign)................. 154
(d)21,700 Shinawatra Satellite PCL (Foreign)................ 25
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
3,600 Siam Cement PCL (Foreign)......................... $ 113
37,300 Siam City Bank PCL (Foreign)...................... 35
(d)3,500 Siam City Cement PCL (Foreign).................... 18
(a)204,100 TelecomAsia Corp. PCL (Foreign)................... 426
(d)41,600 Thai Airways International PCL (Foreign).......... 60
26,500 Thai Military Bank PCL (Foreign).................. 52
21,500 United Communication Industry PCL (Foreign)....... 231
----------
2,554
----------
UNITED KINGDOM (11.6%)
29,200 Abbey National plc................................ 383
15,500 Arjo Wiggins Appleton plc......................... 48
11,500 Associated British Foods plc...................... 95
36,535 Barclays plc...................................... 626
24,300 Bass plc.......................................... 342
68,135 BAT Industries plc................................ 565
15,454 BICC plc.......................................... 73
28,510 Blue Circle Industries plc........................ 173
13,847 BOC Group plc..................................... 207
23,000 Boots Co. plc..................................... 237
14,200 BPB Industries plc................................ 93
11,175 British Aerospace plc............................. 245
24,625 British Airways plc............................... 255
93,100 British Gas plc................................... 358
119,849 British Petroleum Co. plc......................... 1,438
35,000 British Sky Broadcasting plc...................... 313
43,400 British Steel plc................................. 119
124,700 British Telecommunications plc.................... 843
89,505 BTR plc........................................... 436
6,526 Burmah Castrol plc................................ 123
53,576 Cable & Wireless plc.............................. 446
24,180 Cadbury Schweppes plc............................. 204
17,900 Caradon plc....................................... 73
19,543 Coats Viyella plc................................. 45
14,296 Commercial Union plc.............................. 167
10,400 Courtaulds plc.................................... 70
3,116 De La Rue Co. plc................................. 31
10,731 EMI Group plc..................................... 254
61,400 General Electric plc.............................. 402
12,215 GKN plc........................................... 210
68,800 Glaxo Wellcome plc................................ 1,117
15,612 Granada Group plc................................. 230
45,672 Grand Metropolitan plc............................ 359
25,700 Great Universal Stores plc........................ 269
18,163 Guardian Royal Exchange plc....................... 87
47,200 Guinness plc...................................... 370
110,521 Hanson plc........................................ 154
27,700 Harrisons & Crosfield plc......................... 63
47,788 HSBC Holdings plc................................. 1,041
18,300 Imperial Chemical Industries plc.................. 241
25,819 Ladbroke Group plc................................ 102
17,100 Land Securities plc............................... 218
17,600 Lasmo plc......................................... 72
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
10
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
26,600 Legal & General Group plc......................... $ 170
116,700 Lloyds TSB Group plc.............................. 862
17,905 Lonrho plc........................................ 38
73,900 Marks and Spencer plc............................. 622
13,000 MEPC plc.......................................... 96
30,700 National Power plc................................ 257
16,800 Peninsular & Oriental Steam Navigation Co. plc.... 170
32,604 Pilkington plc.................................... 87
42,762 Prudential Corp. plc.............................. 360
18,200 Rank Group plc.................................... 137
12,916 Redland plc....................................... 81
15,300 Reed International plc............................ 289
36,400 Reuters Holdings plc.............................. 469
12,200 Rexam plc......................................... 75
7,300 RMC Group plc..................................... 125
30,428 Royal & Sun Alliance Insurance Group plc.......... 232
11,385 Royal Bank of Scotland Group plc.................. 110
25,399 RTZ Corp. plc..................................... 408
18,414 Safeway plc....................................... 127
33,246 Sainsbury (J) plc................................. 221
4,600 Schroders plc..................................... 119
20,430 Scottish Power plc................................ 123
42,300 Sears plc......................................... 69
12,100 Sedgwick Group plc................................ 27
9,700 Slough Estates plc................................ 46
52,710 Smithkline Beecham plc............................ 730
6,150 Southern Electric plc............................. 84
31,307 Tarmac plc........................................ 53
16,316 Taylor Woodrow plc................................ 43
41,220 Tesco plc......................................... 250
15,752 Thames Water plc.................................. 165
11,150 Thorn plc......................................... 48
11,417 TI Group plc...................................... 114
14,500 Unilever plc...................................... 352
14,682 United Utilities plc.............................. 156
69,207 Vodafone Group plc................................ 292
19,200 Zeneca Group plc.................................. 542
----------
21,346
----------
TOTAL COMMON STOCKS (Cost $158,289)........................... 165,198
----------
PREFERRED STOCKS (1.5%)
AUSTRALIA (0.1%)
23,171 News Corp., Ltd................................... 103
----------
BRAZIL (NON-VOTING STOCKS) (1.2%)
22,666 Aracruz Celelose S.A., Class B.................... 37
19,179,873 Banco Bradesco S.A................................ 139
(a)1,922,000 Banco do Brasil................................... 17
(a)1,118,000 Banco do Estado Sao Paulo......................... 5
165,663 Brahma............................................ 91
847,000 Ceval Alimentos S.A............................... 7
1,064,000 Cia Brasileira de Petroleo Ipiranga............... 15
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
2,861,500 Cia Energetica de Minas Gerais.................... $ 97
(a)71,000 Cia Energetica de Sao Paulo....................... 3
1,818,000 Cia Siderurgica de Tubarao........................ 28
8,136 Cia Vale Do Rio Doce.............................. 157
1,020,000 Eletrobras, Class B............................... 379
21,500 Industrias Klabin de Papel e Celulose S.A......... 20
222,000 Itaubanco......................................... 96
81,000 Itausa Investimentos Itau S.A..................... 61
2,044,000 Petrobras......................................... 325
20,000 Sadia Concordia................................... 15
7,618,000 Telebras.......................................... 587
638,000 Telesp............................................ 138
42,268,000 Usiminas.......................................... 43
----------
2,260
----------
GERMANY (0.2%)
7,200 RWE AG............................................ 241
1,300 SAP AG............................................ 179
----------
420
----------
ITALY (0.0%)
44,000 Fiat S.p.A........................................ 73
----------
TOTAL PREFERRED STOCKS (Cost $2,217).......................... 2,856
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a)2,876 Cia Paulista de Forca e Luz....................... --
----------
TOTAL RIGHTS (Cost $0)........................................ --
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANTS (0.0%)
BRAZIL (0.0%)
(a)384,400 Banco Do Brasil, Series A, expiring 6/30/01....... 1
(a)576,600 Banco Do Brasil, Series B, expiring 6/30/06....... 1
(a)961,000 Banco Do Brasil, Series C, expiring 6/30/11....... 1
----------
3
----------
FRANCE (0.0%)
(a)620 Casino Guichard - Perrachon, expiring 12/31/99.... 7
----------
HONG KONG (0.0%)
(a)4,400 Applied International Holdings, expiring
12/30/99........................................ --
(a)13,700 Hong Kong & China Gas Co., Ltd., expiring
9/30/97......................................... 8
(a)2,300 Hysan Development Co., Ltd., expiring 4/30/98..... 2
(a)11,500 Oriental Press Group, expiring 10/02/98........... 1
(a)1,750 Peregrine Investment Holdings Ltd., expiring
5/15/98......................................... --
----------
11
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
11
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- --------------------------------------------------------------------------
<C> <S> <C>
ITALY (0.0%)
(a)2,950 R.A.S. S.p.A, expiring 12/31/97................... $ 8
(a)1,550 R.A.S. S.p.A. Saving Shares, expiring 12/31/97.... 2
(a,d)1,050 Rinascente S.p.A., expiring 12/31/99.............. --
----------
10
----------
SINGAPORE (0.0%)
(a)11,750 Straits Steamship, expiring 12/20/00.............. 13
----------
SWITZERLAND (0.0%)
(a)112 Roche Holdings, expiring 5/05/98.................. 4
----------
THAILAND (0.0%)
(a,d)6,349 National Finance & Securities PCL, expiring
11/15/99........................................ 5
(a)1,980 One Holding PCL, expiring 10/14/01................ --
----------
5
----------
TOTAL WARRANTS (Cost $10)..................................... 53
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
UNITS
<C> <S> <C>
- ----------
UNITS (0.1%)
AUSTRALIA (0.1%)
20,821 General Property Trust............................ 40
26,348 Westfield Trust................................... 50
----------
TOTAL UNITS (Cost $80)........................................ 90
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
CONVERTIBLE DEBENTURE (0.0%)
FRANCE (0.0%)
FRF 60 Sanofi 4.00%, 1/01/00............................. 66
----------
TOTAL CONVERTIBLE DEBENTURE (Cost $38)........................ 66
----------
FIXED INCOME SECURITY (0.0%)
FRANCE (0.0%)
62 Casino Guichard-Perrachon, Series XW, 4.50%,
7/12/01......................................... 29
----------
TOTAL FIXED INCOME SECURITY (Cost $27)........................ 29
----------
TOTAL FOREIGN SECURITIES (91.5%) (Cost $160,661).............. 168,292
----------
SHORT-TERM INVESTMENT (7.9%)
REPURCHASE AGREEMENT (7.9%)
$ 14,432 Chase Securities Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $14,437,
collateralized by U.S. Treasury Bonds, 8.875%,
due 8/15/17, valued at $14,823 (Cost $14,432)... 14,432
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FOREIGN CURRENCY (0.1%)
AUD 42 Australian Dollar................................. $ 34
ATS 23 Austrian Schilling................................ 2
BEF 6 Belgian Franc..................................... --
BRL 1 Brazilian Real.................................... 1
GBP 2 British Pound..................................... 4
FRF 36 French Franc...................................... 7
IDR 6,833 Indonesian Rupiah................................. 3
ITL 7,194 Italian Lira...................................... 5
JPY 801 Japanese Yen...................................... 7
KRW 7 Korean Won........................................ --
MYR 22 Malaysian Ringgit................................. 9
NLG 81 Netherlands Guilder............................... 46
ESP 3,842 Spanish Peseta.................................... 29
CHF 2 Swiss Franc....................................... 1
THB 325 Thai Baht......................................... 13
----------
TOTAL FOREIGN CURRENCY (Cost $163)............................ 161
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.5%) (Cost $175,256)................ 182,885
--------
OTHER ASSETS (19.9%)
Securities at Value, Held as Collateral for
Securities Lending....................... $ 34,886
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 1,232
Dividends Receivable....................... 204
Receivable for Portfolio Shares Sold....... 183
Foreign Withholding Tax Reclaim
Receivable............................... 54
Receivable for Investments Sold............ 26
Security Lending Income Receivable......... 16
Interest Receivable........................ 3
Other...................................... 13 36,617
----------
LIABILITIES (-19.4%)
Collateral on Securities Loaned, at
Value.................................... (34,886)
Payable for Portfolio Shares Redeemed...... (346)
Investment Advisory Fees Payable........... (214)
Payable for Investments Purchased.......... (57)
Custodian Fees Payable..................... (49)
Administrative Fees Payable................ (31)
Bank Overdraft............................. (27)
Security Lending Expense Payable........... (11)
Dividends Payable.......................... (7)
Directors' Fees and Expenses Payable....... (5)
Sub-Administrative Fees Payable............ (2)
Other Liabilities.......................... (41) (35,676)
---------- --------
NET ASSETS (100%)........................................ $183,826
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $172,825
Overdistributed Net Investment Income............. (308)
Accumulated Net Realized Gain..................... 2,449
Unrealized Appreciation on Investments and Foreign
Currency Translations (Net of accrual for
foreign tax of $4 on unrealized appreciation on
investments).................................... 8,860
--------
NET ASSETS........................................ $183,826
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
12
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $183,193
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 16,009,331 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $11.44
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $633
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 55,366 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $11.44
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------- -------- ---------- ------------- -------- ------------
U.S.$ 1,491 $ 1,491 1/24/97 DEM 2,313 $ 1,506 $ 15
DEM 16,624 10,821 1/24/97 U.S.$ 10,931 10,931 110
DEM 2,166 1,410 1/24/97 U.S.$ 1,400 1,400 (10)
JPY 619,026 5,368 1/30/97 U.S.$ 5,501 5,501 133
NLG 9,072 5,265 2/10/97 U.S.$ 5,394 5,394 129
JPY 1,399,413 12,172 2/21/97 U.S.$ 12,700 12,700 528
FRF 32,396 6,265 2/24/97 U.S.$ 6,400 6,400 135
FRF 17,451 3,375 2/24/97 U.S.$ 3,400 3,400 25
JPY 725,916 6,336 3/17/97 U.S.$ 6,481 6,481 145
150,668 1,315 3/17/97 U.S.$ 1,337 1,337 22
-------- -------- ------
$ 53,818 $ 55,050 $ 1,232
--------
-------- -------- ------
-------- ------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- See note A-1 to financial
statements
DEM -- Deutsche Mark
NCS -- Non Convertible Shares
PCL -- Public Company Limited
RFD -- Ranked for Dividend
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment...................... $ 24,915 13.5%
Consumer Goods......................... 35,227 19.1
Energy................................. 19,469 10.6
Finance................................ 31,743 17.4
Gold Mines............................. 96 --
Materials.............................. 21,267 11.5
Multi-Industry......................... 5,120 2.8
Services............................... 30,455 16.6
--------- ---
$ 168,292 91.5%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
13
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
China 0.5%
Hong Kong 30.4%
India 0.5%
Indonesia 5.7%
Korea 4.4%
Malaysia 24.0%
Philippines 5.0%
Singapore 15.2%
Taiwan 4.0%
Thailand 8.6%
Other 1.7%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ASIAN EQUITY PORTFOLIO-CLASS
MSCI COMBINED FAR EAST FREE EX-JAPAN INDEX (1) A
<S> <C> <C>
7/1/91* 500,000 500,000
10/31/1991 493,080 483,500
10/31/1992 676,180 684,130
12/31/1992 630,045 658,030
12/31/1993 1,252,425 1,353,595
12/31/1994 1,014,350 1,139,550
12/31/1995 1,083,427 1,217,837
12/31/1996 1,182,886 1,260,340
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) COMBINED FAR EAST FREE EX-JAPAN INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A................... 3.49% 19.35% 18.28%
PORTFOLIO -- CLASS
B(3)................ 2.92 N/A N/A
INDEX............... 9.18 17.34 16.93
</TABLE>
1. The MSCI Combined Far East Free ex-Japan Index is an unmanaged index of
common stocks and includes Indonesia, Hong Kong, Malaysia, the Philippines,
Korea, Singapore, Taiwan and Thailand (assumes dividends are reinvested).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
COMBINED FAR EAST FREE EX-JAPAN INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY
AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE
PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.
The investment objective of the Asian Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities which are
traded on recognized exchanges of Hong Kong, Singapore, Malaysia, Thailand,
Indonesia and the Philippines. The Portfolio may also invest in equity
securities traded on markets in Taiwan, South Korea, India, Pakistan, Sri Lanka
and other Asian developing markets which are open for foreign investment. The
Portfolio does not intend to invest in securities which are principally traded
in Japan or in companies organized under the laws of Japan.
For the year ended December 31, 1996, the Portfolio had a total return of 3.49%
for the Class A shares and 2.92% for the Class B shares, as compared to a total
return of 9.18% for the Morgan Stanley Capital International (MSCI) combined Far
East Free ex-Japan Index. The average annual total return for the five year
period ended December 31, 1996 and for the period from inception on July 1, 1991
through December 31, 1996 was 19.35% and 18.28%, respectively, for the Class A
shares as compared with 17.34% and 16.93%, respectively, for the Index.
PERFORMANCE REVIEW
Over the year, the Portfolio underperformed the Index. This was attributable to
a large extent to security selection, principally in Malaysia where stocks such
as Genting and Resorts World fell victim to natural disasters and severely
trailed the overall market. The Portfolio also missed a portion of the large
move in Taiwan, as the Portfolio did not participate in the speculative frenzy
which seized the financial sector, instead concentrating on the undervalued
electronic stocks. Security selection in Thailand also hampered the Portfolio's
performance. The effect on the Portfolio of asset allocation was slightly
negative.
MARKET REVIEW
Asian markets exceeded the modest gains they displayed in 1995, rising 9.2% in
1996. This increase disguised a huge disparity between the performance of
different markets, however. Most of the markets were up strongly, led by
Taiwan's 38.9% increase, followed by China (+35.1%) and Hong Kong (+28.9%).
Indonesia and Malaysia also posted returns in excess of 20%. This is in sharp
contrast to the performance of other markets in the region, as South Korea
plummeted -38.4% and Thailand tumbled -38.0%.
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
14
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)
Despite a series of political confrontations with China in the first quarter,
Taiwan rallied to become the region's best performing market. Lee Teng-Hui
emerged as the country's first democratically elected leader, and relations with
China softened following the live missile exercises that began the year.
Confidence returned to domestic investors who formed the major component of the
rally, especially in financial stocks. Taiwan's inclusion in the MSCI regional
index also impacted the markets, as foreign investors sought exposure to the
market. Investors have remained concerned, however, as the collapse in
semiconductor prices has led to pressure on many of the island's top exporters.
Lessened anxiety over relations with China also spurred the Hong Kong market.
Investor sentiment over the prospects of a smooth transition improved gradually
throughout the year and stock prices reacted accordingly. As widely expected,
shipping magnate C.H. Tung was appointed Chief Executive of the Special
Administrative Region that will encompass Hong Kong after the handover. Economic
fundamentals also buoyed the market as the U.S. Federal Reserve resisted raising
interest rates, spurring property prices throughout Hong Kong. China stocks also
benefited from improved relations. The major impetus behind the MSCI China
Index's 35% move, however, was frantic local buying in the fourth quarter. The
government brought to a close its 3-year austerity program and cut interest
rates twice in 1996, injecting a large amount of liquidity into the domestic
market. This led to the unusual occurrence of local shares actually trading at a
premium to foreign shares.
The South Korean market was the region's worst performer, losing 38.4% of its
value based on the MSCI index. The current account deficit increased
substantially, exceeding $22 billion in 1996. Exporters suffered severely as the
prices for key Korean exports of semiconductors and petrochemicals fell sharply.
Though the Korean Won devalued throughout the year, the comparative weakening of
the Yen prevented any consequent gains in Korean product competitiveness. The
situation continued to be exacerbated by the zeal with which the chaebols have
built up capacity, far in excess of any reasonable expectation of short-term
demand. A final blow to the overall market landed at year's end, as many labor
unions went on strike following changes to national labor laws by the Korean
government.
The Thai market also suffered a significant decline this year. Worries about the
nature and term of the capital inflows mounted throughout the year, leading to a
downgrading of Thai debt by Moody's in May. The Thai central bank responded to
concerns over the stability of the financial sector by imposing stiff new
regulations which severely impacted the short-term profitability of the banks,
which then proceeded to lead the market into its decline. The market suffered
further setbacks as the government of Chuan Leekpai lost a no-confidence motion
in parliament and was replaced by a shaky minority coalition under General
Chavalit's New Aspiration Party. A large and persistent current account deficit
has also plagued the country, as the government has remained firm to their
commitment to maintain the value of the Thai Baht at current levels.
PORTFOLIO ACTIVITIES
The Portfolio this year saw a net increase in subscriptions of $79.3 million,
with subscribers amounting to $370.5 million and redemptions of $291.2 million.
Large net purchases were made in Malaysia as the market continued its upward
trend, and in Thailand and Korea where large market declines led to attractive
buying opportunities. Some of the major purchases in Malaysia included Sime
Darby, Genting and Petronas Gas. The Portfolio also made major purchases of Siam
Commercial Bank, which despite a strong balance sheet was sold off with the rest
of the financial sector.
The Portfolio made minor net sales in China, Hong Kong, and the Philippines. In
Hong Kong we sold Guangdong Investments as it became fully valued, and trimmed
our holdings of Cheung Kong to its original allocation following large price
increases. A range of property stocks in the Philippines declined as property
prices began to take on a speculative tone. A large net sale was also made of
the Malaysian national electric company, Tenaga Nasional, as it was felt that
the market was overvaluing changes in the regulatory environment.
MARKET OUTLOOK
Against the background of an increase in global growth, Asian markets in general
should continue to appreciate in 1997. In Hong Kong, strong corporate earnings
growth and liquidity are likely to provide support for the market despite its
recent strength. Stock valuations are no longer cheap, and will likely remain
close to the recent historical average. As the
- --------------------------------------------------------------------------------
Asian Equity Portfolio
15
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)
handover to China becomes reality, China related stocks and red-chips will
remain the focus of the market. Shares of companies listed in China should also
come under increasing interest from both foreign and local investors, and
volatility will remain high. Both markets will be susceptible to China's foreign
relations with the U.S. and Taiwan, and Hong Kong will continue to be vulnerable
to changes in U.S. interest rates (the Chinese government has pledged to keep
the Hong Kong dollar pegged to the U.S. dollar). Shares in Taiwan should benefit
from an improvement in global demand for electronics, as well as improving
economic fundamentals and a benign interest rate environment.
Although it is premature in the near term to envision a sustained fundamental
turnaround in the Korean economy and stock market, with a reduction in
facilities investment, de-stocking of inventory levels, and gradual recovery of
prices, improvements should impact the market starting in the second half. A
reduction in facilities investment during this period of oversupply should help
reduce import growth and in turn shrink the current account deficit, which will
reduce the need for working capital financing and lower market interest rates.
However, the uncertain political situation ahead of this year's presidential
election and the pace of chaebols to focus on production efficiency will
determine the speed of a sustained recovery.
Despite strong upward moves in 1996, the Malaysian market prospective 1997 price
earnings ratio (18.5 times) is at the low end of the past 5-year historical
range. Whereas gains in 1996 were led by small and medium cap firms, large cap
companies are expected to generate better earnings growth in 1997. Singapore is
likely to trade within a narrow range, though with a definite upward bias led by
small cap electronic stocks.
Indonesia's macroeconomic environment should continue to buoy the stock market
with healthy economic growth and lower inflation. Earnings growth is predicted
to top 20%, yielding a 15 times prospective 1997 price earnings ratio.
Parliamentary elections in May should not provide any major surprises, and
concerns over Suharto's health have lessened, though not dissipated. The
Philippines will also retain the high earnings and GDP growth it enjoyed in
1996. However, stock prices here look fairly valued if not expensive, and record
property prices have raised concerns over the asset quality of some banks. The
market is also vulnerable to increasing uncertainty ahead of the Presidential
elections in 1998, where Ramos, the architect of the country's economic success,
is required to step down under the current constitution.
The market in Thailand is likely to trend sideways as investors await
indications of the future of the economy. The finance sector was forced to
swallow stern medicine by the central bank, and it remains to be seen whether
they will be able to grow out of their current problems. Record low valuations
should provide a floor under the current market level, though institutional
selling and lackluster earnings growth will impede large upside moves in the
immediate future.
PORTFOLIO STRATEGY
In Hong Kong we will continue to look for companies with China interests, as
well as increase our exposure in China itself on a selective basis. Our approach
in Taiwan is to remain with the electronic stocks which maintain very low
valuations, while avoiding the financial stocks which have been driven to
unsustainable price earnings ratios. In Korea, while stock valuations are
compelling, lack of fundamental improvements should dictate selective bottom-up
investing in the first half. Stronger credit banks and domestic plays, such as
telecoms remain attractive.
In Malaysia, the Portfolio will continue to add to positions which reflect the
changing structure of this dynamic economy. We will increase our exposure to
automotive stocks in Indonesia, especially Astra which has shaken off the
competition from a national car and proceeded to perform strongly. In the
Philippines, the Portfolio will continue to trim its exposure to the hot
property sector, while in Singapore it will increase its holdings in stocks in
the electronic sector. The incredibly low valuations have made investment in
Thailand very compelling, and we will continue to invest in banks with the
strongest balance sheets.
Ean Wah Chin
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
16
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (98.0%)
CHINA (0.5%)
(a)240,300 Changchai Co., Ltd., Class B...................... $ 209
(a)24,000 Guangshen Railway Co., Ltd. ADR................... 495
(a)2,800,000 Guangshen Railway Co., Ltd., Class H.............. 1,213
----------
1,917
----------
HONG KONG (30.4%)
(a)253,000 Asia Satellite Telecommunications Holdings Ltd.... 587
2,032,000 CDL Hotels International Ltd...................... 1,162
1,667,000 Cheung Kong Holdings Ltd.......................... 14,818
(a)679,000 Cheung Kong Infrastructure Holdings............... 1,800
(a)2,036,000 China Resources Beijing Land...................... 1,290
1,968,000 China Resources Enterprise Ltd.................... 4,427
1,352,500 Citic Pacific Ltd................................. 7,851
768,000 Cosco Pacific Ltd................................. 894
170,000 Great Eagle Holdings Ltd.......................... 701
340,300 Hang Seng Bank Ltd................................ 4,136
355,000 Henderson Land Development Co., Ltd............... 3,580
205,000 Hong Kong Ferry Holdings.......................... 400
137,000 Hong Kong Land Holdings Ltd....................... 381
490,020 Hong Kong & Shanghai Bank Holdings plc............ 10,485
4,549,000 Hong Kong Telecommunications Ltd.................. 7,322
2,123,000 Hutchison Whampoa Ltd............................. 16,675
(a)1,405,000 Kerry Properties Ltd.............................. 3,851
1,567,000 New World Development Co., Ltd.................... 10,586
(a)387,000 Shanghai Industrial Holdings Ltd.................. 1,411
661,100 Sun Hung Kai Properties Ltd....................... 8,099
769,060 Swire Pacific Ltd., Class A....................... 7,333
1,214,000 Wharf Holdings Ltd................................ 6,059
----------
113,848
----------
INDIA (0.5%)
(e)25,500 Hindalco Industries Ltd. GDR...................... 638
63,500 Mahindra & Mahindra Ltd. GDR...................... 746
(a)24,000 State Bank of India GDR........................... 420
----------
1,804
----------
INDONESIA (5.7%)
788,500 Astra International (Foreign)..................... 2,170
(d)1,948,010 Bank International Indonesia (Foreign)............ 1,917
(a,d)963,000 Daya Guna Samuder (Foreign)....................... 1,121
(d)531,000 Gudang Garam (Foreign)............................ 2,293
(d)775,200 Hanjaya Mandala Sampoerna (Foreign)............... 4,135
(d)2,564,824 Indah Kiat Pulp & Paper Corp. (Foreign)........... 1,873
(a,d)1,123,998 Sorini Corp. (Foreign)............................ 524
(d)4,251,000 Telekomunikasi Indonesia (Foreign)................ 7,334
----------
21,367
----------
KOREA (4.4%)
(a,d)80,050 Housing & Commercial Bank, Korea (New)............ 1,219
(a)40,000 Kookmin Bank GDR.................................. 727
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
53,900 Korea Electric Power.............................. $ 1,569
(d)2,503 Korea Mobile Telecommunications Corp.............. 2,499
61,800 Korea Mobile Telecommunications Corp. ADR......... 796
16,130 LG Information & Communication Ltd. RFD (New)..... 1,143
22,660 LG Information & Communications Ltd. (Old)........ 1,448
61,600 Pohang Iron & Steel Co., Ltd. ADR................. 1,247
(d)26,618 Samsung Electronics............................... 1,577
(a)7,533 Samsung Electronics GDR (New)..................... 306
(a,e)300 Samsung Electronics GDR........................... 12
(a,d)27,595 Samsung Electronics RFD........................... 1,634
(d)133,761 Shinhan Bank Co., Ltd............................. 2,148
----------
16,325
----------
MALAYSIA (24.0%)
552,000 Commerce Asset Holding Bhd........................ 4,153
119,000 Dialog Group Bhd.................................. 1,696
501,000 Edaran Otomobil Nasional Bhd...................... 5,009
1,626,700 Genting Bhd....................................... 11,207
741,000 Hicom Holdings Bhd................................ 2,127
871,000 IJM Corp. Bhd..................................... 2,052
848,000 Leader Universal Holdings Bhd..................... 1,780
1,083,500 Malayan Banking Bhd............................... 12,013
1,441,316 Malaysian International Shipping Bhd (Foreign).... 4,280
1,878,000 Petronas Gas Bhd.................................. 7,808
2,974,000 Renong Bhd........................................ 5,276
1,570,000 Resorts World Bhd................................. 7,149
3,142,000 Sime Darby Bhd.................................... 12,379
1,197,000 Telekom Malaysia Bhd.............................. 10,664
278,757 United Engineers Ltd.............................. 2,517
----------
90,110
----------
PHILIPPINES (5.0%)
1,613,237 Ayala Land, Inc., Class B......................... 1,840
(a)15,461,000 Digital Telecommunications Philippines, Inc....... 1,293
(a)1,865,100 DMCI Holdings, Inc................................ 1,223
17,982,100 JG Summit Holding, Class B........................ 5,060
385,565 Manila Electric Co., Class B...................... 3,152
6,309,075 Petron Corp....................................... 2,135
26,960 Philippine Long Distance Telephone Co., Class B... 1,481
9,231,400 SM Prime Holdings, Inc., Class B.................. 2,387
----------
18,571
----------
SINGAPORE (14.9%)
2,499,000 Comfort Group Ltd................................. 2,215
563,500 Development Bank of Singapore Ltd. (Foreign)...... 7,611
117,560 Fraser & Neave Ltd................................ 1,210
265,000 Jurong Shipyard Ltd............................... 1,335
1,175,000 Keppel Corp., Ltd................................. 9,153
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
17
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SINGAPORE (CONT.)
<TABLE>
<C> <S> <C>
607,482 Oversea-Chinese Banking Corp. (Foreign)........... $ 7,554
522,000 Parkway Holdings Ltd.............................. 2,052
468,000 Sembawang Corp. Ltd............................... 2,475
305,000 Singapore Airlines Ltd. (Foreign)................. 2,768
248,400 Singapore Press Holdings (Foreign)................ 4,899
1,004,000 Straits Steamship Land Ltd........................ 3,214
477,000 Straits Trading Co., Ltd.......................... 1,159
666,200 United Overseas Bank Ltd. (Foreign)............... 7,427
(a)1,006,000 Want Want Holdings................................ 2,646
----------
55,718
----------
TAIWAN (4.0%)
828,150 Cathay Life Insurance Co., Ltd.................... 5,270
6,254,000 China Steel Corp.................................. 5,867
(a)702,000 Siliconware Precision Industries Co............... 1,481
1,663,890 Yang Ming Marine Transport........................ 2,202
----------
14,820
----------
THAILAND (8.6%)
467,400 Advance Information Service PCL (Foreign)......... 4,374
709,100 Bangkok Bank PCL (Foreign)........................ 6,857
1,046,800 Finance One PCL (Foreign)......................... 2,122
(d)487,000 Shinawatra Computer Co. plc (Foreign)............. 5,887
780,800 Siam Commercial Bank PCL (Foreign)................ 5,663
847,270 Thai Farmers Bank PCL (Foreign)................... 5,286
189,700 United Communications Industry PCL (Foreign)...... 2,042
----------
32,231
----------
TOTAL COMMON STOCKS (Cost $347,284)........................... 366,711
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
</TABLE>
<TABLE>
<C> <S> <C>
WARRANTS (0.3%)
SINGAPORE (0.3%)
(a)1,178,750 Straits Steamship Land Ltd., expiring 12/12/00.... 1,272
----------
THAILAND (0.0%)
(a,d)98,821 Thai Farmers Bank PCL (Foreign) expiring
09/15/02........................................ --
----------
TOTAL WARRANTS (Cost $1,652).................................. 1,272
----------
TOTAL FOREIGN SECURITIES (98.3%) (Cost $348,936).............. 367,983
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<C> <S> <C>
- ----------
FOREIGN CURRENCY (0.3%)
HKD 233 Hong Kong Dollar.................................. 30
KRW 227,231 Korean Won........................................ 269
MYR 40 Malaysian Ringgit................................. $ 16
PHP 10,646 Philippines Peso.................................. 405
SGD 287 Singapore Dollar.................................. 205
TWD 5,839 Taiwan Dollar..................................... 212
----------
TOTAL FOREIGN CURRENCY (Cost $1,137).......................... 1,137
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.6%) (Cost $350,073)................ 369,120
--------
OTHER ASSETS (11.0%)
Securities, at Value, Held as Collateral
for Securities Loaned.................... $ 23,576
Receivable for Investments Sold............ 16,002
Receivable for Portfolio Shares Sold....... 1,106
Dividends Receivable....................... 551
Security Lending Income Receivable......... 54
Foreign Withholding Tax Reclaim
Receivable............................... 20
Other...................................... 23 41,332
----------
LIABILITIES (-9.6%)
Collateral for Securities Loaned, at
Value.................................... (23,576)
Bank Overdraft............................. (10,517)
Payable for Portfolio Shares Redeemed...... (723)
Investment Advisory Fees Payable........... (666)
Custodian Fees Payable..................... (184)
Deferred Foreign Taxes Payable............. (115)
Administrative Fees Payable................ (52)
Security Lending Fees Payable.............. (27)
Directors' Fees and Expenses Payable....... (11)
Distribution Fees Payable.................. (8)
Net Unrealized Loss on Foreign Currency
Exchange Contracts....................... (8)
Other Liabilities.......................... (65) (35,952)
---------- --------
NET ASSETS (100%)........................................ $374,500
--------
--------
</TABLE>
<TABLE>
<S> <C> <C>
NET ASSETS CONSIST OF:
Paid in Capital.............................. $ 348,095
Overdistributed Net Investment Income........ (4)
Accumulated Net Realized Gain................ 7,479
Unrealized Appreciation on Investments and
Foreign Currency Translations (Net of
accrual for foreign taxes of $115 on
unrealized appreciation on investments).... 18,930
--------
NET ASSETS............................................... $374,500
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
18
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- -------------------------------------------------------------------
<S> <C> <C>
CLASS A:
- ---------------------------------------------
NET ASSETS................................... $363,498
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 19,408,234 outstanding $0.001
par value
shares (authorized 500,000,000 shares)..... $18.73
--------
--------
CLASS B:
- ---------------------------------------------
NET ASSETS................................... $11,002
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 586,978 outstanding $0.001
par value
shares (authorized 500,000,000 shares)..... $18.74
--------
--------
</TABLE>
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver foreign currency in exchange for
U.S. 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>
- ------------- ------- ---------- ----------- ------- -----------
HKD 23,272 $ 3,009 1/02/97 U.S.$ 3,008 $ 3,008 $ (1)
HKD 35,794 4,628 1/03/97 U.S.$ 4,627 4,627 (1)
MYR 1,277 506 1/03/97 U.S.$ 505 505 (1)
SGD 1,566 1,119 1/03/97 U.S.$ 1,118 1,118 (1)
SGD 1,832 1,310 1/06/97 U.S.$ 1,309 1,309 (1)
MYR 7,890 3,123 1/06/97 U.S.$ 3,120 3,120 (3)
------- -------
--
$13,695 $13,687 $ (8)
------- ------- --
------- ------- --
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Securities (totaling $34,161 or 9.1% of net assets at December 31,
1996) valued at fair value -- See Note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
PCL -- Public Company Limited
RFD -- Ranked for Dividend
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -------------------------------------------------------------
Capital Equipment...................... $ 21,595 5.8%
Consumer Goods......................... 9,797 2.6
Energy................................. 14,664 4.0
Finance................................ 152,409 40.7
Materials.............................. 14,826 3.9
Multi-Industry......................... 55,714 14.9
Services............................... 98,978 26.4
-------- ---
$367,983 98.3%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
19
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 2.6%
Brazil 14.4%
Bulgaria 1.0%
Chile 0.5%
China 1.2%
Colombia 0.4%
Egypt 1.3%
Greece 0.1%
Hong Kong 9.3%
Hungary 0.5%
India 10.1%
Indonesia 7.1%
Israel 2.6%
Korea 6.9%
Mexico 9.9%
Morocco 0.8%
Pakistan 2.5%
Peru 0.3%
Philippines 1.9%
Poland 1.7%
Russia 7.5%
Singapore 0.3%
South Africa 4.1%
Taiwan 2.0%
Thailand 4.8%
Turkey 3.5%
United Kingdom 0.1%
Venezuela 0.2%
Zimbabwe 0.5%
Other 1.9%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
IFC GLOBAL TOTAL RETURN COMPOSITE INDEX EMERGING MARKETS PORTFOLIO-CLASS
(1) A
<S> <C> <C>
9/25/92* 500,000 500,000
10/31/1992 525,300 505,500
12/31/1992 527,370 511,000
12/31/1993 880,750 950,000
12/31/1994 878,950 858,500
12/31/1995 770,488 748,870
12/31/1996 831,280 840,157
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE IFC GLOBAL TOTAL
RETURN COMPOSITE INDEX(1)
- ------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 12.19% 12.93%
PORTFOLIO -- CLASS B(3)............................................................................ 11.04 N/A
INDEX.............................................................................................. 7.89 12.64
</TABLE>
1. The IFC Global Total Return Composite Index is an unmanaged index of common
stocks and includes developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa (assumes dividends are reinvested).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS
COUNTRY OR REGIONAL INDICES, 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 investment objective of the Emerging Markets Portfolio is to provide
long-term capital appreciation by investing in equity securities of emerging
country issuers.
For the year ended December 31, 1996, the Portfolio had a total return of 12.19%
for the Class A shares and 11.04% for the Class B shares, as compared to a total
return of 7.89% for the IFC Global Total Return Composite Index. The average
annual total return for the period from inception on September 25, 1992 through
December 31, 1996 was 12.93% for the Class A shares as compared to 12.64% for
the Index.
The Emerging Markets Portfolio also outperformed the MSCI Emerging Markets Free
(EMF) Index, with the MSCI EMF Index showing a return of 3.9% for the year. The
Portfolio's strong out-performance during the year was attributable in large
part to country selection and security selection was also positive.
Following two weak years, hopes ran high in early 1996 that the emerging markets
would recover. After a relatively strong first half, however, the emerging
markets lost ground in the second half of the year. The first six months of 1996
were dominated by politics as several of the larger emerging markets, notably
Russia, South Korea, India and Taiwan, held successful elections. Fears of
contagion from a decline in the lofty U.S. equity market and concerns of a rise
in U.S. interest rates sapped support from emerging market equities and led to a
weak second half. As always in the emerging market universe, there were major
disparities in performance among the markets (see Chart on page 21).
Overall, the 3.9% return for the MSCI EMF Index was somewhat muted. By region,
Latin America out-performed Europe/Middle East and Asia (see Table below). Three
emerging markets achieved results in excess of 100% for the year--Russia,
Venezuela and Hungary posted returns of 151.1%, 127.9% and 104.2%, respectively.
The emerging Asian markets offered some of the best and worst to investors.
Taiwan ended the year up 38.9%, and Hong Kong finished the year up 28.9%.
Thailand and Korea, beset with export and liquidity problems, were the worst
performing emerging markets of 1996, off 38.0% and
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
20
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MSCI EMERGING MARKETS INDICES
<S> <C>
Performance ($US)
12 Months to December 31, 1996
Venezuela 127.90%
Poland 57.20%
Taiwan 38.90%
Brazil 38.00%
Portugal 32.30%
Turkey 31.90%
Hong Kong 28.90%
Indonesia 25.40%
Malaysia 24.50%
Argentina 16.80%
Mexico 16.10%
Philippines 15.10%
Colombia 6.60%
Greece 1.40%
Peru -2.80%
India -3.80%
Israel -3.90%
Jordan -11.40%
Sri Lanka -16.30%
Chile -16.40%
Pakistan -19.40%
South Africa -20.10%
Thailand -38.00%
Korea -38.40%
% change
</TABLE>
TABLE 1:
<TABLE>
<CAPTION>
VALUATION
PERFORMANCE 12 MONTH TRAILING
1996 PRICE/EARNINGS
--------------- -------------------
<S> <C> <C>
MSCI U.S. 21.4% 19.3x
MSCI EAFE 4.4 25.8x
MSCI EMF 3.9 16.2x
EMF Asia 1.6 19.1x
EMF Europe/Middle East 11.3 13.0x
EMF Latin America 18.9 14.1x
</TABLE>
Source: Morgan Stanley Capital International
38.4%, respectively. India had a very strong first quarter, rallying 11.5%, but
lost virtually all the gain to end the year down 3.8%.
The largest contributors to the Portfolio's out-performance, relative to the
benchmark, came from Brazil, Turkey, Russia and Hong Kong--all overweight
positions. Underweights in Thailand, South Africa and Chile also added to
performance. Being underweight Malaysia however and overweight India and Israel
all had negative impacts. Stock selection was extremely positive in Brazil and
Mexico.
There are several reasons to be optimistic about the outlook for the emerging
markets in 1997. First, as a group, the emerging economies are in much better
financial shape than three years ago when the Federal Reserve began to raise
interest rates. Major inroads have been made on inflation, leaving scope for
interest rates to continue to decline in the majority of emerging markets,
despite the path of U.S. rates. Inflation in the OECD economies is expected to
increase during 1997, but in Latin America and emerging Europe it is forecasted
to steadily decline. Only in Asia is there expected to be an increase in
inflation, but even here it is from a very low base. One clear signal of
successful economic strengthening has been the performance of emerging markets
debt. Reacting to the numerous credit upgrades and improved economic management,
emerging market debt was the best performing asset class during 1996. Emerging
market stocks, on the other hand, have lagged both developed markets and debt,
and emerging market equity performance has yet to reflect the fundamental
improvements.
Second, foreign direct investment (FDI) in the emerging markets is running in
excess of $100 billion per annum underpinning future growth prospects for these
economies. Foreign reserves of the emerging economies--currently around $700
billion--have doubled since 1993 and are now almost equal to the aggregate
reserves of the industrialized countries. In addition, portfolio flows which, by
nature, have shorter time horizons than FDI have also picked up from the hiatus
following the Mexican peso crisis suggesting confidence is returning. We expect
portfolio flows to total approximately $30 billion in 1997. At their peak in
1993, almost $1 billion per week was being invested in the emerging markets.
Third, on a valuation basis, the emerging markets (see Table 1 above) sell at a
16.2 times trailing price to
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
21
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
earnings ratio, which is lower than 1991 levels of valuation and compare very
favorably with the U.S. and international EAFE markets. During the last two
years, global financial markets have focused on the bull market in the U.S., but
the emerging markets have made tremendous fundamental progress and are laggards
in performance terms.
While the economic picture for the emerging markets overall continues to
improve, there are still hurdles to be overcome in individual countries. Some of
the emerging markets have to make progress on reducing their government deficits
(India, Pakistan, Brazil, and Russia) and on their current account deficits
(Thailand and Turkey). In aggregate, however, the outlook is for continued
progress to be made by all these countries on their deficits. We anticipate that
the emerging markets will do well, relative to other asset classes in 1997,
based on their good value, continued premium earnings growth prospects and their
persistence in improving their economic standing in the world.
Madhav Dhar
PORTFOLIO MANAGER
Marianne L. Hay
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
22
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
COMMON STOCKS (87.5%)
ARGENTINA (2.6%)
(a)6 Acindar "B" shares................................ $ --
293,038 Quilmes (Registered).............................. 2,344
241,868 Telecom Argentina ADR............................. 9,765
580,045 Telefonica Argentina ADR.......................... 15,009
291,740 YPF ADR........................................... 7,367
----------
34,485
----------
BRAZIL (5.7%)
(a,e)20,000 CELESC GDR........................................ 1,810
17,566 CEMIG ADR......................................... 598
(e)84,361 CEMIG ADR......................................... 2,826
7,737,000 Coteminas......................................... 2,469
80,137,000 Eletrobras........................................ 28,689
332,375 Eletrobras ADR.................................... 5,950
1,542,000 Itausa............................................ 1,158
2,554,000 Light............................................. 907
(a,d)9,268,000 Lightpar.......................................... 1,971
(a)175,880 Multicanal Participaccoes ADR..................... 2,253
39,236,000 Pao de Acucar..................................... 699
(e)196,119 Pao de Acucar ADR................................. 3,420
286,099,000 Telebras.......................................... 20,512
(a)8,853,162 Telesp............................................ 1,914
----------
75,176
----------
CHILE (0.5%)
147,900 CCU ADR........................................... 2,385
167,112 Santa Isabel ADR.................................. 3,781
----------
6,166
----------
CHINA (1.2%)
5,000,500 China International Marine Container Ltd., Class
B............................................... 5,819
(a)60,000 Guangshen Railway Co., Ltd., ADR.................. 1,238
(a)4,056,000 Guangshen Railway Co., Ltd., Class H.............. 1,757
162,400 Shandong Huaneng Power Co., Ltd., ADR............. 1,583
13,658,000 Yizheng Chemical Fibre Co. Ltd., Class H.......... 3,320
7,998,000 Zhenhai Refining & Chemical Co., Ltd., Class H.... 2,947
----------
16,664
----------
COLOMBIA (0.4%)
12,728,000 Banco de Colombia................................. 5,250
----------
EGYPT (1.3%)
89,993 Ameriyah Cement Co................................ 1,698
18,584 Commercial International Bank..................... 2,804
(a)187,700 Commercial International Bank GDR (Registered).... 2,647
114,650 Eastern Tobacco................................... 1,774
14,525 Egypt American Bank............................... 646
(a)49,350 Egyptian Finance & Industrial..................... 1,564
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
78,000 Helwan Portland Cement............................ $ 1,379
10,230 Madinet Nasr Housing & Development................ 1,155
21,655 North Cairo Mills Co.............................. 855
125,765 Torah Portland Cement............................. 2,539
----------
17,061
----------
GREECE (0.1%)
325,179 Aegek Ltd. (Registered)........................... 1,199
----------
HONG KONG (9.3%)
(a)621,500 Asia Satellite Telecommunications Holdings Ltd.... 1,442
1,689,000 Cheung Kong Holdings Ltd.......................... 15,013
(a)1,363,000 Cheung Kong Infrastructure Holdings............... 3,613
(a)4,029,000 China Resources Beijing Land...................... 2,553
5,635,000 China Resources Enterprise Ltd.................... 12,677
2,590,000 Citic Pacific Ltd................................. 15,035
3,951,000 Cosco Pacific Ltd................................. 4,597
203,000 Hang Seng Bank Ltd................................ 2,467
671,000 Henderson Land Development Co., Ltd............... 6,767
595,000 Hong Kong Ferry Holdings Co., Ltd................. 1,162
2,098,200 Hong Kong Telecommunications Ltd.................. 3,377
2,144,000 Hutchison Whampoa Ltd............................. 16,840
2,053,000 New World Development Co., Ltd.................... 13,869
(a)333,000 Shanghai Industrial Holdings Ltd.................. 1,214
812,000 Sun Hung Kai Properties Ltd....................... 9,947
896,500 Swire Pacific Ltd., Class A....................... 8,548
(a)12,064,000 Tingyi (Cayman Islands) Holding Co................ 3,159
----------
122,280
----------
HUNGARY (0.5%)
9,978 Borsod Chem Rt. GDR (Registered).................. 246
(a)23,700 Cofinec S.A. GDR (Registered)..................... 714
22,500 Gedeon Richter GDR (Registered)................... 1,311
158,984 MOL Magyar GDR (Registered)....................... 2,011
19,750 Pannonplast Industries PLC........................ 727
(a)117,500 Tisza Vegyi Kombinat Rt. GDR (Registered)......... 1,345
----------
6,354
----------
INDIA (9.8%)
(a)230,000 American Dry Fruits............................... 79
11,700 Andhra Valley Power Supply Co., Ltd............... 36
493,300 Apollo Tyres Ltd.................................. 1,612
54,500 AP Rayon Ltd., Class B............................ 55
48,623 Associated Cement Companies Ltd................... 1,663
(a)891,500 Balaji Foods & Feeds.............................. 124
252,255 Bharat Forge Co., Ltd., Class A................... 651
4,001,400 Bharat Heavy Electricals.......................... 24,220
(a)499,600 Bharat Pipes & Fittings Ltd., Class B............. 49
710,040 Birla VXL Ltd..................................... 498
80,400 BPL Ltd........................................... 65
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
23
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
INDIA (CONT.)
141,642 Carrier Aircon Ltd................................ $ 691
335,400 Ceat Ltd.......................................... 599
8,777 Century Textiles and Industries Ltd. GDR.......... 481
1,048,400 Container Corp. of India Ltd...................... 10,089
86,000 Cosmo Films Ltd................................... 94
380,100 Crompton Greaves Ltd. GDR......................... 1,272
118,900 Dabur India Ltd................................... 829
(a)600,000 DCL Polyesters Ltd................................ 184
77,000 DCM Shriram Industries Ltd........................ 57
(a)38,800 Delta Industries Ltd.............................. 23
185,000 Esab India Ltd.................................... 452
50,000 Essel Packagings, Ltd............................. 138
4,650 Federal Bank Ltd.................................. 13
(a,d)5,950 Federal Bank Ltd. (New)........................... 16
4,900 Fuller Kep........................................ 16
(a)200,300 Garware Plastics & Polyester (New)................ 508
376,700 Garware Plastics & Polyester, Class A............. 956
688,500 Godrej Soaps Ltd.................................. 731
3,109,500 Great Eastern Shipping Co......................... 3,036
387,800 Gujarat Ambuja Cements Ltd........................ 2,547
75,100 Gujarat Narmada Valley Fertilizers Co., Ltd....... 52
322,750 Hero Honda, Class B............................... 2,179
817,500 Hindustan Development Corp. Ltd................... 363
126,206 Housing Development Finance Corp.................. 7,787
122,650 ICI India Ltd..................................... 469
(a,f,g)78,000 India Magnum Fund Ltd., (The) Class A (acquired
11/25/92-3/01/94, Cost $3,872).................. 3,120
(a,g)55,194 India Magnum Fund Ltd., (The) Class B............. 2,208
(a)644,625 India Organic Chemical Ltd........................ 218
1,000,000 Indian Petrochemicals Corp. Ltd. GDR.............. 3,278
(a,d)16,500 Indian Seamless Financial Services Ltd. (New)..... 14
(a)40,000 Indian Seamless Steel & Alloys.................... 5
571,047 Indo Rama Synthetics Ltd.......................... 376
(d)171,154 Indo Rama Synthetics Ltd. (New)................... 102
1,215,500 Industrial Finance Corp. of India................. 1,095
100,000 Infosys Technology Ltd............................ 2,148
(a)246,400 ITC Agrotech Ltd., Class B........................ 310
388,350 ITC Bhadrachalam Paperboards Ltd.................. 688
(a,d)500,913 ITC Bhadrachalam Paperboards Ltd. (New)........... 845
233,500 ITC Ltd........................................... 2,153
5,292 JCT Ltd. GDR...................................... 11
(a)1,500,162 JK Synthetics Ltd................................. 513
490,000 KEC International Ltd............................. 760
110,200 Kirloskar Oil Engines Ltd......................... 215
185,450 Lakme Ltd., Class B............................... 1,273
150,000 Lakshmi Precision Screws.......................... 142
145,000 Laser Lamp Ltd.................................... 73
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
1,760 Madras Cement Ltd................................. $ 393
798,800 Mahanagar Telephone Nigam......................... 5,125
306,484 Mahavir Spinning Mills Ltd........................ 567
(a)300,700 Maikaal Fibres.................................... 75
(a,g)42,697,100 Morgan Stanley Growth Fund........................ 7,205
(a,g)19,389 Morgan Stanley India Investment Fund, Inc......... 184
73,581 MRF Ltd., Class B................................. 5,800
25,000 OM Sindoori Hotels Ltd............................ 44
350,000 Patheja Forgings & Auto Parts, Class B............ 360
1,055 PCS Data Products Ltd., Class B................... --
218,500 Philips India Ltd................................. 465
(a)135,500 Polar Latex....................................... 19
232,700 Priyadarshini Cement Ltd., Class B................ 171
(a)350,000 PVD Plastic Mouldings Inds. Ltd., Class B......... 56
209,750 Raymond Ltd....................................... 667
(a,d)104,875 Raymond Ltd. (Bonus Shares)....................... 319
(e)3,770 Reliance Industries Ltd. GDS...................... 47
(a)73,581 Reliance Industries Ltd. GDS (New)................ 800
(a,d)84,500 Rossel Industries Ltd............................. 73
(d)25,350 Rossel Tea Ltd.................................... --
1,248,100 Sanghi Polyesters Ltd............................. 381
450 SCICI Ltd., Class B............................... --
135,400 Shanti Gears Ltd.................................. 638
697,500 Shipping Corp. of India........................... 564
150,636 Shree Vindhya Paper Mills......................... 66
188,000 Siemens India Ltd................................. 2,231
45,000 Sri Venkatesa Mills Ltd........................... 125
1,605,150 State Bank of India............................... 10,488
37,250 Sudarshan Chemical Industries Ltd................. 88
(a)725,950 Super Forgings & Steels........................... 213
439,762 Tata Engineering & Locomotive, Class A............ 4,171
9,870 Tata Hydro Electric Power......................... 27
12,600 Tata Iron and Steel Co., Ltd...................... 59
200 Thiru Arooran Sugars Ltd.......................... --
196,100 Tube Investments of India......................... 345
1,676 United Phosphorus Ltd. GDR........................ 12
1,566,000 Uttam Steels Ltd., Class A........................ 535
100 Videocon International Ltd., Class A.............. --
146,800 Videsh Sanchar Nigam Ltd.......................... 3,890
89,600 Wartsila Diesel Ltd............................... 614
----------
128,998
----------
INDONESIA (7.1%)
3,174,500 Astra International (Foreign)..................... 8,736
(d)6,772,976 Bank International Indonesia (Foreign)............ 6,667
(d)4,580,500 Bimantara Citra (Foreign)......................... 6,109
(a,d)6,647,000 Daya Guna Samudera (Foreign)...................... 7,739
(d)2,705,500 Gudang Garam (Foreign)............................ 11,683
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
24
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
INDONESIA (CONT.)
(d)2,973,000 Hanjaya Mandala Sampoerna (Foreign)............... $ 15,859
(d)7,404,777 Indah Kiat Pulp & Paper Corp. (Foreign)........... 5,408
(d)3,658,500 Sorini Corp. (Foreign)............................ 1,704
(d)17,145,000 Telekomunikasi Indonesia (Foreign)................ 29,579
----------
93,484
----------
ISRAEL (2.6%)
(a)152,300 Blue Square ADR................................... 2,170
124,141 Elbit Ltd......................................... 891
413,803 Elbit Medical Imaging Ltd......................... 1,722
413,803 Elbit Systems Ltd................................. 3,166
5,250 First International Bank of Israel, Class 1....... 582
22,807 First International Bank of Israel, Class 5....... 2,632
(a)342,350 Israel Land Development Co........................ 1,255
106,835 Koor Industries Ltd............................... 9,310
768,000 Osem Investment Ltd............................... 4,316
325,497 Supersol Ltd...................................... 7,971
----------
34,015
----------
KOREA (6.9%)
(a,d)154,800 Cho Hung Bank Co., Ltd............................ 1,270
374,700 Cho Hung Bank Co., Ltd. GDR....................... 2,810
(a,d)20,110 Chosun Brewery Co., Ltd........................... 522
1,349,270 Hanwa Chemical Corp............................... 10,459
(a,d)286,590 Housing & Commercial Bank Korea................... 4,362
202,500 Hyundai Engineering & Construction Co............. 4,697
(a)281,900 Kookmin Bank GDR.................................. 5,123
208,810 Korea Electric Power.............................. 6,079
184,400 Korea Exchange Bank............................... 1,669
618,401 Korea Mobile Telecommunications Corp. ADR......... 7,962
(d)6,805 Korea Mobile Telecommunications Corp.............. 6,794
147,700 LG Information & Communications
Ltd............................................. 9,439
(a)15,060 LG Information & Communication
Ltd. (New)...................................... 1,068
(d)7,890 Pohang Iron & Steel............................... 453
145,670 Pohang Iron & Steel Co., Ltd., ADR................ 2,950
(a,e)110,620 Samsung Electronics GDR........................... 4,577
(d)147,060 Samsung Electronics............................... 8,711
(a,d)34,311 Samsung Electronics (RFD)......................... 2,032
(d)343,639 Shinhan Bank...................................... 5,519
195,830 Ssangyong Oil Refining Co. Ltd.................... 4,287
----------
90,783
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
MEXICO (9.9%)
590,602 Apasco, Class A................................... $ 4,045
4,945,660 Banacci, Class B.................................. 10,424
966,103 Banacci, Class L.................................. 1,833
(a)11,745,228 Bancomer, Class B................................. 4,692
(a,e)1,364,075 Bancomer, Class B ADR............................. 11,083
1,212,460 Carso, Class A1................................... 6,381
320,690 Carso, ADR, Class A1.............................. 3,367
2,928,245 Cemex CPO......................................... 10,473
1,143,322 Cemex CPO ADR..................................... 8,206
149,940 Cemex, Class B.................................... 584
(a)1,434,360 Cifra, Class B.................................... 1,754
(a)2,393,695 Cifra, Class C.................................... 2,914
(a)205,620 Desc ADR.......................................... 4,524
7,310,872 FEMSA, Class B.................................... 25,034
(a)124,890 Gruma ADR......................................... 3,028
(a)509,044 Gruma, Class B.................................... 3,099
(a)121,547 ICA ADR........................................... 1,778
1,901,119 Maseca, Class B................................... 2,401
(a)854,034 Televisa GDR CPO.................................. 21,885
65,353 Panamco, Class A.................................. 3,063
----------
130,568
----------
MOROCCO (0.8%)
163,200 SNI Maroc, Series 'V' (Bearer).................... 10,178
----------
PAKISTAN (2.5%)
41,816 Adamjee Insurance Co., Ltd........................ 91
142,649 Cherat Cement Ltd................................. 67
(a)1,814 Crescent Investment Bank.......................... 1
(a)6,741 Crescent Textile Mills Ltd........................ 2
31,200 Dewan Salman Fibre................................ 24
(a)1,225,539 D.G. Khan Cement Ltd.............................. 283
5,972,000 Fauji Fertilizer Co., Ltd......................... 10,058
(a)2,068,660 Karachi Electric Supply Corp...................... 968
(a)113,127 Muslim Commercial Bank Ltd........................ 85
(a)1,256,519 Nishat Mills Ltd.................................. 501
626,106 Pakistan State Oil Co., Ltd....................... 4,046
(a)17,239,000 Pakistan Telecommunications Corp.................. 10,796
(a)38,350 Pakistan Telecommunications Corp. GDS............. 2,378
(a)4,225,960 Sui Northern Gas.................................. 3,216
(a)298,000 Zahur Textile Mills............................... 14
----------
32,530
----------
PERU (0.3%)
42 Cementos Lima..................................... --
199,350 Telefonica del Peru ADR........................... 3,763
----------
3,763
----------
PHILIPPINES (1.9%)
3,201,843 Ayala Land, Inc., Class B......................... 3,652
(a)5,688,300 DMCI Holdings, Inc................................ 3,731
21,094,030 JG Summit Holdings, Class B....................... 5,935
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
25
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
PHILIPPINES (CONT.)
904,901 Manila Electric Co., Class B...................... $ 7,398
81,235 Philippine Long Distance Telephone Co., Class B... 4,463
----------
25,179
----------
POLAND (1.7%)
(a)165,000 Agros Holding S.A., Class C....................... 4,345
8,640 Bank Slaski S.A................................... 880
68,000 BRE Bank.......................................... 2,039
(a)85,960 Debica S.A........................................ 1,919
(d)33,400 Eastbridge N.V.................................... 2,245
537,000 Elektrim.......................................... 4,869
(a)142,468 Exbud S.A......................................... 1,317
(a)2,085,038 International UNP Holdings Ltd.................... 426
(a)373,740 Mostostal Exports S.A............................. 886
266,000 Polifarb Wroclaw S.A.............................. 1,503
(a)56,500 Rafako............................................ 321
80,000 WBR S.A........................................... 541
11,125 Wedel S.A......................................... 547
22,135 Zywiec............................................ 1,027
----------
22,865
----------
RUSSIA (6.9%)
(d)592,359 Alliance Cellulose Ltd............................ 3,981
(d)400,000 Global Tele-Systems Group, Inc. (Registered)...... 8,000
(a)54,315,000 Irkutskenergo..................................... 7,197
710,100 LUKoil Holding.................................... 8,024
(e)275,730 LUKoil Holding ADR................................ 12,615
80,000 LUKoil Holding ADR................................ 3,660
16,490,000 Mosenergo......................................... 16,820
(a)3,528,500 Rostelecom........................................ 8,539
(d)317,851 Russian Telecomm Development Corp................. 3,178
(d)990 Storyfirst Communications, Inc., Class C.......... 660
(d)2,640 Storyfirst Communications, Inc., Class D.......... 1,980
(d)3,250 Storyfirst Communications, Inc., Class E.......... 3,250
(d)1,331 Storyfirst Communications, Inc., Class F.......... 3,327
(a)112,039,000 United Energy System.............................. 10,196
----------
91,427
----------
SINGAPORE (0.3%)
(a)1,576,000 Want Want Holdings................................ 4,145
----------
SOUTH AFRICA (4.1%)
81,050 Anglo American Industrial Corp., Ltd.............. 2,936
500,000 Barlow Rand Ltd................................... 4,435
360,600 Bidvest Group Ltd................................. 1,869
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
287,500 Dreifontein Consolidated Ltd...................... $ 3,026
949,600 Gencor Ltd........................................ 3,451
(g)224,490 Morgan Stanley Africa Investment Fund, Inc........ 3,059
547,900 Sage Group Ltd.................................... 2,225
2,645,000 Sasol Ltd......................................... 31,377
800,000 Spur Holdings Ltd................................. 1,411
----------
53,789
----------
TAIWAN (2.0%)
1,605,500 Cathay Life Insurance Co., Ltd.................... 10,217
3,624,000 China Steel Corp.................................. 3,400
1,410,000 Formosa Plastics Corp............................. 3,538
(a)1,575,000 Pacific Construction.............................. 1,346
(a)1,945,000 Siliconware Precision Industries Co............... 4,102
2,791,340 Yang Ming Marine Transport........................ 3,694
----------
26,297
----------
THAILAND (4.8%)
1,207,650 Advanced Information Service PCL (Foreign)........ 11,302
1,469,400 Bangkok Bank PCL (Foreign)........................ 14,209
2,216,400 Finance One PCL (Foreign)......................... 4,494
(d)1,053,400 Shinawatra Computer Co. plc (Foreign)............. 12,733
1,617,800 Siam Commercial Bank PCL (Foreign)................ 11,733
1,382,700 Thai Farmers Bank, PCL (Foreign).................. 8,626
----------
63,097
----------
TURKEY (3.5%)
7,259,000 Aksa.............................................. 987
25,953,000 Arcelik........................................... 2,632
23,161,000 Bossa............................................. 1,944
41,314,050 Ege Biracilik..................................... 8,857
43,404,000 Erciyas Biracilik................................. 4,703
85,854,000 Eregli Demir Ve Celik............................. 10,291
(e)61,671,000 Garanti Bankasi A.S............................... 2,786
496,085 Garanti Bankasi A.S. ADR.......................... 2,228
3,375,750 Guney Biracilik Ve Malt Sanayii................... 215
2,320,000 Migros (Registered)............................... 2,835
85,761,000 Sabah............................................. 1,107
7,244,998 Tat Konserve Sanayii.............................. 1,086
22,215,000 Trakya Cam Sanayii................................ 1,127
225,665,000 Yapi Ve Kredi Bankasi A.S......................... 5,618
----------
46,416
----------
UNITED KINGDOM (0.1%)
929,039 Lonrho plc........................................ 1,989
----------
VENEZUELA (0.2%)
(a)114,925 CANTV ADR......................................... 3,232
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
26
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
ZIMBABWE (0.5%)
(e)1,980,000 Trans Zambezi Industries Ltd...................... $ 4,752
760,000 Trans Zambezi Industries Ltd. (Registered)........ 1,824
----------
6,576
----------
TOTAL COMMON STOCKS (Cost $1,144,149)................................ 1,153,966
----------
PREFERRED STOCKS (8.7%)
BRAZIL (NON-VOTING STOCKS) (8.7%)
1,997,728,448 Banco Bradesco.................................... 14,477
(a,d)295,998,880 Banco Nacional.................................... 14
35,313,030 Brahma............................................ 19,303
620,000 Brasmotor......................................... 172
86,587,993 CEMIG............................................. 2,950
42,835,850 Eletrobras, Class B............................... 15,913
37,900 Eletrobras Class B, ADR........................... 704
24,276,800 Itaubanco......................................... 10,514
74,270,333 Petrobras......................................... 11,829
12,500 Sadia Concordia................................... 10
75,975,000 Telebras.......................................... 5,849
(e)7,769 Telebras ADR...................................... 594
390,495 Telebras ADR...................................... 29,873
7,058,615 Telesp............................................ 1,528
----------
113,730
----------
GREECE (0.0%)
69,738 Aegek Ltd......................................... 206
----------
INDIA (0.0%)
2,700 Fabworth (India) Ltd.............................. 1
----------
TOTAL PREFERRED STOCKS (Cost $95,490)................................ 113,937
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -----------------
RIGHTS (0.0%)
INDIA (0.0%)
(a,d)159 Indo Rama Synthetics Ltd.......................... --
(a,d)155,100 ITC Agrotech Ltd.................................. --
(a,d)50 Thiru Arooran Sugars Ltd.......................... --
----------
--
----------
POLAND (0.0%)
(a,d)373,740 Mostostal Exports S.A............................. 15
----------
TOTAL RIGHTS (Cost $0)............................................... 15
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- -----------------
WARRANTS (0.0%)
INDIA (0.0%)
(a,d)176,850 Apollo Tyres Ltd., expiring 2/28/98............... 109
(a,d)27,383 Flex Industries Ltd., expiring 11/23/97........... 40
(a,d)44,702 Garware Plastics & Polyesters, expiring 4/04/98... 62
----------
211
----------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
THAILAND (0.0%)
(d)117,662 Thai Farmers Bank, PCL (Foreign), expiring
9/15/02......................................... $ --
----------
TOTAL WARRANTS (Cost $465)........................................... 211
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------------
FIXED INCOME SECURITIES (1.1%)
BULGARIA (1.0%)
U.S.$ (n)17,250 Bulgaria Front Loaded Interest Reduction Bond,
Series A, 2.25%, 7/28/12........................ 6,630
13,000 Bulgaria Discount Bond, Series A, "Euro",
(floating rate), 6.688%, 7/28/24................ 7,386
----------
14,016
----------
RUSSIA (0.1%)
(d)1 Storyfirst Communications Convertible Bond,
4/30/97......................................... 844
----------
TOTAL FIXED INCOME SECURITIES (Cost $14,215)......................... 14,860
----------
CONVERTIBLE DEBENTURES (0.1%)
INDIA (0.1%)
INR (d)33,574 DCM Shriram Industries
14.50%, 3/04/00................................. 354
(d)1,467 Mahavir Spinning Mills Ltd., Series A, 15.40%,
3/22/00......................................... 37
(d)50,000 Raymond Ltd. 16.00%, 12/31/99..................... 1,235
U.S.$ 130 Tata Iron & Steel Co. Ltd.,
2.25%, 4/01/99.................................. 118
----------
TOTAL CONVERTIBLE DEBENTURES (Cost $2,233)........................... 1,744
----------
NON-CONVERTIBLE DEBENTURES (0.2%)
INDIA (0.2%)
INR (d)3,357 Bharat Forge Co., Ltd. 7.25%, 3/04/00............. 37
(d)34,055 DCM Shriram Industries Ltd. 9.90%, 2/21/01........ 452
(d)4,470 Garware Plastics & Polyester 16.00%, 4/04/98...... 106
(d)70,000 Saurashtra Cement & Chemicals Ltd. 18.00%,
11/27/98........................................ 1,645
----------
TOTAL NON-CONVERTIBLE DEBENTURES (Cost $3,426)....................... 2,240
----------
LOAN AGREEMENTS (0.5%)
POLAND (0.0%)
U.S.$ (e)54 Republic of Poland Interest Arrears PDI Bonds,
(Floating Rate) 3.75%, 10/27/14................. 46
----------
RUSSIA (0.5%)
CHF (b)11,910 Bank for Foreign Economic Affairs................. 6,807
----------
TOTAL LOAN AGREEMENTS (Cost $3,270).................................. 6,853
----------
TOTAL FOREIGN SECURITIES (98.1%) (Cost $1,263,248)................... 1,293,826
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
27
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (2.5%)
REPURCHASE AGREEMENT (2.5%)
$ 32,934 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $32,944,
collateralized by U.S. Treasury Bonds, 8.125%,
due 8/15/21, valued at $33,776 (Cost $32,934)... $ 32,934
----------
FOREIGN CURRENCY (0.8%)
ARP 4 Argentine Peso.................................... 4
BRL 2,663 Brazilian Real.................................... 2,562
GRD 54,347 Greek Drachma..................................... 220
HKD 7,994 Hong Kong Dollar.................................. 1,034
HUF 59,707 Hungarian Forint.................................. 369
INR 189,139 Indian Rupee...................................... 5,276
KRW 99,338 Korean Won........................................ 118
MXP 17 Mexican Peso...................................... 2
MAD 980 Morrocan Dirham................................... 112
PKR 8,251 Pakistani Rupee................................... 206
PHP 2,098 Philippine Peso................................... 80
PLZ 1,700 Polish Zloty...................................... 593
ZAR 170 South African Rand................................ 36
LKR 2 Sri Lankan Rupee.................................. --
TWD 5,571 Taiwan Dollar..................................... 203
TRL 15,301,500 Turkish Lira...................................... 141
----------
TOTAL FOREIGN CURRENCY (Cost $11,013)................................ 10,956
----------
TOTAL INVESTMENTS (101.4%) (Cost $1,307,195)......................... 1,337,716
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.9%)
Cash................................................... $ 3,379
Receivable for Portfolio Shares Sold................... 3,193
Dividends Receivable................................... 3,186
Receivable for Investments Sold........................ 1,202
Interest Receivable.................................... 802
Foreign Withholding Tax Reclaim Receivable............. 51
Net Unrealized Gain on Foreign Currency Exchange
Contracts............................................ 1
Other.................................................. 315 12,129
----------
LIABILITIES (-2.3%)
Payable for Investments Purchased...................... (16,670)
Payable for Portfolio Shares Redeemed.................. (8,839)
Investment Advisory Fees Payable....................... (4,157)
Custodian Fees Payable................................. (864)
Payable for Foreign Taxes.............................. (219)
Bank Overdraft......................................... (190)
Administrative Fees Payable............................ (169)
Sub-Administrative Fees Payable........................ (60)
Payable for Stamp Duty Tax............................. (53)
Directors' Fees and Expenses Payable................... (35)
Distribution Fees Payable.............................. (9)
Other Liabilities...................................... (361) (31,626)
---------- ----------
NET ASSETS (100%).................................................... $1,318,219
----------
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- -----------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital................................ $1,302,754
Overdistributed Net Investment Income.......... (198)
Accumulated Net Realized Loss.................. (14,577)
Unrealized Appreciation on Investment and
Foreign Currency Translations (Net of accrual
for foreign taxes of $219 on unrealized
appreciation on investments)................. 30,240
----------
NET ASSETS..................................... $1,318,219
----------
----------
CLASS A:
- -----------------------------------------------
NET ASSETS..................................... $1,304,006
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 88,929,927 outstanding $0.001 par
value shares (authorized 500,000,000 shares)... $14.66
----------
----------
CLASS B:
- -----------------------------------------------
NET ASSETS..................................... $ 14,213
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 969,196 outstanding $0.001 par
value shares (authorized 500,000,000 shares)... $14.66
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver U.S. dollars in exchange for
foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------ ------- ----------- ------------ ------- ------------
U.S.$ 1,919 $ 1,919 1/02/97 BRL 1,995 $ 1,920 $ 1
------- ------- ---
------- ------- ---
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(b) -- Non-income producing-in default
(d) -- Securities (totaling $162,055 or 12.3% of net assets at December 31,
1996) valued at fair value -- See note A-1 to financial statements
(e) -- 144A Security -- Certain conditions for public sale may exist
(f) -- Restricted as to public resale. Total value of restricted securities
at December 31, 1996 was $3,120 of 0.2% of net assets. (Total Cost
$3,782)
(g) -- The fund is advised by an affiliate
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1996. Maturity date disclosed is the
ultimate maturity.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
PCL -- Public Company Limited
PDI -- Past Due Interest
RFD -- Ranked for Dividend
Floating Rate -- 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, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
28
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------
Capital Equipment...................... $ 74,203 5.6%
Consumer Goods......................... 190,758 14.5
Energy................................. 171,728 13.0
Finance................................ 283,278 21.5
Gold Mines............................. 3,026 0.2
Loan Agreements........................ 20,869 1.6
Materials.............................. 105,439 8.0
Multi-Industry......................... 162,688 12.3
Services............................... 281,837 21.4
----------- ---
$ 1,293,826 98.1%
----------- ---
----------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
29
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Austria 0.7%
Belgium 2.3%
Denmark 2.1%
Finland 2.6%
France 11.6%
Germany 11.4%
Italy 6.6%
Netherlands 9.5%
Norway 2.5%
Portugal 0.5%
Spain 7.2%
Sweden 4.5%
Switzerland 11.7%
United Kingdom 16.6%
Other 10.2%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EUROPEAN EQUITY PORTFOLIO-CLASS
A MSCI EUROPE INDEX (1)
<S> <C> <C>
4/2/1993* 500,000 500,000
12/31/1993 645,500 606,808
12/31/1994 715,750 620,650
12/31/1995 800,566 754,835
12/31/1996 979,012 914,030
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EUROPE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 22.29% 19.62%
PORTFOLIO -- CLASS B(3)............................................................................ 20.76 N/A
INDEX.............................................................................................. 21.09 17.45
</TABLE>
1. The MSCI Europe Index is an unmanaged market value weighted index of common
stocks listed on the stock exchanges of countries in Europe (assumes
dividends are reinvested).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE MEASURED BY THE MSCI
EUROPE INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED
AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS
NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN
RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
The investment objective of the European Equity Portfolio is to seek long-term
capital growth through investment in equity securities of European issuers.
Equity securities for this purpose include stocks and stock equivalents such as
securities convertible into common and preferred stocks and securities having
equity characteristics, such as rights and warrants to purchase common stock.
The approach taken in selecting investments for the Portfolio is oriented to
individual stock selection and is value driven. The initial step in identifying
attractive undervalued securities is the screening of European databases. Stocks
are screened for undervaluation on two primary criteria, cash flow and book
value, and three secondary criteria, earnings, sales and yield. Once stocks have
been selected from this screening process, they are put through detailed
fundamental analysis. Important areas covered during this in-depth study include
the companies' balance sheets and cash flow, franchise, products, management and
the strategic value of the assets.
For the year ended December 31, 1996, the Portfolio had a total return of 22.29%
for the Class A shares and 20.76% for the Class B shares as compared to a total
return of 21.09% for the Morgan Stanley Capital International (MSCI) Europe
Index. The average annual total return for the period from inception on April 2,
1993 through December 31, 1996 was 19.62%, for the Class A shares as compared to
17.45% for the Index.
In 1996 we have witnessed some changes in the European investment environment
from that seen in 1995. One of the most prominent changes has been the weakness
of most continental European currencies against the U.S. dollar following an
extended period of strength. The weakest currency was the Swiss franc which lost
15.6% against the dollar during the year. Of the other main currencies, the
deutschemark fell by 8% and the French franc by 6.3%. There were two currencies
that appreciated against the dollar, the Italian lira, following a period of
weakness, and sterling which gained 10%. Sterling was particularly strong in the
final quarter of the year following an increase in U.K. interest rates and the
potential for further rises early in the new year. The other main trend was
mentioned in our mid-year report, the strength of smaller cap stocks. This was
mainly in the first half of the year and we continue to see this as an area of
investment opportunity in the coming year.
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
30
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO (CONT.)
During the year, the top performing equity market in Europe and the world's
developed markets was Spain, up 40% in U.S. dollar terms. Sectors that performed
well included electrical utilities, an industry that continues to restructure
and telecommunications with Telefonica showing particularly good returns.
Another area of strong performance was the Baltic region of Europe with the
Swedish market returning 37% and Finland 34%. The poorer performing markets
included Switzerland up only 2.3% and Austria up 4.5%. Both of these returns
were influenced by weakness of the local currency.
In general, the economies in Europe have continued to grow steadily throughout
the year. The best performance in the main markets has come from the Netherlands
where strong levels of consumer spending has sustained an annual growth rate of
3%. In Germany, domestic demand remains poor but export growth, helped by the
relative weakness of the deutschemark, has helped the economy grow. There has
been volatility in the performance of the French economy primarily due to
savings in consumption as consumers follow government tax incentives. In the
U.K., strong growth has resulted in an increase in interest rates and a further
potential rise has led to sterling being strong against most major currencies.
In recent months we have added the following stocks to the Portfolio:
SCHINDLER is the world's second largest installer of elevator systems after
Otis, a division of United Technologies. Current earnings are being depressed by
aggressive pricing to gain market share but this augurs well for long term
recurrent service revenue. The company has net cash and sells on 6 times
depressed cash flow.
LUFTHANSA, the German national airline, is currently 52% owned by the German
Government. It is the world's third largest cross-border airline, and boasts the
youngest fleet of any first world airline, averaging about seven years.
Lufthansa has an excellent reputation for safety and reliability. The German
Government is under pressure from the Bundesbank to finance the cost of
unification and a sale of the remaining 52% of Lufthansa therefore seems likely.
MERITA BANK is the result of a merger at the beginning of 1996 of the previous 2
largest commercial banks in Finland, Kansalis-Osake-Pankki and Unitas. The
combined banks have suffered catastrophic capital losses arising out of severe
asset quality problems in the wake of the Nordic banking crisis of the early
1990's and the deep recession in Finland. The combined entity is now on the
recovery path following government assistance to shore up its Tier 1 Capital and
now enjoys the position of domestic market share of over 50% in both deposits
and lending. However, the bank's continued large exposure to Finnish property is
holding up the pace of this recovery.
SGS THOMSON is a semiconductor company that has over the years been migrating
its product mix to proprietary products and lessening its exposure to commodity
products, with the consequence that it has no exposure to the heavily
commoditized DRAM chips that are responsible for the bulk of volatility in
semiconductor markets. The company does now appear to have genuine defensible
positions in its product line and has an admirable record in terms of growth in
both top line earnings and profits.
USINOR SACILOR is the largest producer of flat and specialty steel products in
Europe and the second largest producer of stainless steel in the world. The
company has been realigning its activities over the past few years away from the
commodity, spot market end of the business to more stable higher value added
businesses, and has attempted to move further downstream in distribution and
finishing.
BT is one of the world's leading providers of telecommunication services. BT
offers a full range of telephone services to a domestic and international client
base. BT is concentrating on expanding its international activities to offset an
increasingly competitive domestic market.
SOUTHERN ELECTRIC is a Regional Electricity Company (REC) which distributes
electricity principally in central southern England. It also has interests in
electricity generation and electrical and utility contracting. The company is
currently suffering from market concerns on what it will do with its strong
balance sheet and the size of likely windfall taxes to be imposed by a potential
Labour government. A satisfactory outcome for both of these concerns should lead
to a re-rating of the stock.
MARZOTTO is an Italian textile and clothing group active in yarns, fabrics and
apparel. Marzotto acquired the Hugo Boss group in 1992, which it has
subsequently managed to turn around by restoring the brand and subcontracting
the manufacturing process. Marzotto's own apparel division is currently
generating poor levels of profitability but with the appointment as
- --------------------------------------------------------------------------------
European Equity Portfolio
31
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO (CONT.)
CEO of one of the people responsible for the Hugo Boss transformation, we expect
it to be restored to an adequate level of profitability.
KLM is the Dutch national airline operating the youngest fleet in Europe with an
average of only seven years. They were one of the first European airlines to
realize the need to restructure the group and reduce costs to remain positive.
KLM are studying possibilities of cooperation with SAS, Swissair and Austrian
Airlines; if this resulted in a merger, it would create the world's largest
airline in terms of turnover and balance sheet. The Dutch and U.S. authorities
have recently signed an 'open skies' deal allowing carriers to fly to all
destinations in each country. This will allow KLM to strengthen their
trans-Atlantic position while traffic will increase on short haul flights from
Amsterdam. KLM is one of the cheapest stocks in the sector trading at a 40%
discount to book value and a price to cash flow ratio of 2.2 times.
UNI STOREBRAND is the market leader in Norway in both Life and Non Life
insurance. Following a period of attempted international expansion which nearly
bankrupted the company, Storebrand is now concentrated on direct insurance in
Norway. Life insurance should see quite robust growth over the next year due to
the demographics facing Norway as with the rest of Europe, although forecast
growth rates for this market are at present clouded by lack of a clear
government policy regarding private sector savings in Norway.
SVENSKA HANDELSBANKEN is consistently the most cost efficient bank in
Continental Europe while at the same time has managed to post improvements in
its cost/income ratio, in spite of being a full service universal bank with a
large branch network and a foreign expansion program. The bank is managing to
show significant top-line growth in a scenario of a very mature and stagnant
Swedish lending market, and now has sizable retail operations in both Finland
and Norway (both the result of acquisitions).
DEUTSCHE TELEKOM is the recently privatized national telephone operator in
Germany. Benefiting from an initially benign regulatory regime, the company is a
substantial generator of free cash flow and has the potential for significant
further cost and debt reduction and dividend growth.
Robert Sargent
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
32
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
COMMON STOCKS (86.2%)
AUSTRIA (0.7%)
17,000 Boehler-Uddeholm AG............................... $ 1,217
----------
BELGIUM (2.3%)
12,500 Arbed S.A......................................... 1,359
13,000 Delhaize, 'Le Lion' S.A........................... 772
45,000 G.I.B. Holdings Ltd............................... 2,017
55 G.I.B. Holdings Ltd. VVPR (New)................... 3
----------
4,151
----------
DENMARK (2.1%)
22,000 BG Bank A/S....................................... 1,031
6,300 Jyske Bank A/S (Registered)....................... 474
45,200 Unidanmark A/S, Class A (Registered).............. 2,340
----------
3,845
----------
FINLAND (2.6%)
78,000 Amer-Yhtymae Oy, Class A.......................... 1,611
50,000 Huhtamaki Oy, Series 1............................ 2,326
(a)250,000 Merita Ltd., Class A.............................. 777
----------
4,714
----------
FRANCE (11.6%)
38,704 Banque Nationale de Paris......................... 1,498
3,654 Bongrain S.A...................................... 1,414
17,526 Cie de Saint Gobain............................... 2,480
20,000 Elf Aquitaine S.A................................. 1,821
13,500 Eridania Beghin-Say S.A........................... 2,173
12,300 Groupe Danone..................................... 1,715
41,711 Lafarge S.A....................................... 2,503
42,005 Legris Industries S.A............................. 1,769
8,500 PSA Peugeot Citroen............................... 957
(a)15,200 SGS-Thompson Microelectronics N.V................. 1,076
24,100 Total S.A., Class B............................... 1,961
107,700 Usinor Sacilor.................................... 1,568
----------
20,935
----------
GERMANY (7.8%)
42,000 BASF AG........................................... 1,610
60,000 Bayer AG.......................................... 2,435
825 Buderus AG........................................ 413
(a)42,900 Deutsche Telekom AG ADR........................... 874
77,050 Gerresheimer Glas AG.............................. 1,680
4,900 Karstadt AG....................................... 1,630
51,400 Lufthansa AG...................................... 694
2,000 Mannesmann AG..................................... 861
(a)5,000 Varta AG.......................................... 894
32,000 VEBA AG........................................... 1,841
3,000 Volkswagen AG..................................... 1,243
----------
14,175
----------
ITALY (6.6%)
(a)518,000 Editoriale L'Expresso S.p.A....................... 1,434
228,150 Marzotto (Gaetano) & Figli S.p.A.................. 1,474
(a)2,610,000 Olivetti S.p.A.................................... 920
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
239,100 Pirelli S.p.A..................................... $ 444
869,000 Sogefi S.p.A...................................... 1,930
660,000 Stet Di Risp (NCS)................................ 2,230
811,000 Telecom Italia S.p.A.............................. 2,106
700,000 Telecom Italia S.p.A. Di Risp (NCS)............... 1,366
----------
11,904
----------
NETHERLANDS (9.5%)
30,891 ABN Amro Holdings N.V............................. 2,010
16,000 Akzo Nobel N.V.................................... 2,185
9,000 DSM N.V........................................... 888
8,957 Hollandsche Beton Groep N.V....................... 1,855
51,710 ING Groep N.V..................................... 1,862
76,000 KLM Royal Dutch Airlines N.V...................... 2,138
20,200 Koninklijke Bijenkorf Beheer N.V.................. 1,456
36,000 Koninklijke Van Ommeren N.V....................... 1,625
78,400 Philips Electronics N.V........................... 3,177
----------
17,196
----------
NORWAY (2.5%)
568,000 Den Norske Bank ASA............................... 2,176
51,000 Saga Petroleum A/S, Class B....................... 801
(a)254,000 Storebrand ASA.................................... 1,475
----------
4,452
----------
PORTUGAL (0.5%)
53,000 Banco Totta & Acores, S.A., Class B
(Registered).................................... 999
----------
SPAIN (7.2%)
11,518 Bodegas y Bebidas S.A............................. 302
(a)200,000 Grupo Duro Felguera S.A........................... 2,041
185,300 Iberdrola S.A..................................... 2,626
47,000 Repsol S.A........................................ 1,803
58,528 Sevillana de Electricidad S.A..................... 665
158,000 Telefonica de Espana S.A.......................... 3,669
250,000 Uralita S.A....................................... 1,955
----------
13,061
----------
SWEDEN (4.5%)
11,000 Electrolux AB, Series B........................... 639
101,000 Nordbanken AB..................................... 3,060
48,400 Skandia Forsakrings AB............................ 1,370
67,000 S.K.F. AB, Class B................................ 1,588
54,900 Sparbanken Sverige AB, Class A.................... 942
16,700 Svenska Handelsbanken, Class A.................... 480
----------
8,079
----------
SWITZERLAND (11.7%)
2,440 Ascom Holdings AG (Bearer)........................ 2,485
1,200 Bobst AG (Bearer)................................. 1,623
6,500 Forbo Holding AG (Registered)..................... 2,622
3,270 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 2,336
4,000 Magazine Globus (Participating Certificates)...... 1,847
140 Magazine Globus (Registered)...................... 73
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
33
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SWITZERLAND (CONT.)
<TABLE>
<C> <S> <C>
2,100 Nestle S.A. (Registered).......................... $ 2,254
(a)1,013 Novartis AG....................................... 1,160
(a)746 Novartis AG (Bearer).............................. 854
(a)20,300 Oerlikon-Buehrle Holding AG (Registered).......... 2,002
600 Schindler Holding AG (Participating
Certificates)................................... 652
1,360 Schweizerische Industrie-Gesellschaft Holdings AG
(Registered).................................... 1,651
1,800 Sulzer AG (Participating Certificates)............ 963
1,230 Sulzer AG (Registered)............................ 710
----------
21,232
----------
UNITED KINGDOM (16.6%)
207,000 Associated British Foods plc...................... 1,718
65,000 Bass plc.......................................... 914
346,892 BAT Industries plc................................ 2,876
363,000 British Telecommunications plc.................... 2,453
384,300 Calor Group plc................................... 1,952
450,000 Christian Salvesen plc............................ 2,213
446,000 Courtaulds Textiles plc........................... 1,696
88,900 Grand Metropolitan plc............................ 699
(a)265,000 Imperial Tobacco Group plc........................ 1,712
417,624 John Mowlem & Co. plc............................. 812
158,350 Kwik Save Group plc............................... 871
98,100 Railtrack Group plc PP............................ 649
206,721 Reckitt & Colman plc.............................. 2,560
298,522 Royal & Sun Alliance Insurance Group plc.......... 2,278
77,200 Southern Electric plc............................. 1,053
320,000 Tate & Lyle plc................................... 2,598
67,800 Unilever plc...................................... 1,645
300,000 WPP Group plc..................................... 1,305
----------
30,004
----------
TOTAL COMMON STOCKS (Cost $131,963)............................. 155,964
----------
PREFERRED STOCKS (3.6%)
GERMANY (3.6%)
7,163 Dyckerhoff AG..................................... 1,978
28,000 Hornbach Holding AG............................... 2,002
25,000 RWE AG............................................ 837
60,000 Spar Handels AG................................... 733
3,200 Volkswagen AG..................................... 1,021
----------
TOTAL PREFERRED STOCKS (Cost $5,474)............................ 6,571
----------
TOTAL FOREIGN SECURITIES (89.8%) (Cost $137,437)................ 162,535
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (5.7%)
REPURCHASE AGREEMENT (5.7%)
$ 10,261 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $10,264,
collateralized by U.S. Treasury Bonds, 8.125%,
due 8/15/19, valued at $10,533 (Cost $10,261)... $ 10,261
----------
FOREIGN CURRENCY (2.4%)
GBP 10 British Pound..................................... 17
DEM 6,741 Deutsche Mark..................................... 4,381
FRF 3 French Franc...................................... 1
ITL 262 Italian Lira...................................... --
NLG 1 Netherlands Guilder............................... --
ESP 247 Spanish Peseta.................................... 2
----------
TOTAL FOREIGN CURRENCY (Cost $4,379)............................ 4,401
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (97.9%) (Cost $152,077)................ 177,197
--------
OTHER ASSETS (2.8%)
Cash....................................... $ 1
Receivable for Portfolio Shares Sold....... 4,465
Dividends Receivable....................... 373
Foreign Withholding Tax Reclaim
Receivable............................... 145
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 6
Interest Receivable........................ 2
Other...................................... 3 4,995
----------
LIABILITIES (-0.7%)
Payable for Investments Purchased.......... (687)
Investment Advisory Fees Payable........... (283)
Payable for Portfolio Shares Redeemed...... (107)
Custodian Fees Payable..................... (27)
Administrative Fees Payable................ (22)
Directors' Fees and Expenses Payable....... (3)
Distribution Fees Payable.................. (2)
Other Liabilities.......................... (51) (1,182)
---------- --------
NET ASSETS (100%)........................................ $181,010
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $154,554
Overdistributed Net Investment Income............. (223)
Accumulated Net Realized Gain..................... 1,559
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 25,120
--------
NET ASSETS........................................ $181,010
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
34
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $178,356
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 10,680,943 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $16.70
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $2,654
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 159,157 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $16.67
----------
----------
</TABLE>
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver U.S. dollars in exchange for
foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------ ------ ----------- ------------ ------ ------------
U.S.$ 309 $ 309 1/02/97 GBP 184 $ 315 $ 6
------ ------ ---
------ ------ ---
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
NCS -- Non Convertible Shares
PP -- Partially Paid
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment...................... $ 26,874 14.8%
Consumer Goods......................... 29,017 16.0
Energy................................. 12,732 7.0
Finance................................ 22,774 12.6
Materials.............................. 36,049 20.0
Multi-Industry......................... 6,098 3.4
Services............................... 28,991 16.0
--------- ---
$ 162,535 89.8%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
35
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 1.5%
Canada 0.5%
France 4.4%
Germany 8.8%
Hong Kong 0.8%
Ireland 3.6%
Italy 3.4%
Japan 10.5%
Netherlands 4.4%
Spain 4.8%
Sweden 0.5%
Switzerland 5.9%
United Kingdom 9.4%
United States 36.7%
Other 4.8%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GLOBAL EQUITY PORTFOLIO-CLASS
A MSCI WORLD INDEX(1)
<S> <C> <C>
7/15/92* $500,000 $500,000
10/31/1992 467,500 482,000
12/31/1992 455,813 475,879
12/31/1993 703,145 604,750
12/31/1994 752,000 635,450
12/31/1995 892,323 767,115
12/31/1996 1,096,041 870,522
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) WORLD INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. 22.83% 19.22%
PORTFOLIO -- CLASS B(3).......... 22.04 N/A
INDEX............................ 13.48 13.22
</TABLE>
1. The MSCI World Index is an unmanaged index of common stocks and includes
securities listed on the stock exchanges of the U.S., Europe, Canada,
Australia, New Zealand and the Far East (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 COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW 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 OF LESS THAN THEIR
ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
The Global Equity Portfolio is managed with the objective of obtaining a high
total return by investing in markets worldwide, including the United States.
Investments may also be made with discretion in smaller companies or emerging
markets.
For the year ended December 31, 1996, the Portfolio had a total return of 22.83%
for the Class A shares and 22.04% for the Class B shares, as compared to a total
return of 13.48% for the Morgan Stanley Capital International (MSCI) World
Index. The average annual total return for the period from inception on July 15,
1992 through December 31, 1996 was 19.22% for the Class A shares, as compared to
13.22% for the Index.
The outperformance was principally attributable to the Portfolio's underweight
position in Japan, and stock selection in the United States, Japan, Germany,
Spain, the Netherlands and Ireland.
A particularly strong fourth quarter resulted in another robust performance from
equities in 1996 in all major markets other than Japan, which fell 16% in dollar
terms. The MSCI U.S. Index was up 23% on top of 1995's 37% rise; the U.K.
markets rose 27% and Continental European markets largely all finished in record
territory, although the strength of the dollar shaved returns in dollar terms.
Peripheral markets such as Ireland, Hong Kong and the Scandinavian bloc also
performed strongly, registering returns in excess of 30%.
During the year, U.S. indices were driven higher by a continuation of the low
inflation and steady growth environment -- helped by the 75 basis points of
monetary easing in 1995. Further merger activity, particularly in the
deregulated banking and telecommunications sectors and a mammoth $220 billion of
inflows into equity mutual funds were also key factors. This latter "wall of
money" more than offset growing unease over valuations, earnings sustainability,
consumer debt levels, and rising wage pressure, as unemployment nudged 5% and
the House passed an increased minimum wage. The return of the Republican
Congress in November was greeted with relief as was the defeat of a proposal in
California which if enacted, would have increased company management's liability
for inaccurate business forecasts.
In Europe, steepening yield curves, restructuring and the improved
competitiveness of the Deutschemark bloc currencies all provided support for
continental
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
36
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO (CONT.)
stocks. Domestic conditions however remained difficult with double digit
unemployment in both Germany and France combined with renewed fiscal discipline
as EMU candidates strove to meet the [Maastrict] criteria.
The U.K., being substantially further advanced in the business cycle than its
continental peers, enjoyed a broadly based manufacturing recovery. Falling
unemployment, continued takeover activity among the utilities ahead of the
imminent election, deregulation of the building societies and recently, rising
house prices, all contributed to surprising strength in final demand.
Japan was the exception. After seeming to recover from its worst recession since
World War II, and aided by a weaker yen and loose monetary policy, many
commentators expected the Japanese market to outperform in 1996. Unhappily, it
remained beleaguered by continuing instability in the banking and property
sectors with corporates facing the daunting prospect of deregulation in a number
of highly protected industries. This outlook combined with a planned rise in
consumption tax in April augurs for another difficult year and despite its
substantial underperformance in 1996, Japan remains expensive from a value
perspective.
Looking forward, the Portfolio is likely to remain slightly underweight in the
U.S., substantially so in Japan and overweight in Continental Europe. We tend to
agree with the consensus that a gradual intensification on inflationary
pressures may lead to a moderate move up in U.S. interest rates, particularly if
the fourth quarter's likely 4% GDP growth rate continues for any length of time.
Moreover, there is a risk that earning growth could slow to between mid and high
single digits. All of this underscores the need to focus on Mr. Greenspan's
recent warning of "irrational market exuberance" at a time when the Dow Jones
was in fact several hundred points lower than it is today.
U.S. corporates do however remain the key beneficiaries of globalization, which
combined with their leadership in technology, and a decade's experience of
restructuring, suggests that certain companies can continue to generate
substantial free cashflows over the foreseeable future. Restructuring remains
the central theme in Europe while governments there face the dilemma of having
to reconcile accommodative monetary policies with tight fiscal policies,
dictated by the political commitment to monetary union, in a climate of labor
market rigidities and high levels of structural unemployment.
The long term return for equities is typically 6% per annum over and above
consumer price inflation. With global inflation likely to be in the 2.5-3.5%
range, barring another oil shock, an increase of 8-10% in the MSCI World Index
is considered achievable although at this stage of the cycle the need for
clearly focused stock picking is paramount.
Frances Campion
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Global Equity Portfolio
37
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (94.1%)
AUSTRALIA (1.5%)
13,350 Brambles Industries Ltd........................... $ 260
163,407 Coles Myer Ltd.................................... 673
105,100 CSR Ltd........................................... 367
----------
1,300
----------
CANADA (0.5%)
22,900 Hudson's Bay Co................................... 383
----------
FRANCE (4.4%)
19,303 Banque Nationale de Paris......................... 747
2,010 Bongrain S.A...................................... 778
(a)12,000 Credit Lyonnaise CDI.............................. 308
9,266 Elf Aquitaine S.A................................. 844
11,000 Scor S.A.......................................... 387
10,365 Valeo S.A......................................... 639
----------
3,703
----------
GERMANY (7.7%)
25,900 BASF AG........................................... 993
32,920 Bayer AG.......................................... 1,336
(a)20,800 Deutsche Telekom AG ADR........................... 424
3,470 Karstadt AG....................................... 1,155
3,000 Mannesmann AG..................................... 1,291
(a)2,364 Sinn AG........................................... 450
(a)2,225 Varta AG.......................................... 398
1,000 Volkswagen AG..................................... 414
----------
6,461
----------
HONG KONG (0.8%)
189,600 Jardine Strategic Holdings, Inc................... 686
----------
IRELAND (3.6%)
690,253 Anglo Irish Bank Corp. plc........................ 824
405,100 Avonmore Foods plc, Class A....................... 1,194
264,836 Green Property plc................................ 1,077
----------
3,095
----------
ITALY (3.4%)
(a)624,000 Olivetti S.p.A.................................... 220
431,000 Stet Di Risp (NCS)................................ 1,456
603,400 Telecom Italia S.p.A. Di Risp (NCS)............... 1,178
----------
2,854
----------
JAPAN (10.5%)
140 East Japan Railway Co............................. 630
66,000 Fuji Photo Film Ltd............................... 2,177
21,000 Hitachi Ltd....................................... 196
122,000 Kao Corp.......................................... 1,422
47,000 Matsushita Electric Industries Co., Ltd........... 767
140,000 Nichido Fire & Marine Insurance Co., Ltd.......... 798
9,000 Sony Corp......................................... 590
86,000 Sumitomo Rubber Industries........................ 641
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
13,000 TDK Corp.......................................... $ 847
34,000 Toyo Seikan Kaisha Ltd............................ 819
----------
8,887
----------
NETHERLANDS (4.4%)
20,753 ABN Amro Holdings N.V............................. 1,350
1,888 Hollandsche Beton Groep N.V....................... 391
34,797 ING Groep N.V..................................... 1,253
17,200 Philips Electronics N.V........................... 697
----------
3,691
----------
SPAIN (4.8%)
51,300 Iberdrola S.A..................................... 727
26,900 Repsol S.A........................................ 1,032
96,800 Telefonica de Espana S.A.......................... 2,248
----------
4,007
----------
SWEDEN (0.5%)
14,300 Skandia Forsakrings AB............................ 405
----------
SWITZERLAND (5.9%)
400 Ascom Holdings AG (Bearer)........................ 407
370 Bobst AG (Bearer)................................. 500
1,200 Forbo Holding AG (Registered)..................... 484
835 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 597
1,200 Magazine Globus (Participating Certificates)...... 554
(a)917 Novartis AG (Registered).......................... 1,050
780 Schweizerische Industrie-Gesellschaft Holding AG
(Registered).................................... 947
680 Sulzer AG (Registered)............................ 393
----------
4,932
----------
UNITED KINGDOM (9.4%)
28,500 Calor Group plc................................... 145
257,500 Christian Salvesen plc............................ 1,266
103,413 John Mowlem & Co. plc............................. 201
30,500 Kwik Save Group plc............................... 168
241,400 Matthews (Bernard) plc............................ 519
(a,d)653,333 Pentos plc........................................ --
61,700 Railtrack Group plc PP............................ 408
138,491 Reckitt & Colman plc.............................. 1,715
63,702 Rolls-Royce plc................................... 281
68,550 Southern Electric plc............................. 935
99,100 Tate & Lyle plc................................... 805
40,000 Unilever plc...................................... 970
113,800 WPP Group plc..................................... 495
----------
7,908
----------
UNITED STATES (36.7%)
17,750 Aluminum Company of America....................... 1,132
(a)13,300 AMR Corp.......................................... 1,172
16,200 AT&T Corp......................................... 705
55,300 Bank of New York Co., Inc......................... 1,866
(a)26,300 Beazer Homes USA, Inc............................. 487
33,300 Browning-Ferris Industries, Inc................... 874
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
38
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED STATES (CONT.)
<TABLE>
<C> <S> <C>
(a)129,300 Cadiz Land Co., Inc............................... $ 671
75,500 Comsat Corp....................................... 1,859
(a)69,000 Data General Corp................................. 1,001
(a)109,000 Egghead, Inc...................................... 572
43,100 Enhance Financial Services Group, Inc............. 1,573
32,800 Finova Group, Inc................................. 2,107
2,000 General Motors Corp............................... 112
(a)90,600 GenRad, Inc....................................... 2,106
13,800 Georgia Pacific Corp.............................. 994
22,600 Greenfield Industries, Inc........................ 692
19,100 Houghton Mifflin Co............................... 1,082
(a)83,000 InteliData Technologies Corp...................... 602
6,092 Lucent Technologies Inc........................... 282
20,900 Lukens, Inc....................................... 421
11,200 MBIA, Inc......................................... 1,134
61,400 MCI Communications Corp........................... 2,007
12,300 Mellon Bank Corp.................................. 873
28,700 Penncorp Financial Group, Inc..................... 1,033
16,000 Philip Morris Cos., Inc........................... 1,802
12,000 Prime Retail, Inc................................. 150
(a)2,802 Silicon Graphics, Inc............................. 71
14,050 Tandy Corp........................................ 618
11,300 Tecumseh Products Co., Class A.................... 648
23,300 UST Corp.......................................... 481
(a)47,400 Waban, Inc........................................ 1,232
(a)135,400 WorldCorp, Inc.................................... 592
----------
30,951
----------
TOTAL COMMON STOCKS (Cost $63,224)............................... 79,263
----------
PREFERRED STOCKS (1.1%)
GERMANY (1.1%)
3,000 Volkswagen AG (Cost $647)......................... 957
----------
CONVERTIBLE PREFERRED SECURITY (0.0%)
HONG KONG (0.0%)
21,000 Jardine Strategic Holdings, Inc., IDR, 7.50%,
5/07/97 (Cost $21).............................. 25
----------
TOTAL FOREIGN & U.S. SECURITIES (95.2%) (Cost $63,892)........... 80,245
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -------------
SHORT-TERM INVESTMENT (4.2%)
REPURCHASE AGREEMENT (4.2%)
$ 3,521 Chase Securities Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $3,522,
collateralized by U.S. Treasury Bonds, 7.25%,
due 5/15/16, valued at $3,588 (Cost $3,521)..... 3,521
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
FOREIGN CURRENCY (0.2%)
AUD 160 Australian Dollar................................. $ 127
GBP 28 British Pound..................................... 49
JPY 2,168 Japanese Yen...................................... 19
NLG 2 Netherlands Guilder............................... 1
ESP 2 Spanish Peseta.................................... --
----------
TOTAL FOREIGN CURRENCY (Cost $196)............................... 196
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.6%) (Cost $67,609)................. 83,962
--------
OTHER ASSETS (0.9%)
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... $ 226
Receivable for Investments Sold............ 215
Dividends Receivable....................... 197
Foreign Withholding Tax Reclaim
Receivable............................... 54
Receivable for Portfolio Shares Sold....... 6
Interest Receivable........................ 1
Other...................................... 6 705
----------
LIABILITIES (-0.5%)
Payable for Investments Purchased.......... (243)
Investment Advisory Fees Payable........... (144)
Administrative Fees Payable................ (12)
Custodian Fees Payable..................... (8)
Distribution Fees Payable.................. (2)
Directors' Fees and Expenses Payable....... (2)
Other Liabilities.......................... (31) (442)
---------- --------
NET ASSETS (100%)........................................ $84,225
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................... $ 67,523
Undistributed Net Investment Income................ 19
Accumulated Net Realized Gain...................... 101
Unrealized Appreciation on Investments and Foreign
Currency Translations............................ 16,582
--------
NET ASSETS......................................... $ 84,225
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ---------------------------------------------------
NET ASSETS......................................... $ 80,297
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 4,944,210 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $16.24
--------
--------
CLASS B:
- ---------------------------------------------------
NET ASSETS......................................... $3,928
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 242,347 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $16.21
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
39
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars or foreign currency 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>
- ------------ ------- ----------- ------------ ------- ------------
AUD 259 $ 206 1/03/97 U.S.$ 206 $ 206 $ --
NLG 6,900 4,008 2/24/97 U.S.$ 4,201 4,201 193
U.S.$ 587 587 2/24/97 NLG 1,000 581 (6)
FRF 17,668 3,461 9/12/97 U.S.$ 3,500 3,500 39
------- ------- -----
$ 8,262 $ 8,488 $ 226
-------
------- ------- -----
------- -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- See note A-1 to financial
statements
ADR -- American Depositary Receipt
CDI -- Certificate of Investment
FRF -- French Franc
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
PP -- Partially Paid
SUMMARY OF FOREIGN AND U.S. SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment...................... $ 20,506 24.3%
Consumer Goods......................... 12,262 14.5
Energy................................. 4,973 5.9
Finance................................ 16,090 19.1
Materials.............................. 5,549 6.6
Multi-Industry......................... 4,010 4.8
Services............................... 16,855 20.0
-------- ---
$ 80,245 95.2%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
40
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Africa 25.3%
Australia 18.4%
Canada 24.9%
United Kingdom 1.7%
United States 16.3%
Other 13.4%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GOLD PORTFOLIO - CLASS PHILADELPHIA GOLD AND SILVER
A INDEX(1)
<S> <C> <C>
2/01/94* $500,000 $500,000
12/31/94 457,550 396,150
12/31/95 517,992 440,281
12/31/96 605,740 430,243
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE PHILADELPHIA
GOLD AND SILVER INDEX(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ ----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 16.94% 6.80%
PORTFOLIO -- CLASS B(3)............................................................................ 13.21 N/A
INDEX.............................................................................................. -2.28 -4.91
</TABLE>
1. The Philadelphia Gold and Silver Index is an unmanaged index comprised of the
leading companies involved in the mining of gold and silver.
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 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.
Companies involved in the exploration, mining, fabrication, processing,
distribution or trading of gold (or, to a lesser degree, silver, platinum, or
other precious metals or minerals) qualify as Portfolio candidates. Mining
shares differ fundamentally from investments in gold bullion. Because companies
can produce positive cash flows and increase gold reserves in the ground through
exploration and discovery, mining company equity shares provide investors with a
more dynamic investment vehicle. Portfolio securities are selected on the basis
of relative valuation, liquidity, and risk diversification.
For the year ended December 31, 1996, the Portfolio had a total return of 16.94%
for the Class A shares and 13.21% for the Class B shares as compared to -2.28%
for the Philadelphia Gold and Silver Index. The average annual total return for
the Portfolio for the period from inception on February 1, 1994 through December
31, 1996 was 6.80% for the Class A shares compared to -4.91% for the
Philadelphia Gold and Silver (XAU) Index.
The Portfolio benefited from a strong gold rally in January, continued relative
strength in gold shares through year-end, and an underweight in North American
gold shares which remain overvalued on a fundamental basis. Within the gold
share universe, the Portfolio continues to benefit from corporate exposure to
favorable exploration results, a trend we expect to continue based on an
improved global political climate for the past several years. Notable for
investors is that an exploration strategy can yield positive investment results
in a neutral gold price environment. Nonetheless, the gold price does directly
influence cash flows from projected operations and how much investors are
willing to pay for undeveloped precious metals deposits.
The primary challenge to performance has been a gold market which posted
declines for 10 of the 11 months following gold's $418.40 high on February 2.
Following every intermediate "buy" signal since the January high, gold has been
unable to mount anything but minor countertrend rallies. Four factors hurt gold:
(1) competing financial assets provided strong returns, (2) a higher dollar
increased the gold price in foreign currencies and dampened global fabrication
demand,
- --------------------------------------------------------------------------------
Gold Portfolio
41
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO (CONT.)
(3) mining producers stepped up forward sales ahead of rumored central bank
sales, and (4) the Dutch central bank sold 300 tonnes of gold during late 1996,
confirming miners' fears (announced January 1997).
Viewed in retrospect, the January 1996 high can be seen as the culmination of
supply and demand imbalances which dominated the fundamental outlook since late
1992. Professional investors, using the price discovery function, identified
this disequilibrium following the November 1995 "lease rate spike" and drove
gold higher during January in an effort to seek out a new equilibrium. Bullion
investors unknowingly bought gold from the Bank of Belgium during the year's
first central bank sale, which helped cap the extent of the rally. And with an
improving macroeconomic backdrop favoring financial assets, the next "wave" of
investors who were supposed to push gold to $500 held fast in equity mutual fund
investments.
Investment demand has always been the key factor in gold price determination.
With continued strong returns from financial asset classes, there is little need
for investors to alter their successful capital growth strategy by moving assets
towards gold, a capital preservation asset. Sir Isaac Newton's 1(st) Law of
Motion aptly describes the present situation. The 1(st) law states that an
object at rest will remain at rest and an object in motion will remain in motion
at constant velocity unless acted upon by an unbalanced force. Applying the law,
we observe that financial asset returns demonstrate a high constant velocity and
that gold shows a constant velocity of zero. What is required to alter the
current state of affairs is an unbalanced force. Because of the "regression to
mean" phenomenon, we believe it is inevitable that an unbalanced force will
enter the markets and cause above-average financial returns to revert to their
historical mean. In this scenario, we believe that gold will reassert its role
as a capital preservation asset and provide significant Portfolio
diversification benefits.
With limited investability (-$300 billion for bullion, another -$75 billion for
mining equities), it doesn't take many investment dollars to generate a sizable
market impact on precious metal returns, especially considering that the world's
pool of fixed income and equity assets now exceeds $30 trillion. For this
reason, we recommend that investors make precious metals allocations on a
contrary basis rather than a momentum play. Even a trickle of funds diverted
from the financial asset pool towards gold will cause new investors to pay a
substantial premium for precious metals investments. During 1997, we will
continue to monitor for emergence of an "unbalanced force" and will direct our
efforts on stock selection until that day arrives.
Peter F. Palmedo
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
GOLD PORTFOLIO
42
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (86.6%)
AFRICA (25.3%)
99,000 Ashanti Goldfields Co. GDR........................ $ 1,225
(a)179,521 Avgold Ltd........................................ 480
153,000 Free State Consolidated Gold Mines Ltd. ADR....... 1,100
(a)93,000 Harmony Gold Mining Co., Ltd. ADR................. 732
58,000 JCI Co., Ltd...................................... 570
114,000 Vaal Reefs Exploration & Mining Co., Ltd. ADR..... 705
93,205 Western Area Gold Mining ADR...................... 1,285
42,700 Western Deep Levels Ltd. ADR...................... 1,281
----------
7,378
----------
AUSTRALIA (18.4%)
(a)1,000 Delta Gold N.L.................................... 2
214,400 Great Central Mines N.L........................... 610
(a)300,000 Lihir Gold Ltd.................................... 572
496,988 Newcrest Mining Ltd............................... 1,974
705,002 Normandy Mining Ltd............................... 974
190,000 Plutonic Resources Ltd............................ 883
(a)500,000 Wiluna Mines Ltd.................................. 365
----------
5,380
----------
CANADA (24.9%)
62,000 Agnico-Eagle Mines Ltd............................ 871
(a)209,000 Arizona Star Resource Corp........................ 1,564
(a)50,000 Bema Gold Corp.................................... 296
(a)106,100 Bre-X Minerals Ltd................................ 1,681
8,210 Bro-X Minerals Ltd................................ 14
(a)200,000 Meridian Gold, Inc. -- Installment Receipts....... 474
(a)130,600 Miramar Mining Corp............................... 572
41,000 Placer Dome, Inc.................................. 892
88,000 Prime Resource Group, Inc......................... 623
(a)290,000 TVI Pacific, Inc.................................. 269
----------
7,256
----------
UNITED KINGDOM (1.7%)
227,200 Lonrho plc........................................ 487
----------
UNITED STATES (16.3%)
(a)206,000 Dakota Mining Corp................................ 348
(a)126,000 Gold Reserve Corp................................. 1,205
(a)103,600 Pegasus Gold, Inc................................. 784
(a)387,000 Royal Oak Mines, Inc.............................. 1,258
(a)65,000 Stillwater Mining Co.............................. 1,178
----------
4,773
----------
TOTAL COMMON STOCKS (Cost $30,152)............................ 25,274
----------
FOREIGN CURRENCY (3.3%)
ZAR 4,448 South African Rand (Cost $952).................... 951
----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -------------------------------------------------------------------
TOTAL INVESTMENTS (89.9%) (Cost $31,104)................. $26,225
--------
OTHER ASSETS (11.0%)
Receivable for Investments Sold............ $ 2,368
Receivable for Portfolio Shares Sold....... 846
Other...................................... 1 3,215
----------
LIABILITIES (-0.9%)
Payable for Portfolio Shares Redeemed...... (92)
Payable for Investments Purchased.......... (76)
Sub-Advisory Fees Payable.................. (32)
Investment Advisory Fees Payable........... (14)
Custodian Fees Payable..................... (5)
Administrative Fees Payable................ (4)
Bank Overdraft............................. (3)
Distribution Fees Payable.................. (1)
Directors' Fees and Expenses Payable....... (1)
Other Liabilities.......................... (32) (260)
---------- --------
NET ASSETS (100%)........................................ $29,180
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................... $ 36,072
Overdistributed Net Investment Income.............. (30)
Accumulated Net Realized Loss...................... (1,978)
Unrealized Depreciation on Investments and Foreign
Currency Translations............................ (4,884)
--------
NET ASSETS......................................... $ 29,180
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ---------------------------------------------------
NET ASSETS......................................... $27,810
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,988,808 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $9.30
--------
--------
CLASS B:
- ---------------------------------------------------
NET ASSETS......................................... $1,370
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 147,615 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $9.28
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
- ------------------------------------------------------------
SUMMARY OF FOREIGN AND U.S. SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Finance................................ $ 570 1.9%
Gold Mines............................. 23,050 79.0
Materials.............................. 1,167 4.0
Multi-Industry......................... 487 1.7
-------- ---
$ 25,274 86.6%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Gold Portfolio
43
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 3.6%
Belgium 0.6%
Denmark 2.4%
Finland 0.7%
France 9.3%
Germany 10.4%
Hong Kong 3.4%
Italy 3.0%
Japan 17.9%
Netherlands 8.5%
New Zealand 0.4%
Norway 1.1%
Singapore 0.1%
Spain 4.5%
Sweden 3.4%
Switzerland 5.9%
United Kingdom 15.3%
Other 9.5%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY PORTFOLIO -
MSCI EAFE INDEX (1) CLASS A
<S> <C> <C>
8/04/89* 500,000 500,000
10/31/1990 417,750 505,380
12/31/1991 446,800 541,635
10/31/1992 387,750 516,940
12/31/1992 393,450 524,830
12/31/1993 521,500 769,000
12/31/1994 562,100 864,150
12/31/1995 625,111 965,860
12/31/1996 662,930 1,155,555
*Commencement of operations
**Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------------
AVERAGE
ANNUAL
AVERAGE ANNUAL SINCE
ONE YEAR FIVE YEARS INCEPTION
---------------- -------------- ----------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.................... 19.64% 16.41% 11.96%
PORTFOLIO -- CLASS B(3)................. 18.58 N/A N/A
INDEX................................... 6.05 8.15 3.88
</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.
3. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE 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 investment objective of the International Equity Portfolio is long-term
capital appreciation through investment primarily in equity securities of
non-U.S. issuers. Equity securities for this purpose include common stocks and
equivalents, such as securities convertible into common stocks, and securities
having common stock characteristics, such as rights and warrants to purchase
common stocks.
For the year ended December 31, 1996, the Portfolio had a total return of 19.64%
for the Class A shares and 18.58% for the Class B shares as compared to a total
return of 6.05% for the Morgan Stanley Capital International (MSCI) EAFE Index.
The average annual total return for the five year period ended December 31, 1996
and for the period from inception on August 4, 1989 through December 31, 1996
were 16.41% and 11.96%, respectively, for the Class A shares as compared to
8.15% and 3.88%, respectively, for the Index.
For the three month period ended December 31, 1996, the Portfolio had a total
return of 7.31% for the Class A shares and 7.19% for the Class B shares as
compared to 1.59% for the MSCI EAFE Index. The Portfolio's meaningful
outperformance relative to its benchmark in the final quarter of 1996 was driven
by the underweight position in Japan, the overweight position in Spain and
superior returns from Germany, Japan, Italy and Spain. Poor French returns was
the most notable negative factor for the quarter, while currency was broadly
neutral.
The Portfolio's outperformance for the full year was again driven by the
underweight in Japan while overweight positions in Spain, Germany, Netherlands
and Sweden were also positives. Stock returns against local market returns
contributed significantly in Japan, Australia, Germany, Spain and Switzerland.
Notable negatives for the year were French stock selection and the sterling
underweight. Forwards, however, contributed positively after holding back
returns in 1995.
With the notable exception of Japan, global stock markets are extended while the
Portfolio's valuation is arguably extended against the broader indices given the
strong market returns it achieved in 1996. We believe that the best has been
seen from world bond markets with the U.K. and U.S. facing a moderate
intensification of inflationary pressures while the euphoria of convergence is
at a mature stage in Europe. Currency factors, meanwhile, are likely to
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
44
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
restrain profit growth in the U.K. and U.S. while macro inefficiencies and
restrictive fiscal policies will hold back Continental European growth and
therefore profits. Factor in a thoroughly lacklustre outlook for Japan as fiscal
policy tightens and one has another year of low global economic growth. If our
forecast of dull to slightly weaker bond markets is correct, current stock
market levels are not consonant with the fundamental backdrop for 1997.
As value investors we are not interested in pursuing the last hurrah in European
banking stocks and the last price leap of European bond convergence
beneficiaries. Equally, we believe restructuring stories, so long the principal
investment theme of our portfolios, are now well developed and well discounted,
as is the two tier market in Japan consisting of globally competitive companies
on the one hand and those companies reliant on crumbling domestic cartels on the
other.
The only clear area of value to us at this stage are cash generative companies
producing short term earnings weakness attributable to one-off problems like the
strength of sterling for U.K. exporters. Though Japan has fallen a long way in
recent months apparent value is not matched by quality except in some very
specific cases. The Portfolio's holdings in Japanese non-life insurance
companies have been battered recently. These very good but poorly managed
businesses have become significantly less attractive businesses with the same
poor management as a result of government deregulation. To add to such stocks on
weakness is not necessarily wise as the non-life insurance market has changed
fundamentally for the worse for its current participants. This is a problem
across a broad range of Japanese industries.
In this environment we expect cash positions to build to allowable levels as
speedy profit taking is not matched by the rapid identification of new
investment opportunities.
GERMANY
The Morgan Stanley Capital International Germany Index increased by 5.23% in
U.S. dollar terms and by 6.32% in local currency terms in the final quarter of
1996. The best performing sector in Germany during the quarter was automobiles,
up over 20% in Deutschemark terms. Other strong performing sectors included
chemicals, an area in which we remain overweight, and food and household
products. The poor performers included beverages and tobacco down over 11%, and
construction and housing down 10%, hurt by the cold winter weather.
The most recent GDP statistics from the third quarter show that the strong
pick-up in growth in the second quarter was not sustained. From July through
September real GDP increased by 0.75%. Domestic demand remained poor, however
export growth increased by over 4% helped by the relative weakness of the
Deutschemark which enhanced the price competitiveness of German products in
international markets. Inflation in Germany remains low and could be down to
1.5% for 1996. Given the low levels of inflation and poor growth dynamics we
could see further cuts in interest rates in the new year. Productivity levels of
German companies continue to improve, however this is resulting in higher levels
of unemployment. Germany continues to offer opportunities to the value investor.
Although pricing power remains poor, company restructuring should continue to
offer earnings and share price appreciation in the coming months.
FRANCE
During the final quarter of 1996, the Morgan Stanley Capital International
France Index increased by 8.59% in U.S. dollar terms and by 9.37% in French
franc terms. Sectors that performed well included electronic components
following a global trend, and pharmaceutical stocks. Retail stocks also finished
the year strongly in what has been a period of slow domestic consumer demand.
Automobile stocks have been weak in the final quarter with demand falling
following the end of government incentives in September.
Over the last year there has been volatility in the French economy. Strong
growth in the first three months was followed by a contraction in the second
quarter and another bounce in the third quarter. Some initial indicators for the
fourth quarter show that GDP growth may be down. This volatility is primarily
due to swings in consumption as consumers follow government tax incentives. The
ending of incentives to car buyers in September led to a rush to beat the
deadline and can be seen as a major reason for GDP growth in the third quarter.
In this environment it is difficult to measure the underlying trend of the
economy. In general, however, growth is being driven by the export markets,
helped by a weaker French franc. In the domestic market, there
- --------------------------------------------------------------------------------
International Equity Portfolio
45
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
have been poor levels of investment by industry due to uncertainty over interest
rates and currencies. There are cheap stocks available for investment in France
but it is clear that the investor must be cautious before entering some
industries in this market due to the poor economic environment.
SWITZERLAND
The Morgan Stanley Capital International Switzerland Index fell by 1.45% in U.S.
dollar terms but rose by 5.56% in Swiss franc terms during the fourth quarter of
1996. As these performance numbers show, the Swiss franc has been weak against
the dollar and other major currencies during the quarter. Looking at the Swiss
market for the full year, it was Europe's worst performer in U.S. dollar terms,
up only 2.28%. Sectors that showed good returns during the quarter included
retail and chemicals while poorer performers included real estate and banking.
The Swiss economy has contracted for each of the first three quarters of 1996.
In our last quarterly report we stated that there was positive news of an
increase of private consumption in the second quarter; this however, has not
continued into the second half of the year. In addition, government consumption
has fallen back, as fiscal policy has tightened. The Swiss economy has also
suffered from slow export growth due to the franc's strength, until recently,
and the weakness of export markets. The only real positive news has been the
levels of investment, which remain strong. The sluggish economy has meant that
inflation has stayed well under control despite the introduction of VAT. With no
upward pressure on inflation the SNB should be able to hold the discount rate at
around the 1% level for the foreseeable future.
NETHERLANDS
In the fourth quarter of 1996 the Morgan Stanley Capital International
Netherlands Index increased by 11.47% in U.S. dollar terms and by 12.70% in
Dutch guilder terms. The financial services companies finished the year strongly
with both the banks and insurance sectors performing well in the final quarter.
Other strong returns came from some of the more cyclical industries including
chemicals, machinery and shipping. The poorest performing sectors included
alcoholic beverages and the paper sector.
Consumer spending has been the driving force behind Dutch GDP growth which
continues to outperform the rest of Europe. Third quarter GDP grew at an annual
rate of 3%, a similar level to the second quarter. The main reasons for the
strong consumer spending has been the growth in wages at a time when the picture
for unemployment has been improving. Secondly, the Dutch consumer has been happy
to reduce their saving rates. Not surprisingly, this environment has led to
recent signs that inflation is edging up. Consumer prices have risen to an
annual rate of 2.4% due in part to the higher oil price but also to a rise in
import prices. Unlike the domestic market there has been little pick-up in Dutch
exports despite weakness of the guilder against the dollar. This is due
primarily to the weakness of demand from their main European trade partners.
ITALY
The Morgan Stanley Capital International Italy Index increased by 2.13% in U.S.
dollar terms and by 2.03% in local currency terms during the quarter. The top
performing sectors included metal stocks and telecommunications, an area in
which we are overweight, with exposure to Stet and Telecom Italia. The poor
performers included insurance which continued its poor run throughout the year.
The economy has been greatly influenced by the desire of politicians to move
Italy toward greater European integration. Measures to meet the criteria include
a ITL 62.5 trillion deficit cutting package in the 1997 budget resulting in an
increase in tax revenue of around ITL 10 trillion. This news, and a background
of stagnant employment and a lower capacity to save, has led to a sharp drop in
consumer confidence since the summer. Other changes in the economy over the last
quarter have included Italy rejoining the ERM following a period of relative
currency strength. The lira rejoined at a parity of ITL 990 to the Deutschemark.
We have also seen a meaningful drop in inflation which is now at 2.6%. This has
enabled the Italian authorities to cut rates by 75 basis points. Despite these
significant efforts to reach the Maastricht criteria, the Italian economy will
probably have to see a stronger economic pick-up in 1997 than we are currently
seeing. Although Italy has been a poor relative performer over the last year it
is difficult to find cheap stocks that are of suitable quality to include in the
Portfolio.
SPAIN
During the final quarter of 1996 the Morgan Stanley Capital International Spain
Index appreciated by 23.16% in U.S. dollar terms and by 24.76% in local currency
terms. For the full year the Spanish market
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
46
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
was up over 40% in U.S. dollar terms and by over 50% in peseta terms making it
the top performer of the world's developed markets. The electrical utility
sector continued its strong run as the industry continues to restructure.
Another good performer was the telecommunications sector with the sale of the
final stake of Telefonica scheduled for the beginning of 1997.
The Spanish economy continued its steady growth in the third quarter of the
year. Recent data on industrial production and private consumption suggest that
GDP grew at an annual rate of 2% during the quarter. During this period there
was a pick-up in domestic demand with investment particularly strong. The
headline inflation rate fell to 3% in November from 4% at the beginning of the
year. Lower inflation and moderate economic growth has allowed the Bank of Spain
to bring down the repo rate to 6%, down 2% from the end of 1995. The Government
has prepared a budget for 1997 to reduce the public deficit to the convergence
limit for Maastricht of 3% of GDP. To help achieve this target, real government
investment has been cut by 15% and a wage freeze has been introduced for civil
servants. Those companies which depend on government expenditure, particularly
construction, will suffer in this environment. Spain is a country in which we
have, through stock picking, outperformed a strong market. We will continue to
look for new investment ideas while lowering our exposure to some of the better
performers.
UNITED KINGDOM
In the last quarter of 1996, the Morgan Stanley Capital International U.K. Index
rose by 4.64% in local currency terms and by 14.54% in U.S. dollar terms. For
the 1996 year overall, the figures were 15.60% and 27.42%, respectively.
In the first half of 1996, the U.K. economy was generally weaker than expected,
led by poor manufacturing output figures as stocks were run down which fed good
consumer demand. GDP growth downgrades resulted for the year and PSBR concerns
emerged on the back of sluggish tax receipts. These reductions were reversed in
the second half of the year following a pick-up in manufacturing output,
particularly in the last quarter, co-existing with strong retail sales growth.
As a result, consensus estimates for GDP growth for 1996 of 2.3% and for a PSBR
of 21.2 billion for the year to April 1997 ended in line with estimates
originally made at the start of 1996. These conditions are not thought to be a
re-run of the late 1980s, although the market's key concern is the extent to
which current rapid growth results in higher inflation.
The big surprise of the quarter and the year as a whole has been Sterling
strength, with market consensus at the start of 1996 expecting, on balance, a
reasonably dull outlook. This has transformed the performance of the U.K. market
to dollar-based investors from laggard to strong performer. The source of
Sterling strength has been market realization that the U.K. is virtually the
only OECD country to be increasing interest rates on a still reasonable economic
backdrop. Having allowed -- against Bank of England advice -- for interest rates
to go too low at 5.75% for too long, the question for the Government is when
interest rates (currently 6.0%) have to go up, rather than if. With a General
Election looming, this is an obvious sensitivity, although Sterling strength
should aid short term governmental prevarication.
As in 1995, the divergence in performance between high and low quality stocks
has continued, with the market continuing to place a high premium on growth. The
best performing sectors in the U.K. market were oils (particularly E&P),
property, life assurance, retail banks (given the year's low interest rate
environment), and media and support services. In general, cyclicals did very
poorly, with chemicals, building materials and textiles among the worst sectors.
The market starts 1997 with much to chew over. Market consensus suggests a
likely Labour win in the General Election (which must be held by May 1997).
Labour's potential changes to the corporate taxation regime to encourage
investment may significantly alter the relative attraction of equities over
gilts and the fate of utilities for windfall taxes will be decided; and, of
course, EMU. However, a direct effect of Sterling strength has been the re-
emergence, towards the end of the year, of value in the U.K. market. This is
particularly the case for better quality, export-related or international stocks
where earnings have been downgraded often for translational, rather than
transactional, exposure and valuations have consequently weakened in the flight
to the perceived safer havens of domestically oriented stocks.
- --------------------------------------------------------------------------------
International Equity Portfolio
47
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
JAPAN
The Japanese stock market weakened significantly in the final quarter, with the
Morgan Stanley Capital International Japan Index declining 7.77% in yen terms
and 11.50% in U.S. dollar terms.
Given the strength of the local bond market this weakness appears all the more
significant because there was no other major catalyst to justify it. The problem
for the Japanese stock market is that economic activity is not finding its way
through to corporate profits due to the gradual opening up of the economy to
internal and external competition. The latest example of this trend was seen in
the December announcement of full scale deregulation of the non-life insurance
industry, currently a cosy oligopoly operated under the protective aegis of the
Ministry of Finance. This move will unquestionably lower the supranormal
underwriting returns enjoyed by the existent cartel who can only react by
cutting costs and improving investment performance. The former is never easy in
Japan but the latter is readily achievable through the sale of low yielding, low
quality Japanese equities which dominate the asset profiles of the non-life
industry. By a sleight of hand the Japanese government has therefore created a
brand new supply of stock out of a historic net buyer of Japanese equities. This
is just one example of how deregulation is weighing on Japanese corporate
profitability and worsening the supply and demand outlook for Japanese stocks.
We believe foreigners are as fully weighted as they wish to be in this market
while Japanese corporates and life assurance companies are sellers on any
strength. The only source of buying is therefore likely to come from
individuals, but though subscriptions to investment trusts have risen
moderately, individual investor appetite appears to be for high yielding
overseas bonds rather than domestic equities.
The outlook for Japan in 1997 is hardly one of robust economic growth. While
consumption should be underpinned by good levels of nominal and real income
growth, it will equally be retarded by ongoing asset deflation in the property
market and to a lesser extent in the stock market, while the pernicious effect
of derisory low interest rates on a household sector replete with cash should
not be underestimated. Final demand is also likely to be constrained by the
April hike in the consumption tax, with a marked fall in housing starts
forecasted for the second half of the year. Though the capital expenditure
recovery is likely to continue for the time being, it is likely to peak in the
second half of the year as the domestic auto cycle matures. Meanwhile, fiscal
policy will be continuously tight as the Ministry of Finance attempts to lower
the current government deficit from its current unacceptable level of 5.8% of
GNP. In addition, public works expenditure will contract as the recent special
budget expenditures tail off and a new austerity sets in. Therefore, we forecast
modest consumption and capex growth but a contraction in public works; but this
will be offset by a forecasted growth in net exports as recent yen weakness
creates an improved trade performance. The recent trade figure for November
heavily implies a rapid growth in Japan's trade surplus after 18 months of
contraction and this leads us to believe that we have seen the bottom in the yen
against the U.S. dollar. This is an important judgment because the recent
massive relative strength of the export blue chips is unlikely to continue if
the yen's recent weakness begins to reverse.
Having made a fairly negative judgment on the supply demand outlook for Japanese
equities and having given a neutral forecast on economic activity, there remains
the issue of the financial sector where outstanding bad debts total between 40
trillion (government estimate) and 100 trillion (pessimistic estimate of foreign
analysts), and where the life insurance industry has a huge if unknown long-term
asset and liability mismatch. It is impossible to quantify the extent of risk in
Japan's financial sector because of the lack of reliable information but it is
still in a chronically weak state after three years of reliquification from the
Bank of Japan. Furthermore, recent deregulation measures from the Government are
putting the system under renewed strain. We believe that there is a meaningful,
if unquantifiable, risk of an uncontrollable reassertion of deflationary forces
in Japan's financial markets. What such an eventuality means for the yen and
government bonds is not clear, but self-feeding weakness in both is a
possibility.
The Japanese stock market now has two tiers: there are the globally competitive
manufacturing and pharmaceutical companies whose futures are tied to Wall Street
and the yen, where stock prices are high. Then there are the domestic sectors
whose prices are depressed by weak pricing power and competitive threats from
within and outside Japan. To add to either category seems unattractive at the
moment given the ratings of quality stocks and the secular
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
48
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
profits risk in the latter. Perhaps retrospect will show that the American
government in 1995 cooperated with Japan in weakening the yen only in return for
meaningful deregulation of Japan's domestic economy. This deregulation may only
have exacerbated the deflationary pressure the yen's devaluation temporarily put
in abeyance.
HONG KONG
The Hong Kong stock market continued its remarkable bull run in the final
quarter of 1996, with the Morgan Stanley Capital International Hong Kong Index
appreciating 12.16% in U.S. dollars and 12.19% in local currency.
Bullish sentiment was reinforced during the quarter by a transaction in the
commercial property market made by Hysan Development at levels of 25% above
market expectations. This led analysts to rework their net asset value figures
for all property investment companies which were reflected in share prices in
days rather than weeks. Meanwhile, burgeoning liquidity from the mainland has
led to record levels of speculation in the residential property market which has
received further support from China's conciliatory approach to the handover of
sovereignty and from falling U.S. interest rates. All in all, 1996 came to a
close in as propitious an environment for Hong Kong equities as one could hope
for.
However, as ever, the stock market has been quick to discount good news and it
is important that the market has undergone a significant rerating in 1996 with
corporate profits matching growth accounting for approximately one third of the
market's 33% gain for the year. While we believe corporate profits will continue
in the 10-12% range in 1997, it is unlikely that there will be a further
rerating because there has been no improvement in the relatively poor quality of
Hong Kong's profit structure which is substantially made up of asset sales,
stock market trading profits and non recurring property development earnings.
Given that China's wish for a smoother political transition is taken for
granted, we think that this market will find few new buyers in the second half
of 1997. What happens between then and now depends on U.S. interest rates and
sentiment on Wall Street.
AUSTRALIA
During the fourth quarter of 1996 the Australian stock market appreciated 7.36%
in Australian dollars and 7.77% in U.S. dollars.
The rally was driven by a strong bond market which improved sentiment for
equities generally, and banking stocks specifically. Meanwhile, the resources
sector benefited from a buoyant oil price and a worthwhile rally in the copper
price after the weakness associated with the Sumitomo affair. The economy
itself, however, remained in the doldrums with robust real and nominal income
not finding its way through to consumer spending. The housing industry appears
to be reaching a cyclical low from which we expect a moderate recovery over the
next three years.
At current levels, we believe that the banking sector discounts the positive
fundamentals of the industry and any further progress depends on actual or
supposed takeover activity. The resources sector seems fairly to fully valued
given its capital intensity and requires an unanticipated breakout in metals
prices for further gains. The industrials appear correctly valued and some of
the value in the housing sector has already been recognized ahead of any
recovery in housing starts. The only area of clear overvaluation are those
companies perceived to be capable of generating earnings growth irrespective of
the environments for metals prices and the domestic economy.
Dominic Caldecott
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
International Equity Portfolio
49
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
COMMON STOCKS (87.3%)
AUSTRALIA (3.6%)
1,849,500 Brambles Industries Ltd........................... $ 36,068
5,000,347 Coles Myer Ltd.................................... 20,574
7,300,000 CSR Ltd........................................... 25,515
--------------
82,157
--------------
BELGIUM (0.6%)
29,558 Arbed S.A......................................... 3,214
243,350 G.I.B. Holdings Ltd............................... 10,907
2,156 G.I.B. Holdings Ltd. VVPR (New)................... 93
--------------
14,214
--------------
DENMARK (2.4%)
(a)190,000 Den Danske Bank A/S............................... 15,321
111,250 Novo-Nordisk A/S, Class B......................... 20,963
352,500 Unidanmark A/S, Class A (Registered).............. 18,251
--------------
54,535
--------------
FINLAND (0.7%)
350,000 Huhtamaki Oy, Series 1............................ 16,283
(a)168,467 Merita Ltd., Class A.............................. 524
--------------
16,807
--------------
FRANCE (9.3%)
190,140 Assurances Generales de France.................... 6,140
581,295 Banque Nationale de Paris......................... 22,503
15,510 Bongrain S.A...................................... 6,001
174,827 Cie de Saint Gobain............................... 24,740
(a)153,050 Credit Lyonnaise CDI.............................. 3,924
350,000 Elf Aquitaine S.A................................. 31,869
150,000 Groupe Danone..................................... 20,908
400,000 Lafarge S.A....................................... 24,006
108,200 PSA Peugeot Citroen S.A........................... 12,182
151,900 Scor S.A.......................................... 5,345
255,000 Total S.A., Class B............................... 20,746
627,268 Usinor Sacilor.................................... 9,130
387,480 Valeo S.A......................................... 23,905
--------------
211,399
--------------
GERMANY (7.3%)
750,000 BASF AG........................................... 28,757
1,050,000 Bayer AG.......................................... 42,614
500,000 Commerzbank AG.................................... 12,705
287,500 Hoechst AG........................................ 13,322
90,500 Karstadt AG....................................... 30,113
30,135 Mannesmann AG..................................... 12,969
(a)24,900 Varta AG.......................................... 4,450
245,700 VEBA AG........................................... 14,131
15,000 Volkswagen AG..................................... 6,215
--------------
165,276
--------------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
HONG KONG (3.3%)
(d)90,600 China Light & Power Co., Ltd...................... $ 410
9,794,242 Hong Kong Land Holdings Ltd....................... 27,228
13,250,000 Jardine Strategic Holdings, Inc................... 47,965
--------------
75,603
--------------
ITALY (3.0%)
(a)12,545,000 Olivetti S.p.A.................................... 4,424
(a)2,560,500 Olivetti Group S.p.A.............................. 979
11,000,000 Stet Di Risp (NCS)................................ 37,162
4,310,000 Telecom Italia S.p.A.............................. 11,194
6,800,000 Telecom Italia S.p.A. Di Risp (NCS)............... 13,269
--------------
67,028
--------------
JAPAN (17.9%)
1,050,000 Aisin Seiki Co., Ltd.............................. 16,683
1,000,000 Canon, Inc........................................ 22,105
123,000 Chudenko Corp..................................... 3,547
1,500,000 Daibiru Corp...................................... 13,859
2,000,000 Daicel Chemical Industries Ltd.................... 9,378
1,100,000 Daikin Industries Ltd............................. 9,783
1,037,000 Dainippon Ink & Chemical, Inc..................... 3,841
4,000 East Japan Railway Co............................. 17,995
2,298,000 Fuji Photo Film Ltd............................... 75,800
2,700,000 Hitachi Ltd....................................... 25,179
2,250,000 Kao Corp.......................................... 26,228
650,000 Kirin Brewery Co., Ltd............................ 6,399
1,352,000 Matsushita Electric Industries Ltd................ 22,064
81,000 Murata Manufacturing Co., Ltd..................... 2,693
3,427,000 Nichido Fire & Marine Insurance Co., Ltd.......... 19,531
2,711 Nippon Telegraph & Telephone Corp................. 20,553
221,000 Ryosan Co......................................... 4,923
350,000 Sony Corp......................................... 22,938
3,000,000 Sumitomo Marine & Fire Insurance Co............... 18,651
2,561,000 Sumitomo Rubber Industries........................ 19,084
350,000 TDK Corp.......................................... 22,818
896,000 Toyo Seikan Kaisha Ltd............................ 21,586
--------------
405,638
--------------
NETHERLANDS (8.5%)
590,647 ABN Amro Holdings N.V............................. 38,428
190,000 Akzo Nobel N.V.................................... 25,955
84,436 Hollandsche Beton Groep N.V....................... 17,492
1,320,000 ING Groep N.V..................................... 47,525
258,500 Koninklijke Bijenkorf Beheer N.V.................. 18,629
1,120,000 Philips Electronics N.V........................... 45,381
--------------
193,410
--------------
NEW ZEALAND (0.4%)
2,236,054 Fisher & Paykel Industries Ltd.................... 8,773
(a,d)392,500 Smith City Group Ltd.............................. --
--------------
8,773
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
50
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------
<C> <S> <C>
NORWAY (1.1%)
3,500,000 Den Norske Bank ASA............................... $ 13,406
(a)743,850 Nycomed ASA, Class B.............................. 11,444
--------------
24,850
--------------
SINGAPORE (0.1%)
3,265,000 Neptune Orient Lines Ltd.......................... 2,823
--------------
SPAIN (4.5%)
(a)89,300 Grupo Duro Felguera S.A........................... 911
3,000,000 Iberdrola S.A..................................... 42,519
590,000 Repsol S.A........................................ 22,632
1,502,500 Telefonica de Espana S.A.......................... 34,893
--------------
100,955
--------------
SWEDEN (3.4%)
198,070 Electrolux AB, Series B........................... 11,507
429,300 Nordbanken AB..................................... 13,006
378,400 Skandia Forsakrings AB............................ 10,714
708,600 S.K.F. AB, Class B................................ 16,789
364,600 Sparbanken Sverige AB, Class A.................... 6,258
879,800 Svenska Cellulosa AB, Class B..................... 17,876
52,400 Svenska Handelsbanken, Class A.................... 1,507
(a)36,460 Tornet Fastighets AB.............................. 556
--------------
78,213
--------------
SWITZERLAND (5.9%)
2,605 Ascom Holdings AG (Bearer)........................ 2,653
20,000 Forbo Holding AG (Registered)..................... 8,069
20,000 Holderbank Financiere Glarus AG (Bearer).......... 14,285
33,000 Nestle S.A. (Registered).......................... 35,428
(a)170 Novartis AG (Bearer).............................. 195
(a)32,000 Novartis AG (Registered).......................... 36,650
13,154 Schindler Holding AG (Participating
Certificates)................................... 14,299
18,250 Sulzer AG (Participating Certificates)............ 9,762
23,250 Sulzer AG (Registered)............................ 13,427
--------------
134,768
--------------
UNITED KINGDOM (15.3%)
1,021,600 Associated British Foods plc...................... 8,479
3,256,556 BAT Industries plc................................ 27,001
1,907,500 British Telecommunications plc.................... 12,891
109,500 Burmah Castrol plc................................ 2,065
4,905,000 Christian Salvesen plc............................ 24,116
2,371,713 English China Clays plc........................... 7,821
5,735,500 Grand Metropolitan plc............................ 45,099
(a)2,221,000 Imperial Tobacco Group plc........................ 14,344
5,004,063 John Mowlem & Co. plc............................. 9,730
2,255,000 Kwik Save Group plc............................... 12,400
843,000 McAlpine (Alfred) plc............................. 1,841
1,140,000 Peninsular & Oriental Steam Navigation Co. plc.... 11,522
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
3,206,094 Reckitt & Colman plc.............................. $ 39,710
1,777,400 Rolls-Royce plc................................... 7,841
2,538,978 Royal & Sun Alliance Insurance Group plc.......... 19,377
1,007,000 Southern Electric plc............................. 13,732
2,546,300 Tate & Lyle plc................................... 20,676
2,252,100 Unilever plc...................................... 54,649
2,975,000 WPP Group plc..................................... 12,945
--------------
346,239
--------------
TOTAL COMMON STOCKS (Cost $1,535,437)............................. 1,982,688
--------------
PREFERRED STOCKS (3.1%)
GERMANY (3.1%)
762,600 RWE AG............................................ 25,523
344,400 Spar Handels AG................................... 4,208
125,000 Volkswagen AG..................................... 39,886
--------------
TOTAL PREFERRED STOCKS (Cost $43,364)............................. 69,617
--------------
CONVERTIBLE PREFERRED STOCKS (0.1%)
HONG KONG (0.1%)
1,863,000 Jardine Strategic Holdings, Inc., IDR, 7.50%,
5/07/97......................................... 2,245
--------------
NETHERLANDS (0.0%)
1,506 ABN Amro Holdings N.V............................. 6
2,196 ING Groep N.V..................................... 12
--------------
18
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $1,923).................. 2,263
--------------
TOTAL FOREIGN SECURITIES (90.5%) (Cost $1,580,724)................ 2,054,568
--------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- --------------
SHORT-TERM INVESTMENT (2.4%)
REPURCHASE AGREEMENT (2.4%)
$ 54,935 Chase Securities, Inc., 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $54,953,
collateralized by U.S. Treasury Bonds, 8.875%,
due 8/15/17, valued at $56,423 (Cost $54,935)... 54,935
----------
FOREIGN CURRENCY (6.8%)
AUD 1 Australian Dollar................................. 1
BEF 2 Belgian Franc..................................... --
GBP 31,424 British Pound..................................... 53,833
DEM 101,569 Deutsche Mark..................................... 66,007
FRF 3,010 French Franc...................................... 580
ITL 1,415 Italian Lira...................................... 1
JPY 3,889,747 Japanese Yen...................................... 33,587
SEK 13 Swedish Krona..................................... 2
----------
TOTAL FOREIGN CURRENCY (Cost $153,497)............................ 154,011
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
51
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ---------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%) (Cost $1,789,156).............. $2,263,514
----------
OTHER ASSETS (30.2%)
Securities at Value, Held as Collateral for
Securities Loaned........................ $ 660,048
Receivable for Portfolio Shares Sold....... 16,055
Dividends Receivable....................... 3,700
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 2,906
Foreign Withholding Tax Reclaim
Receivable............................... 888
Receivable for Security Lending............ 204
Interest Receivable........................ 9
Other...................................... 100 683,910
----------
LIABILITIES (-29.9%)
Collateral on Securities Loaned, at
Value.................................... (660,048)
Payable for Investments Purchased.......... (11,670)
Investment Advisory Fees Payable........... (4,300)
Payable for Portfolio Shares Redeemed...... (847)
Administrative Fees Payable................ (286)
Custodian Fees Payable..................... (188)
Directors' Fees and Expenses Payable....... (53)
Distribution Fees Payable.................. (3)
Dividends Payable.......................... (1)
Other Liabilities.......................... (211) (677,607)
---------- ----------
NET ASSETS (100%)........................................ $2,269,817
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................. $1,773,219
Overdistributed Net Investment Income........... (273)
Accumulated Net Realized Gain................... 19,738
Unrealized Appreciation on Investments and
Foreign Currency Translations................. 477,133
----------
NET ASSETS...................................... $2,269,817
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ------------------------------------------------
NET ASSETS...................................... $2,264,424
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 133,618,211 outstanding $0.001
par value shares (authorized 500,000,000
shares)....................................... $16.95
----------
----------
CLASS B:
- ------------------------------------------------
NET ASSETS...................................... $5,393
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 318,501 outstanding $0.001 par
value shares (authorized 500,000,000
shares)....................................... $16.93
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver or to receive foreign currency in
exchange for U.S. dollars or foreign currency 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>
- -------------- -------- ------------ ------------ -------- -----------
AUD 51,000 $ 40,506 1/10/97 U.S.$40,104 $ 40,104 $ (402)
U.S.$113,982 113,982 6/19/97 DEM165,000 108,455 (5,527)
DEM 165,000 108,455 6/19/97 U.S.$113,392 113,392 4,937
FRF 565,000 110,062 6/19/97 U.S.$112,920 112,920 2,858
FRF 300,000 58,440 6/19/97 U.S.$58,820 58,820 380
SEK 300,000 44,548 9/16/97 U.S.$45,188 45,188 640
ESP5,400,000 41,542 12/02/97 U.S.$41,562 41,562 20
-------- -------- -----------
$517,535 $520,441 $ 2,906
--------
-------- -------- -----------
-------- -----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- See note A-1 to financial
statements
CDI -- Certificate of Investment
ESP -- Spanish Peseta
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment...................... $ 377,399 16.6%
Consumer Goods......................... 586,030 25.8
Energy................................. 125,472 5.5
Finance................................ 315,260 13.9
Materials.............................. 308,943 13.6
Multi-Industry......................... 85,171 3.8
Services............................... 256,293 11.3
---------- ---
$2,054,568 90.5%
---------- ---
---------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
52
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL MAGNUM PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 2.5%
Austria 0.5%
Belgium 1.0%
Denmark 0.9%
Finland 1.2%
France 5.6%
Germany 4.9%
Hong Kong 5.9%
Italy 2.6%
Japan 31.4%
Malaysia 4.0%
Netherlands 4.1%
Norway 1.0%
Singapore 2.3%
Spain 3.7%
Sweden 2.0%
Switzerland 4.8%
United Kingdom 7.9%
Other 13.7%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INTERNATIONAL MAGNUM PORTFOLIO -- CLASS
MSCI EAFE INDEX (1) A
<S> <C> <C>
3/15/1996* $500,000 $500,000
12/31/1996 526,300 541,250
*Commencement of operations
**Minimum Investment -- Class A
<CAPTION>
INTERNATIONAL MAGNUM PORTFOLIO -- CLASS
B
<S> <C>
3/15/1996* $100,000
12/31/1996 107,900
*Commencement of operations
**Minimum Investment -- Class A
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The MSCI EAFE Index value at December 31, 1996
assumes a minimum initial investment of $500,000; if a minimum initial
investment of $100,000 is assumed the value at December 31, 1996 would be
$105,260.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
SINCE INCEPTION
------------------
<S> <C>
PORTFOLIO -- CLASS A(3)....................................................................................... 8.25%
PORTFOLIO -- CLASS B(3)....................................................................................... 7.90
INDEX......................................................................................................... 5.26
</TABLE>
1. The MSCI EAFE Index is an unmanaged Index of common stocks and includes
Europe, Australia and the Far East (assumes dividends are 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.
3. The Portfolio commenced operations on March 15, 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 International Magnum Portfolio seeks 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 December 31, 1996, the
Portfolio had a total return of 8.25% for the Class A shares and 7.90% for the
Class B shares, as compared to a total return of 5.26% for the MSCI EAFE Index.
The world's developed stock markets were somewhat mixed during 1996. While
several markets tested all-time highs, the Japanese market fell dramatically,
particularly at year-end.
Among the regions, Europe was the best performer in the EAFE universe for the
year with a return of 21.1%. The European markets benefited from falling
interest and inflation rates, depreciating currencies and continued corporate
restructuring, even as many European governments struggled to cut their budget
deficits and inflation rates in order to qualify for the new European Monetary
Union. Spain (+40.1% for the year) was the strongest performer among the
developed markets for the year, followed by Sweden (+37.2%) and Finland
(+33.9%).
Japan, the single largest EAFE market in terms of market capitalization, was the
worst performer in U.S. dollar terms among the developed markets for the year as
a whole (-15.5%). Much of Japan's weak performance in U.S. dollar terms was due
to the continued depreciation of the yen, which fell over 11% versus the U.S.
dollar. In addition, the Japanese market's losses were concentrated during the
second half of the year, erasing gains from early in the year. Investors were
disappointed by the slow rate of growth in the country and uncertain economic
prospects. In addition, proposed deregulation of the financial sector, announced
in November, contributed to a particularly poor performance by banking stocks (a
sector which the Portfolio has carefully avoided).
The Asian markets put in a strong performance during the year, as the MSCI
Pacific Free ex-Japan Index rose 20.9% in U.S. dollar terms. Hong Kong
- --------------------------------------------------------------------------------
International Magnum Portfolio
53
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
(+33.1%) put in a robust performance for the year as strong corporate earnings,
recovering property prices and easing fears surrounding the colony's takeover by
China in 1997 contributed to positive investor sentiment. Malaysia (+25.9%) was
the second strongest developed market within Asia for the year as strong
domestic liquidity and an improving economic environment fueled sharp rises
particularly in small and mid-cap stocks. In contrast, Singapore (+0.3% for the
year) was the weakest developed market in the Pacific rim, as the government's
real estate anti-speculation measures implemented during the summer prompted
investors to lose faith in the market, which includes a large number of
real-estate related stocks.
The U.S. dollar began 1996 extremely undervalued relative to the Japanese yen
and the Deutschemark block of currencies. In anticipation of dollar
strengthening, we implemented hedges to protect against losses due to the
depreciation of certain currencies in which we are invested. Through the first
half of 1996, we hedged approximately 75% of our yen exposure and 95% of our
Deutschemark block exposure. By December, our hedges had been reduced to 40% of
our yen exposure and 75% of our Deutschemark block exposure. Our hedging
strategies contributed favorably to results in 1996, and we plan to continue to
hedge these currencies for the foreseeable future.
During the year we maintained approximately a market weight exposure to Japan
and slowly reduced our overweight in Asia and our underweight in Europe. While
our allocation decision to market weight Japan detracted from results, our
hedges and excellent stock selection in Japan helped us to achieve significant
relative outperformance in that market. Our overweight in Asia and in particular
in Hong Kong was a net positive for the Portfolio, especially in the fourth
quarter of the year. Finally, we curtailed our cautious stance in Europe, which
benefited the Portfolio as many European markets rallied strongly during the
latter part of 1996, based on brighter prospects for growth and the long term
benefits of EMU.
Looking ahead, we anticipate that the first quarter of 1997 will be the most
difficult for the Japanese market, as we expect that the Japanese economy will
finally begin to show true signs of a recovery later this year. We believe that
Japanese stocks with strong earnings growth (e.g., international blue chips and
electronics) will significantly outperform the market, and have positioned our
Portfolio accordingly. Our outlook for Europe is positive but cautious;
valuations in many markets are at or near all-time highs, but momentum --
barring any unforeseen cracks in EMU -- continues to be positive. In Asia
ex-Japan, Hong Kong valuations are high but we expect earnings growth and
liquidity to provide support for the market. In Malaysia, the environment for
large cap stocks is improving, while the outlook for Singapore is less rosy.
Given our near-term concerns about the Japanese market, we have reduced our
allocation to a slight underweight versus the EAFE Index, with the money being
deployed to Europe, which will now represent slightly over half of the
Portfolio. We remain optimistic about opportunities in Asia ex-Japan and will
maintain our overweight there.
Francine J. Bovich
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
54
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (85.0%)
AUSTRALIA (2.5%)
41,900 Broken Hill Proprietary Co., Ltd.................. $ 596
33,800 Lend Lease Corp., Ltd............................. 655
52,500 National Australia Bank Ltd....................... 617
49,300 News Corp., Ltd................................... 260
96,300 WMC Ltd........................................... 607
----------
2,735
----------
AUSTRIA (0.5%)
8,000 Boehler-Uddeholm AG............................... 573
----------
BELGIUM (1.0%)
3,280 Arbed S.A......................................... 357
3,660 Delhaize Freres et Cie, 'Le Lion' S.A............. 218
11,900 G.I.B. Holdings Ltd............................... 533
----------
1,108
----------
DENMARK (0.9%)
6,000 BG Bank A/S....................................... 281
1,800 Jyske Bank A/S (Registered)....................... 135
10,430 Unidanmark A/S, Class A (Registered).............. 540
----------
956
----------
FINLAND (1.2%)
23,600 Amer-Yhtymae Oy, Class A.......................... 487
10,780 Huhtamaki Oy, Series 1............................ 502
(a)104,000 Merita Ltd., Class A.............................. 323
----------
1,312
----------
FRANCE (5.6%)
9,500 Banque Nationale de Paris......................... 368
1,100 Bongrain S.A...................................... 426
5,750 Cie de Saint Gobain............................... 814
5,200 Elf Aquitaine S.A................................. 473
4,300 Eridania Beghin-Say S.A........................... 692
4,000 Groupe Danone..................................... 558
8,400 Lafarge S.A....................................... 504
16,000 Legris Industries S.A............................. 674
2,320 PSA Peugeot Citroen S.A........................... 261
(a)4,700 SGS-Thompson Microelectronics N.V................. 332
6,170 Total S.A., Class B............................... 502
31,550 Usinor Sacilor.................................... 459
----------
6,063
----------
GERMANY (3.6%)
12,100 BASF AG........................................... 464
15,300 Bayer AG.......................................... 621
275 Buderus AG........................................ 137
9,350 Deutsche Telekom AG ADR........................... 190
22,700 Gerresheimer Glas AG.............................. 495
1,150 Karstadt AG....................................... 383
14,350 Lufthansa AG...................................... 194
550 Mannesmann AG..................................... 237
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
9,300 VEBA AG........................................... $ 535
1,600 Volkswagen AG..................................... 663
----------
3,919
----------
HONG KONG (5.9%)
113,000 Cheung Kong Holdings Ltd.......................... 1,005
472,000 China Resources Enterprise Ltd.................... 1,062
95,000 Citic Pacific Ltd................................. 552
23,400 Hang Seng Bank Ltd................................ 284
16,000 Henderson Land Development Co., Ltd............... 161
27,400 Hong Kong & Shanghai Bank Holdings plc............ 586
158,800 Hong Kong Telecommunications Ltd.................. 256
129,000 Hutchison Whampoa Ltd............................. 1,013
81,000 New World Development Co., Ltd.................... 547
37,000 Sun Hung Kai Properties Ltd....................... 453
32,000 Swire Pacific Ltd., Class A....................... 305
33,000 Wharf Holdings Ltd................................ 165
----------
6,389
----------
ITALY (2.6%)
(a)157,000 Editoriale L'Expresso S.p.A....................... 435
60,250 Marzotto (Gaetano) & Figli S.p.A.................. 389
(a)553,000 Olivetti S.p.A.................................... 195
65,900 Pirelli S.p.A..................................... 122
135,100 Sogefi S.p.A...................................... 300
186,000 Stet Di Risp (NCS)................................ 628
361,000 Telecom Italia S.p.A. Di Risp (NCS)............... 705
----------
2,774
----------
JAPAN (31.4%)
74,000 Amada Co., Ltd.................................... 575
55,000 Asahi Tec Corp.................................... 271
47,000 Canon, Inc........................................ 1,039
41,000 Dai Nippon Printing Co., Ltd...................... 719
34,000 Daibiru Corp...................................... 314
112,000 Daicel Chemical Industry Ltd...................... 525
56,000 Daifuku Co., Ltd.................................. 706
54,000 Daikin Industries Ltd............................. 480
59,000 Daiwa Securities Co., Ltd......................... 525
17,200 FamilyMart........................................ 688
28,000 Fuji Machine Manufacturing Co..................... 742
25,000 Fuji Photo Film Ltd............................... 825
17,000 Hitachi Credit Corp............................... 276
106,000 Hitachi Ltd....................................... 989
58,000 Inabata & Co...................................... 355
106,000 Kaneka Corp....................................... 543
28,000 Kurita Water Industries........................... 566
11,000 Kyocera Ltd....................................... 686
36,000 Kyudenko Co., Ltd................................. 373
30,000 Matsushita Communication Industries............... 777
61,000 Matsushita Electric Industries Ltd................ 996
176,000 Mitsubishi Chemical Corp.......................... 570
58,000 Mitsubishi Estate Co., Ltd........................ 596
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
55
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
120,000 Mitsubishi Heavy Industries Ltd................... $ 953
40,000 Mitsumi Electric Co., Ltd......................... 753
17,000 Murata Manufacturing Co., Ltd..................... 565
93,000 NEC Corp.......................................... 1,124
36,000 Nifco, Inc........................................ 376
12,000 Nintendo Corp., Ltd............................... 859
28,000 Nippon Pillar Packing............................. 186
115 NTT............................................... 872
95,000 Nissan Motor Co................................... 551
41,000 Nomura Securities Co., Ltd........................ 616
104,000 Obayashi Corp..................................... 702
21,000 Okura Industrial Co., Ltd......................... 106
74,000 Ricoh Co., Ltd.................................... 850
20,000 Rinnai Corp....................................... 402
12,000 Sangetsu Co., Ltd................................. 251
31,000 Sankyo Co., Ltd................................... 878
58,000 Sanwa Shutter..................................... 433
13,000 Secom Co., Ltd.................................... 787
58,000 Sekisui Chemical Co............................... 586
46,000 Sekisui House Ltd................................. 469
8,000 Shimamura Co., Ltd................................ 275
15,600 Sony Corp......................................... 1,022
6,700 Square Company Ltd................................ 338
61,000 Stanley Electric Co............................... 358
77,000 Sumitomo Marine & Fire Insurance Co............... 479
64,000 Suzuki Motor Co., Ltd............................. 586
134,000 Taisei Corp., Ltd................................. 694
15,000 TDK Corp.......................................... 978
28,000 Tokyo Electron Ltd................................ 858
145,000 Toshiba Corp...................................... 912
102,000 Tsubakimoto Chain................................. 546
28,000 Yamanouchi Pharmaceutical Co...................... 575
----------
34,076
----------
MALAYSIA (4.0%)
47,000 Commerce Asset Holding Bhd........................ 354
29,000 Edaran Otomobil Nasional Bhd...................... 290
65,000 Genting Bhd....................................... 448
69,000 IJM Corp. Bhd..................................... 163
23,000 IOI Corp. Bhd..................................... 35
11,000 Leader Universal Holdings Bhd..................... 23
11,000 Magnum Corp. Bhd.................................. 21
28,000 Malayan Banking Bhd............................... 310
95,000 Malaysian International Shipping Bhd (Foreign).... 282
86,000 Petronas Gas Bhd.................................. 358
89,000 Renong Bhd........................................ 158
62,000 Resorts World Bhd................................. 282
163,000 Sime Darby Bhd.................................... 642
58,000 Tanjong plc....................................... 232
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
55,000 Telekom Malaysia Bhd.............................. $ 490
27,000 United Engineers (Malaysia) Ltd................... 244
----------
4,332
----------
NETHERLANDS (4.1%)
11,393 ABN Amro Holdings N.V............................. 741
4,820 Akzo Nobel N.V.................................... 658
2,000 DSM N.V........................................... 197
2,072 Hollandsche Beton Groep N.V....................... 429
17,350 ING Groep N.V..................................... 625
19,417 KLM Royal Dutch Airlines N.V...................... 546
9,800 Koninklijke Van Ommeren N.V....................... 443
21,000 Philips Electronics N.V........................... 851
----------
4,490
----------
NORWAY (1.0%)
136,800 Den Norske Bank ASA............................... 524
13,600 Saga Petroleum A/S, Class B....................... 214
(a)62,000 Storebrand ASA.................................... 360
----------
1,098
----------
SINGAPORE (2.3%)
18,000 Development Bank of Singapore Ltd. (Foreign)...... 243
29,000 Keppel Corp., Ltd................................. 226
21,700 Oversea-Chinese Banking Corp. (Foreign)........... 270
55,000 Sembawang Corp.................................... 291
24,000 Singapore Press Holdings (Foreign)................ 473
57,000 Straits Steamship Land Ltd........................ 182
28,000 United Overseas Bank Ltd. (Foreign)............... 312
(a)104,000 Want Want Holdings................................ 274
70,000 Wing Tai Holdings Ltd............................. 200
----------
2,471
----------
SPAIN (3.7%)
4,000 Banco Bilbao Vizcaya S.A. (Registered)............ 216
(a)57,000 Grupo Duro Felguera S.A........................... 582
58,400 Iberdrola S.A..................................... 828
18,200 Repsol S.A........................................ 698
16,146 Sevillana de Electricidad S.A..................... 183
37,200 Telefonica de Espana S.A.......................... 864
76,000 Uralita S.A....................................... 594
----------
3,965
----------
SWEDEN (2.0%)
4,100 Electrolux AB, Series B........................... 238
17,390 Nordbanken AB..................................... 527
13,500 Skandia Forsakrings AB............................ 382
21,670 S.K.F. AB, Class B................................ 514
15,400 Sparbanken Sverige AB, Class A.................... 264
7,000 Svenska Handelsbanken, Class A.................... 201
----------
2,126
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
56
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
SWITZERLAND (4.8%)
490 Ascom Holdings AG (Bearer)........................ $ 499
350 Bobst AG (Bearer)................................. 473
1,400 Forbo Holding AG (Registered)..................... 565
900 Holderbank Financiere Glaris AG (Bearer).......... 643
380 Magazine Globus (Participating Certificates)...... 175
155 Magazine Globus (Registered)...................... 81
590 Nestle S.A. (Registered).......................... 633
(a)458 Novartis AG (Registered).......................... 525
(a)4,790 Oerlikon-Buehrle Holding AG (Registered).......... 472
150 Schindler Holding AG (Participating
Certificates)................................... 163
420 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 510
890 Sulzer AG (Registered)............................ 514
----------
5,253
----------
UNITED KINGDOM (7.9%)
61,700 Associated British Foods plc...................... 512
31,100 Bass plc.......................................... 437
93,623 BAT Industries plc................................ 776
85,000 British Telecommunications plc.................... 574
83,000 Calor Group plc................................... 422
140,900 Christian Salvesen plc............................ 693
122,700 Courtaulds Textiles plc........................... 467
31,600 Grand Metropolitan plc............................ 248
68,700 Imperial Tobacco Group plc........................ 444
101,239 John Mowlem & Co. plc............................. 197
48,700 Kwik Save Group plc............................... 268
65,673 Reckitt & Colman plc.............................. 813
83,863 Royal & Sun Alliance Insurance Group plc.......... 640
24,350 Southern Electric plc............................. 332
134,791 Tate & Lyle plc................................... 1,095
28,500 Unilever plc...................................... 692
----------
8,610
----------
TOTAL COMMON STOCKS (Cost $89,642)............................ 92,250
----------
PREFERRED STOCKS (1.3%)
GERMANY (1.3%)
2,006 Dyckerhoff AG..................................... 554
7,400 Hornbach Holding AG............................... 529
10,600 RWE AG............................................ 355
----------
TOTAL PREFERRED STOCKS (Cost $1,261).......................... 1,438
----------
TOTAL FOREIGN SECURITIES (86.3%) (Cost $90,903)............... 93,688
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (11.7%)
REPURCHASE AGREEMENT (11.7%)
$ 12,642 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $12,646,
collateralized by U.S Treasury Notes, 6.625%,
due 7/31/01, valued at $12,987 (Cost $12,642)... $ 12,642
----------
FOREIGN CURRENCY (1.4%)
GBP 2 British Pound..................................... 3
DEM 1,601 Deutsche Mark..................................... 1,041
FIM 628 Finnish Markka.................................... 137
HKD 57 Hong Kong Dollar.................................. 7
JPY 8,934 Japanese Yen...................................... 77
MYR 306 Malaysian Ringgit................................. 121
ESP 68 Spanish Peseta.................................... 1
CHF 142 Swiss Franc....................................... 106
----------
TOTAL FOREIGN CURRENCY (Cost $1,481).......................... 1,493
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.4%) (Cost $105,026)................ 107,823
--------
OTHER ASSETS (1.0%)
Cash....................................... $ 1
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 847
Dividends Receivable....................... 150
Receivable for Portfolio Shares Sold....... 96
Foreign Withholding Tax Reclaim
Receivable............................... 29
Interest Receivable........................ 2
Other...................................... 20 1,145
----------
LIABILITIES (-0.4%)
Payable for Investments Purchased.......... (274)
Investment Advisory Fees Payable........... (111)
Custodian Fees Payable..................... (22)
Administrative Fees Payable................ (13)
Distribution Fees Payable.................. (9)
Payable for Portfolio Shares Redeemed...... (6)
Directors' Fees and Expenses Payable....... (1)
Other Liabilities.......................... (43) (479)
---------- --------
NET ASSETS (100%)........................................ $108,489
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $104,659
Overdistributed Net Investment Income............. (213)
Accumulated Net Realized Gain..................... 400
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 3,643
--------
NET ASSETS........................................ $108,489
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
57
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $85,316
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 8,004,070 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.66
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $23,173
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 2,180,447 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.63
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------- -------- ---------- ------------- -------- -----------
U.S.$ 46 $ 46 1/02/97 GBP 27 $ 47 $ 1
U.S.$ 24 24 1/03/97 GBP 14 24 --
BEF 11,209 354 1/24/97 U.S.$ 357 357 3
BEF 6,065 192 1/24/97 U.S.$ 195 195 3
BEF 8,607 272 1/24/97 U.S.$ 280 280 8
DEM 3,135 2,041 1/24/97 U.S.$ 2,060 2,060 19
DEM 2,088 1,359 1/24/97 U.S.$ 1,400 1,400 41
DEM 619 403 1/24/97 U.S.$ 400 400 (3)
JPY225,779 1,958 1/30/97 U.S.$ 2,050 2,050 92
JPY580,650 5,035 1/30/97 U.S.$ 5,250 5,250 215
NLG 914 530 2/10/97 U.S.$ 537 537 7
NLG 2,915 1,692 2/10/97 U.S.$ 1,713 1,713 21
NLG 1,504 873 2/10/97 U.S.$ 900 900 27
NLG 287 166 2/10/97 U.S.$ 165 165 (1)
CHF 2,423 1,818 2/10/97 U.S.$ 1,956 1,956 138
CHF 796 597 2/10/97 U.S.$ 643 643 46
CHF 1,383 1,038 2/10/97 U.S.$ 1,100 1,100 62
CHF 528 396 2/10/97 U.S.$ 397 397 1
FRF 14,616 2,827 2/24/97 U.S.$ 2,900 2,900 73
FRF 8,527 1,649 2/24/97 U.S.$ 1,632 1,632 (17)
JPY765,036 6,677 3/17/97 U.S.$ 6,788 6,788 111
-------- -------- -----
$ 29,947 $ 30,794 $847
-------- -------- -----
-------- -------- -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
BEF -- Belgian Franc
FRF -- French Franc
NCS -- Non Convertible Shares
NLG -- Netherlands Guilder
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment...................... $ 28,927 26.6%
Consumer Goods......................... 18,608 17.1
Energy................................. 5,022 4.6
Finance................................ 16,810 15.5
Materials.............................. 9,861 9.1
Multi-Industry......................... 1,577 1.5
Services............................... 12,883 11.9
-------- ---
$ 93,688 86.3%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
58
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 9.4%
Denmark 1.4%
Finland 5.8%
France 6.2%
Germany 9.2%
Hong Kong 2.8%
Ireland 3.1%
Italy 3.4%
Japan 10.3%
Netherlands 7.8%
New Zealand 1.1%
Norway 2.2%
Spain 4.2%
Sweden 1.6%
Switzerland 8.4%
United Kingdom 17.4%
Other 5.7%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MSCI EAFE INDEX (1) INTERNATIONAL SMALL CAP
<S> <C> <C>
12/15/92* $500,000 495,000
12/31/92 498,985 504,500
12/31/93 661,450 733,240
12/31/94 712,900 756,343
12/31/95 792,816 776,008
12/31/96 840,781 906,533
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO.......................................................................................... 16.82% 16.42%
INDEX.............................................................................................. 6.05 13.70
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australia and the Far East (assumes dividends are 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 COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
EAFE INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED
AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS
NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN
RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
The International Small Cap Portfolio seeks long-term capital appreciation by
investing primarily in the equity securities of non-U.S. issuers. The Portfolio
applies a disciplined bottom-up value approach to identify and invest in small
capitalization companies which are both attractive businesses and available at
cheap prices. A market capitalization cut-off of U.S. $1 billion is used as our
definition of "small."
For year ended December 31, 1996, the Portfolio had a total return of 16.82% as
compared to a total return of 6.05% for the Morgan Stanley Capital International
(MSCI) EAFE Index. The average annual total return for the period from inception
on December 15, 1992 through December 31, 1996 was 16.42% as compared to 13.70%
for the Index.
The Portfolio's outperformance primarily reflected its underweighting of the
very weak Japanese market and Yen, and overweighting in the Dutch, Spanish and
Finnish markets which enjoyed strong outperformance. Stock selection contributed
positively with Australia, the Netherlands, the U.K. and Finland being notably
strong. Although the Portfolio outperformed in all but the third quarter, small
caps enjoyed a far better relative performance in the first half of the year.
The market volatility of the second half, driven by concern over the likely
impact of a rise in U.S. interest rates, created a two tier market with large
cap \ index stocks rising strongly while the remaining names and particularly
small caps lagged. This was most notable in Japan where the blue chip export
stocks outperformed significantly on the back of Yen weakness, while small caps
saw marked underperformance. Thus while the Portfolio's Japanese stock selection
contributed positively for the year as a whole, this hides significant
underperformance in the final quarter.
Clearly the key feature of the year was the significant weakness of the Japanese
market and currency, particularly in the final quarter. There was no single
catalyst for this decline. The interim results in October were generally
disappointing showing reasonable volume growth but clear signs of poor pricing
and margin erosion, while the Government's clear desire to reduce Japan's budget
deficit highlighted a reduction in special budget expenditure aimed at boosting
the economy. In addition, there was increasing concern that the hike in the
consumption tax next April will constrain demand and that
- --------------------------------------------------------------------------------
International Small Cap Portfolio
59
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
deregulation of the non-life insurance industry will force the non-life
companies to sell Japanese equities to boost their performance.
In contrast, the rest of the international markets, with the exception of
Singapore, enjoyed positive returns, driven by expectations of an improving
economic environment with weak inflationary pressures keeping interest rates
low. "Financial exuberance" as Mr. Greenspan recently commented, however,
appears to have been the more recent influence as large cap equity valuations
appear to already discount the relatively modest recovery that we are expecting.
Portfolio activity during the year was relatively high as we took advantage of
significant outperformance in the first half to take profits in many of the
Portfolio's cyclicals. More recently we have been taking profits in a number of
the Portfolio's U.K., French, Dutch and Finnish holdings. The proceeds have been
invested in building new positions in the Spanish IPO Miquel y Costas, Scandic
Hotels in Sweden and Devro in the U.K.
Miquel y Costas has a strong market position in cigarette paper which is high
value added due to its substantial technical content and has an impressive
management team. Brought to the market on very modest multiples of earnings and
cash flow, the stock has already performed strongly.
Scandic Hotels, also an IPO, is the largest hotel chain in Scandinavia with an
excellent reputation for value for money. Free cash flow is strong and with a
shareholder-oriented management team applying strict financial criteria
throughout the chain, its growth outlook is attractive. Bought on 5.5 times cash
flow, we believe the shares are undervalued.
Devro is the world leading manufacturer of food casings with dominant market
positions in this highly technological and thus high margin business. Its recent
acquisition of Teepak in the U.S., an excellent strategic fit, will drive growth
as Devro's management extracts margin improvement. Selling on 9x cash flow the
stock is undervalued given the strength and durability of its franchise and
impressive management.
Looking forward we do not anticipate any major change in the Portfolio's
geographic mix. In Japan, deregulation will continue and thus we remain cautious
on the outlook for many Japanese smaller companies given their all too frequent
domestic blinkers and inability to compete effectively in an increasingly
deregulated, competitive market. We will continue to look for opportunities to
invest in companies that have quality franchises that are either beneficiaries
of the deregulation or at least competitively positioned to prosper in the years
ahead.
Elsewhere, despite our cautious view on the economic environment and valuations
of the major equity markets, we continue to find very attractive value in the
small cap sector especially in Australia, Scandinavia and the U.K.
Margaret Naylor
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
60
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS (88.9%)
AUSTRALIA (9.4%)
125,371 Arnotts Ltd....................................... $ 842
454,740 Auspine Ltd....................................... 1,156
(a)990,079 Bains Harding Ltd................................. 252
549,582 BRL Hardy Ltd..................................... 1,345
856,800 Burswood Property Trust........................... 1,096
2,407,066 Country Road Ltd.................................. 3,403
4,422,291 E.R.G. Ltd........................................ 5,621
459,750 Morgan & Banks Ltd................................ 2,264
6,210,380 Parbury Ltd....................................... 3,650
1,721,500 Solution 6 Holdings Ltd........................... 1,326
(a)699,748 W.D. & H.O. Wills Holdings Ltd.................... 1,162
----------
22,117
----------
DENMARK (1.4%)
6,750 Jyske Bank A/S (Registered)....................... 508
74,110 SYD-Sonderjylland Holdings........................ 2,881
----------
3,389
----------
FINLAND (5.8%)
38,675 Aamulehti Yhtymae Oy, Series II................... 1,177
125,000 Amer-Yhtymae Oy, Class A.......................... 2,582
(a)93,600 KCI Konecranes International...................... 2,951
42,670 Kone Oy, Class B.................................. 4,712
314,100 Oy Tamro AB....................................... 2,096
----------
13,518
----------
FRANCE (6.2%)
40,876 Dauphin O.T.A..................................... 2,537
74,415 De Dietrich et Compagnie S.A...................... 2,805
58,005 Europeene d'Extincteurs........................... 3,601
92,400 Legris Industries S.A............................. 3,892
91,756 Sediver S.A....................................... 1,725
----------
14,560
----------
GERMANY (4.0%)
75,150 Duerr AG.......................................... 2,418
52,600 Gerresheimer Glas AG.............................. 1,147
9,610 Marseille-Kliniken AG............................. 209
10,688 Sinn AG........................................... 2,035
(a)20,000 Varta AG.......................................... 3,574
----------
9,383
----------
HONG KONG (2.8%)
1,752,000 Chen Hsong Holdings............................... 1,065
1,097,000 Jardine International Motor Holdings Ltd.......... 1,468
5,200,000 Pico Far East Holdings Ltd........................ 1,513
5,808,000 Vitasoy International Holdings Ltd................ 2,534
----------
6,580
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
IRELAND (3.1%)
238,722 Anglo Irish Bank Corp. plc........................ $ 285
1,070,000 Avonmore Foods plc, Class A....................... 3,154
955,274 Green Property plc................................ 3,884
----------
7,323
----------
ITALY (3.2%)
(a)1,172,800 Editoriale L'Expresso S.p.A....................... 3,247
580,000 Sogefi S.p.A...................................... 1,288
787,000 Unicem Di Risp (NCS).............................. 2,023
81,000 Vincenzo Zucchi S.p.A............................. 336
212,500 Vincenzo Zucchi S.p.A. (NCS)...................... 513
----------
7,407
----------
JAPAN (10.3%)
15,000 Exedy Corp........................................ 186
231,000 Foster Electric Co., Ltd.......................... 931
377,000 Hankyu Realty..................................... 2,767
742,000 Japan Oil Transportation.......................... 2,915
213,000 Japan Vilene Co., Ltd............................. 931
134,000 Kansei Corp....................................... 1,045
350,000 Kirin Beverage Corp............................... 4,715
136,000 Nifco, Inc........................................ 1,421
425,000 Nissan Fire & Insurance Co........................ 2,349
45,000 Sangetsu Co., Ltd................................. 940
549,000 Toc Co............................................ 4,883
170,000 Toyoda Gosei Co................................... 1,179
----------
24,262
----------
NETHERLANDS (7.8%)
64,530 Ahrend Groep N.V.................................. 3,597
73,900 Apothekers Cooperatie OPG......................... 2,126
24,140 Atag Holding N.V.................................. 1,308
27,916 Hollandsche Beton Groep N.V....................... 5,783
28,885 Industriemij Welna N.V............................ 806
82,000 Koninklijke Van Ommeren N.V....................... 3,702
8,802 Polynorm N.V...................................... 708
4,122 Samas Groep N.V................................... 177
----------
18,207
----------
NEW ZEALAND (1.1%)
687,853 Fisher & Paykel Industries Ltd.................... 2,699
----------
NORWAY (2.2%)
73,850 Adelsten ASA, Class B............................. 1,646
103,000 Kverneland ASA.................................... 2,846
(a)228,020 Oceanor........................................... 626
----------
5,118
----------
SPAIN (4.2%)
80,000 Bodegas y Bebidas S.A............................. 2,098
92,775 Empresa Nacional Hidroelectrica del Ribagorzana
S.A., Class B................................... 2,301
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
61
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SPAIN (CONT.)
<TABLE>
<C> <S> <C>
61,500 Gas y Electricidad S.A............................ $ 3,932
(a)48,550 Miquel y Costas & Miquel, S.A..................... 1,601
----------
9,932
----------
SWEDEN (1.6%)
106,000 Marieberg Tidnings AB............................. 2,597
(a)71,100 Scandic Hotels AB................................. 1,132
----------
3,729
----------
SWITZERLAND (8.4%)
2,600 Bobst AG (Bearer)................................. 3,516
4,914 Bucher Holdings AG (Bearer)....................... 3,378
9,800 Edipresse S.A. (Bearer)........................... 1,918
500 Kouni Reisen Holdings, Class B (Registered)....... 1,214
2,750 LEM Holdings AG................................... 557
6,050 Magazine Globus (Participating Certificates)...... 2,793
4,450 Porst Holding AG (Bearer)......................... 598
6,800 Publicitas Holding S.A. (Registered).............. 1,168
2,415 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 2,932
(a)2,550 Zellweger Luwa AG (Bearer)........................ 1,734
----------
19,808
----------
UNITED KINGDOM (17.4%)
4,101,478 Anglo Irish Bank Corp. plc (British Pound
Shares)......................................... 4,989
47,700 Blagden Industries plc............................ 179
1,136,300 Bluebird Toys plc................................. 3,825
1,325,800 BSM Group plc..................................... 4,122
776,300 Corporate Services Group plc...................... 2,307
498,700 Devro plc......................................... 2,298
(a,d)2,540,850 Donelon Tyson plc................................. --
63,500 Eurocamp plc...................................... 197
1,238,700 GEI International plc............................. 2,472
378,650 Industrial Control Services Group plc............. 766
389,489 International Business Communications (Holdings)
plc............................................. 2,005
1,584,212 John Mowlem & Co. plc............................. 3,080
(a)33,795,100 Kendell plc....................................... 289
206,335 Mallett plc....................................... 269
2,682,000 Matthews (Bernard) plc............................ 5,766
569,400 Oriflame International S.A........................ 5,219
(a,d)2,659,393 Pentos plc........................................ --
23,774 Perry Group plc................................... 78
667,000 Ricardo Group plc................................. 1,280
(a)1,895,000 Tandem Group plc.................................. 227
251,400 The 600 Group plc................................. 975
541,700 Waterman Partnership Holdings plc................. 385
----------
40,728
----------
TOTAL COMMON STOCKS (Cost $194,891)................................ 208,760
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
PREFERRED STOCKS (5.2%)
GERMANY (5.2%)
21,275 Berentzen-Gruppe AG............................... $ 781
10,616 Dyckerhoff AG..................................... 2,932
32,400 Hornbach Holding AG............................... 2,316
4,860 STO AG-Vorzug..................................... 2,290
117,190 Spar Handels AG................................... 1,432
14,990 Wuerttembergische Metallwarenfabrik AG............ 2,523
----------
TOTAL PREFERRED STOCKS (Cost $11,601).............................. 12,274
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ---------------
WARRANTS (0.0%)
SWITZERLAND (0.0%)
(a)4,600 Zellweger Luwa AG, expiring 5/21/97, (Cost $0).... 3
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------
CONVERTIBLE DEBENTURE (0.2%)
ITALY (0.2%)
ITL 518,000 Mediobanca S.p.A 5.50%, 1/01/00, (Cost $328)...... 345
----------
TOTAL FOREIGN SECURITIES (94.3%) (Cost $206,820)................... 221,382
----------
SHORT-TERM INVESTMENT (2.3%)
REPURCHASE AGREEMENT (2.3%)
$ 5,405 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $5,407,
collateralized by U.S. Treasury Bonds, 8.125%,
due 8/15/19, valued at $5,548, (Cost $5,405).... 5,405
----------
FOREIGN CURRENCY (3.9%)
GBP 797 British Pound..................................... 1,365
DEM 11,117 Deutsche Mark..................................... 7,225
FIM 641 Finnish Markka.................................... 139
FRF 10 French Franc...................................... 2
IEP 66 Irish Punt........................................ 112
JPY 9,118 Japanese Yen...................................... 79
ESP 8 Spanish Peseta.................................... --
CHF 205 Swiss Franc....................................... 153
----------
TOTAL FOREIGN CURRENCY (Cost $9,021)............................... 9,075
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
62
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -------------------------------------------------------------------
TOTAL INVESTMENTS (100.5%) (Cost $221,246)............... $235,862
--------
OTHER ASSETS (0.4%)
Cash....................................... $ 27
Receivable for Investments Sold............ 290
Dividends Receivable....................... 260
Foreign Withholding Tax Reclaim
Receivable............................... 181
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 81
Receivable for Portfolio Shares Sold....... 73
Interest Receivable........................ 17
Other...................................... 11 940
----------
LIABILITIES (-0.9%)
Payable for Investments Purchased.......... (1,202)
Investment Advisory Fees Payable........... (500)
Payable for Portfolio Shares Redeemed...... (247)
Custodian Fees Payable..................... (32)
Administrative Fees Payable................ (31)
Directors' Fees and Expenses Payable....... (6)
Other Liabilities.......................... (41) (2,059)
---------- --------
NET ASSETS (100%)........................................ $234,743
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $216,796
Undistributed Net Investment Income............... 323
Accumulated Net Realized Gain..................... 2,935
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 14,689
--------
NET ASSETS........................................ $234,743
--------
--------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 13,951,037 outstanding $0.001 par
value shares (authorized 1,000,000,000
shares)......................................... $ 16.83
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars or foreign currency 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>
- ----------- -------- ----------- ------------ -------- ------------
DEM 308 $ 200 1/03/97 CHF 268 $ 200 $ --
AUD 8,600 6,831 1/13/97 U.S. $ 6,792 6,792 (39)
FRF 55,000 10,776 9/12/97 U.S.$ 10,896 10,896 120
-------- -------- -----
$ 17,807 $ 17,888 $ 81
--------
-------- -------- -----
-------- -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- See Note A-1 to financial statements.
AUD -- Australian Dollar
NCS -- Non Convertible Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment...................... $ 50,292 21.4%
Consumer Goods......................... 58,016 24.7
Energy................................. 6,233 2.7
Finance................................ 26,956 11.4
Materials.............................. 24,597 10.5
Multi-Industry......................... 8,874 3.8
Services............................... 46,414 19.8
--------- ---
$ 221,382 94.3%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
63
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Appliances & Household Durables 5.2%
Automobiles 4.0%
Business & Public Services 3.9%
Chemicals 7.9%
Construction & Housing 7.6%
Data Processing & Reproduction 1.7%
Electrical & Electronics 10.3%
Electrical Components & Instruments 7.7%
Financial Services 4.3%
Healh & Personal Care 3.9%
Industrial Components 2.1%
Insurance 1.9%
Machinery & Engineering 15.8%
Merchandising 6.0%
Metals Non-Ferrous 1.6%
Real Estate 2.5%
Recreation, Other Consumer Goods 4.1%
Telecommunications 1.9%
Textiles & Apparel 1.4%
Transportation - Road & Rail 0.1%
Other 6.1%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
JAPANESE EQUITY PORTFOLIO-CLASS
A MSCI JAPAN INDEX (1)
<S> <C> <C>
4/25/94* $500,000 $500,000
12/31/94 $491,500 $512,000
12/31/95 $473,609 $515,533
12/31/96 $466,979 $435,625
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) JAPAN INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------- ----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... -1.40% -2.51%
PORTFOLIO -- CLASS B(3)............................................................................ -1.67 N/A
INDEX.............................................................................................. -15.50 -5.00
</TABLE>
1. The MSCI Japan Index is an unmanaged index of common stocks (assumes
dividends are reinvested).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser.Without such waiver and reimbursement, total
returns would be lower.
3. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE 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 investment objective of the Japanese Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities of Japanese
issuers. Equity securities are defined as common and preferred stocks, debt
securities convertible into common stock and common stock purchase warrants.
For year ended December 31, 1996, the Portfolio had a total return of -1.40% for
the Class A shares and -1.67% for the Class B shares as compared to a total
return of -15.50% for the Morgan Stanley Capital International (MSCI) Japan
Index. The average annual total return for the period from inception on April
25, 1994 through December 31, 1996 was -2.51% for the Class A shares as compared
to -5.00% for the Index.
During 1996 the Japanese equity market was characterized with a steady first
half advance and second a sharp decline for the second half of the year,
resulting in net loss of 7% for the year in local currency terms.
The main reason for the first half's advance was a more favorable macro
environment stemming from the weakness in the yen. This also resulted in a
widening interest rate differential between the U.S. and Japan, with support for
the dollar in the Paris and Wasington G-7 summit meetings. This weakness in the
yen has contributed to the economic recovery together with positive fiscal
policy and easy momentary policy. GDP for the first quarter 1996 announced in
June showed the economy growing on a 12.7% annualized basis. (This number was
revised down to 8.4% after the initial announcement.) Meanwhile, corporate
profits for 1,050 Tokyo Stock Exchange listed companies (ex-financial) for the
year ended March 1996 almost doubled, further improving investor confidence. The
easy monetary policy did not change despite these factors as well as some
implicative comments of a potential interest rate hike by Mr. Matsushita,
Governor of the Bank of Japan (BOJ), and Mr. Kubo, Financial Minister.
Preliminary resolution of the "Jyusen" problem caused by non-performing assets
was an additional positive development during the first half. Both foreign
investors and domestic pension funds encouraged by these factors increased their
allocation to equities, and the market recovered to the highest level in the
last four years by June.
However, from July 1996 investors began to doubt the sustainability of the
recovery and began to assume
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
64
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO (CONT.)
that positive macro related factors, in particular the weak yen, were already
discounted in the market. While the yen continued a modest decline and interest
rates remained low during the second half, investors became increasingly
concerned that a weak yen was not enough for a sustained recovery and that more
concrete and meaningful structural changes would be necessary. Further
disappointment for the economic outlook emerged as the Government announced an
increase in the consumption tax from 3% to 5% for April 1997 and that they will
terminate the special personal income tax cut at the same time. Therefore, as
investors began looking towards 1997 the improving micro earnings driven market
seemed stalled. The announcement of Japanese "Big-Bang" by the Hashimoto Cabinet
released in October was regarded as lacking in substance and selling of Japanese
equities continued to accelerate towards year-end 1996 with investors becoming
both negative on the economy and on Japan as a whole. Moreover, a robust U.S.
market and global bond rally shifted attention from Japan.
Meanwhile, on a micro basis international blue chips and globally competitive
Japanese companies, through modest corporate restructuring and the weaker yen
continued to improve their earnings momentum. A distinct two-tier market emerged
under such weak market conditions and our stock selection worked positively for
the Portfolio's performance.
We believe that the Japanese market will be weakest during the first quarter
1997. The disappointment due to the increase in consumption tax from 3% to 5%
and the termination of income tax cuts in April 1997 will adversely affect the
economy, severely dampening investor sentiment. However, we also believe that
the market has already begun to discount such negative factors and by year-end
1997 the economy will begin to show signs of growth. Already, private capital
expenditure is improving and disposable income is increasing thanks to the
brighter corporate earnings condition. Structural reforms, such as Japan's "Big
Bang" will become a positive factor for the market as well as overall economy,
in our view, over the medium to the longer term. Furthermore, we believe the
authorities have realized the urgency of concrete action to be taken to root-out
Japanese non-performing loans.
It is critical for the BOJ to keep interest rates low and that the BOJ's policy
remain unchanged during most of 1997. This historically "abnormally" low
interest rate environment, primarily created to help Japanese banks, will most
likely return closer to the "mean" during the later part of 1997 after the BOJ
confirms that economic conditions are steadily on track. We also believe that
corporate earnings (ex-financials), through rationalization of businesses and
improving margins from a weakening yen will show improvement through 1997,
particularly international blue chips in which our portfolio is overweight. This
sector of the market will likely make a further extension of positive earnings
differential from other industries. Sectors such as multimedia, broadcasting and
communications should do well. However, as the market also increasingly becomes
"two-tier", companies with earnings momentum and good stock selection will be
paramount to good investment results in 1997. Thus, the "alarm-bell" rung
earlier in the year for Japan to continue to change and reform to meet the 21st
century will be an important wake-up call for the authorities to heed, which we
believe the Hashimoto Government will implement.
We believe that our Portfolio is well positioned with our current holdings to
meet the earnings driven environment of 1997.
Dominic Caldecott
PORTFOLIO MANAGER
Kunihiko Sugio
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
65
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (93.9%)
APPLIANCES & HOUSEHOLD DURABLES (5.2%)
167,000 Matsushita Electric Industries Ltd................ $ 2,725
117,400 Rinnai Corp....................................... 2,362
47,000 Sony Corp......................................... 3,080
----------
8,167
----------
AUTOMOBILES (4.0%)
473,000 Nissan Motor Co................................... 2,744
377,000 Suzuki Motor Co., Ltd............................. 3,451
----------
6,195
----------
BUSINESS & PUBLIC SERVICES (3.9%)
163,000 Dai Nippon Printing Co., Ltd...................... 2,857
18,000 Nishio Rent All Co................................ 314
48,000 Secom Co., Ltd.................................... 2,906
----------
6,077
----------
CHEMICALS (7.9%)
491,000 Daicel Chemical Industry Ltd...................... 2,302
600,000 Kaneka Corp....................................... 3,072
833,000 Mitsubishi Chemical Corp.......................... 2,697
195,000 Okura Industrial Co., Ltd......................... 985
322,000 Sekisui Chemical Co............................... 3,253
----------
12,309
----------
CONSTRUCTION & HOUSING (7.6%)
206,000 Kyudenko Co., Ltd................................. 2,135
522,000 Obayashi Corp..................................... 3,525
270,000 Sekisui House Ltd................................. 2,751
660,000 Taisei Corp., Ltd................................. 3,419
----------
11,830
----------
DATA PROCESSING & REPRODUCTION (1.7%)
119,000 Canon, Inc........................................ 2,631
----------
ELECTRICAL & ELECTRONICS (10.3%)
307,000 Hitachi Ltd....................................... 2,863
108,000 Matsushita Communication Industries............... 2,798
135,000 Mitsumi Electric Co., Ltd......................... 2,541
240,000 NEC Corp.......................................... 2,901
261,000 Stanley Electric Co............................... 1,533
528,000 Toshiba Corp...................................... 3,319
----------
15,955
----------
ELECTRONIC COMPONENTS & INSTRUMENTS (7.7%)
49,000 Kyocera Ltd....................................... 3,055
80,000 Murata Manufacturing Co., Ltd..................... 2,660
50,000 TDK Corp.......................................... 3,260
97,000 Tokyo Electron Ltd................................ 2,973
----------
11,948
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FINANCIAL SERVICES (4.3%)
256,000 Daiwa Securities Co., Ltd......................... $ 2,277
107,000 Hitachi Credit Corp............................... 1,737
177,000 Nomura Securities Co., Ltd........................ 2,659
----------
6,673
----------
HEALTH & PERSONAL CARE (3.9%)
109,000 Sankyo Co., Ltd................................... 3,087
144,000 Yamanouchi Pharmaceutical Co...................... 2,959
----------
6,046
----------
INDUSTRIAL COMPONENTS (2.1%)
179,000 Nifco, Inc........................................ 1,870
212,000 Nippon Pillar Packing............................. 1,410
----------
3,280
----------
INSURANCE (1.9%)
476,000 Sumitomo Marine & Fire Insurance Co............... 2,959
----------
MACHINERY & ENGINEERING (15.8%)
485,000 Amada Co., Ltd.................................... 3,769
270,000 Daifuku Co., Ltd.................................. 3,404
290,000 Daikin Industries Ltd............................. 2,579
122,000 Fuji Machine Manufacturing Co..................... 3,234
149,000 Kurita Water Industries........................... 3,011
398,000 Mitsubishi Heavy Industries Ltd................... 3,162
220,000 Ricoh Co., Ltd.................................... 2,526
537,000 Tsubakimoto Chain................................. 2,875
----------
24,560
----------
MERCHANDISING (6.0%)
350,000 Asahi Tec Corp.................................... 1,723
96,200 FamilyMart........................................ 3,846
323,000 Inabata & Co...................................... 1,977
86,000 Sangetsu Co., Ltd................................. 1,797
----------
9,343
----------
METALS-NON-FERROUS (1.6%)
339,000 Sanwa Shutter..................................... 2,532
----------
REAL ESTATE (2.5%)
150,000 Daibiru Corp...................................... 1,386
247,000 Mitsubishi Estate Co., Ltd........................ 2,538
----------
3,924
----------
RECREATION, OTHER CONSUMER GOODS (4.1%)
87,000 Fuji Photo Film Ltd............................... 2,870
39,000 Nintendo Corp., Ltd............................... 2,792
14,200 Square Company Ltd................................ 717
----------
6,379
----------
TELECOMMUNICATIONS (1.9%)
395 Nippon Telegraph & Telephone Corp................. 2,995
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
66
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
TEXTILES & APPAREL (1.4%)
72,000 Japan Vilene Co., Ltd............................. $ 315
55,000 Shimamura Co., Ltd................................ 1,890
----------
2,205
----------
TRANSPORTATION-ROAD & RAIL (0.1%)
16,000 Nippon Konpo Unyu Soko............................ 101
----------
TOTAL COMMON STOCKS (Cost $167,048)........................... 146,109
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<C> <S> <C>
- ----------
FOREIGN CURRENCY (13.6%)
JPY2,456,631 Japanese Yen (Cost $21,169)....................... 21,212
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (107.5%) (Cost $188,217)............... 167,321
--------
OTHER ASSETS (8.0%)
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... $ 9,434
Receivable for Investments Sold............ 1,518
Receivable for Fund Shares Sold............ 1,492
Dividends Receivable....................... 45
Other...................................... 7 12,496
----------
LIABILITIES (-15.5%)
Bank Overdraft............................. (22,735)
Payable for Fund Shares Redeemed........... (909)
Investment Advisory Fees Payable........... (419)
Administrative Fees Payable................ (27)
Custodian Fees Payable..................... (13)
Directors' Fees and Expenses Payable....... (5)
Distribution Fees Payable.................. (3)
Other Liabilities.......................... (46) (24,157)
---------- --------
NET ASSETS (100%)........................................ $155,660
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... 181,591
Overdistributed Net Investment Income............. (9,043)
Accumulated Net Realized Loss..................... (5,402)
Unrealized Depreciation on Investments and Foreign
Currency Translations........................... (11,486)
--------
NET ASSETS........................................ $155,660
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A
- ---------------------------------------
NET ASSETS............................. $152,229
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 19,125,105 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $7.96
----------
----------
CLASS B
- ---------------------------------------
NET ASSETS............................. $3,431
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 431,823 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $7.94
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars or foreign currency 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>
- --------------- --------- ----------- --------------- --------- ------------
*JPY 2,496,504 $ 21,557 1/07/97 U.S.$ 21,499 $ 21,499 $ (58)
JPY 3,668,260 31,716 1/09/97 U.S.$ 34,000 34,000 2,284
U.S.$ 33,109 33,109 1/09/97 JPY 3,668,260 31,717 (1,392)
JPY 2,855,307 24,783 2/06/97 U.S.$ 27,300 27,300 2,517
JPY 2,558,780 22,209 2/06/97 U.S.$ 24,500 24,500 2,291
U.S.$ 17,000 17,000 2/06/97 JPY 1,928,021 16,734 (266)
JPY 2,206,158 19,278 3/25/97 U.S.$ 20,638 20,638 1,360
JPY 2,706,405 23,649 3/25/97 U.S.$ 25,294 25,294 1,645
JPY 1,736,110 15,170 3/25/97 U.S.$ 16,223 16,223 1,053
--------- --------- ------------
$ 208,471 $ 217,905 $ 9,434
---------
--------- --------- ------------
--------- ------------
</TABLE>
- --------------------------------------------------------------------
* Transaction is with Morgan Stanley Trust Co.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
67
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 11.4%
Brazil 43.6%
Chile 3.7%
Colombia 4.4%
Mexico 29.6%
Peru 1.3%
Venezuela 5.1%
Other 0.9%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LATIN AMERICAN PORTFOLIO-CLASS
MSCI EMERGING MARKETS GLOBAL LATIN AMERICAN INDEX (1) A
<S> <C> <C>
1/18/95* 500,000 500,000
12/31/1995 459,800 456,600
12/31/1996 560,726 679,284
*Commencement of operation
**Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS GLOBAL LATIN AMERICA INDEX(1)
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 48.77% 16.98%
PORTFOLIO -- CLASS B(3)............................................................................ 42.44 N/A
INDEX.............................................................................................. 21.95 6.04
</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 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 year ended December 31, 1996, the Portfolio had a total return of 48.77%
for the Class A shares and 42.44% for the Class B shares, as compared to a total
return of 21.95% for the Morgan Stanley Capital International (MSCI) Emerging
Markets Global Latin America Index. The average annual total return for the
period from inception on January 18, 1995 through December 31, 1996 was 16.98%
for the Class A shares, as compared to 6.04% for the Index.
The table below presents the percentage change in the Morgan Stanley Capital
International indices for each respective country, in U.S. dollar terms, as of
December 31, 1996 and for the periods preceding.
<TABLE>
<CAPTION>
3 MONTHS 6 MONTHS
------------ ------------
<S> <C> <C>
Argentina................................................................................... 12.7% 4.8%
Brazil...................................................................................... 7.9% 11.0%
Chile....................................................................................... -12.3% -15.0%
Colombia.................................................................................... 1.5% 7.9%
Mexico...................................................................................... 0.2% 2.0%
Peru........................................................................................ -13.2% -8.5%
Venezuela................................................................................... 19.4% 47.8%
Latin America............................................................................... 2.8% 3.8%
<CAPTION>
12 MONTHS
------------
<S> <C>
Argentina................................................................................... 20.3%
Brazil...................................................................................... 42.5%
Chile....................................................................................... -13.5%
Colombia.................................................................................... 11.1%
Mexico...................................................................................... 18.0%
Peru........................................................................................ -0.5%
Venezuela................................................................................... 131.2%
Latin America............................................................................... 22.0%
</TABLE>
ARGENTINA
The Argentine market's strong performance reflected a strong economic turnaround
after the gut-wrenching recession in 1995 provoked by the Mexican devaluation.
Despite a huge increase in unemployment as a result of the recession, from
roughly 10% to 17%, the Argentine government demonstrated remarkable
determination to keep a steady course of fiscal discipline. The government even
introduced labor reforms late in the year, which should create more flexibility
in the labor markets and thereby, over the long-term, reduce the structural
unemployment problem. Additionally, corporate profits grew at a robust pace
during the year, especially in the second half, and this boosted the stock
market toward year end.
The melodrama in the middle of the year of the departure of respected economic
minister Domingo Cavallo, after five years of superlative stewardship of the
economy, quickly dissipated as his successor Roque Fernandez convinced the
market of his pro-
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
68
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO (CONT.)
market beliefs. Further, Fernandez' tenure will likely be less politically
turbulent, and this should introduce much needed calm to the political scenario.
Another interesting development in Argentina in 1996 was the emergence of the
local pension funds as an important institutional investor for the equity
market. We welcome this development for a variety of reasons. First, the private
pension fund system should help increase the low domestic savings rate in
Argentina. Second, more companies will likely utilize equity financing as a
means of raising capital for investments, thereby broadening the market. Third,
local trading volumes will increase and reduce the local market's dependency on
foreign portfolio investment, thereby deepening the local market and reducing
volatility.
Overall, we are encouraged by developments in Argentina. The economy is in the
midst of a sometimes painful process of structural transformation as it opens to
the outside world and increases its exposure both to private participants
domestically and to foreign competition. The government has shown its commitment
to steering the free market course despite occasional adverse shocks, and we
think this bodes well both for future economic activity and also for future
stock market performance.
BRAZIL
Interestingly, despite the Brazilian market's strong performance, during the
course of the year there was very little progress made on critical government
reform items -- notably administrative and social security reform, and fiscal
account improvement -- which were originally thought to be vital. Lack of
tangible progress on these key items, which depend on congress for their
improvement, was more than offset by substantial improvement in a number of key
areas. First, inflation and interest rates continued their downward movement,
finishing the year at annualized rates of roughly 9% and 23%, respectively.
Second, two key privatizations -- first Light, and then Cerj -- took place in
the all-important electric utility sector in the state of Rio de Janeiro. Third,
positive tariff reform in both the telecommunications and the electric utility
sector contributed to a remarkable improvement in corporate earnings growth in
those two sectors, which together comprise over a third of the market's
capitalization. Fourth, positive liberalization of the state oil and gas
monopoly provider, Petrobras, was introduced which considerably improved the
prospects for that company. Fifth, tangible progress was made in preparing state
mining giant CVRD for eventual privatization in the first half of 1997. Sixth,
economic activity was robust enough to allow for selected private sector
companies to grow their earnings at a brisk pace.
Taken together, in a political context in which the government's ability to act
independently of congress on reform items is limited, the Cardoso administration
nevertheless demonstrated a genuine commitment to improving shareholder value
via positive reforms in those areas over which it has independent authority.
Coupled with this commitment, the state level governments have in many cases
been forced or motivated to introduce their own reform and privatization
efforts, which has further enhanced shareholder value.
Needless to say, there are many issues which confront the investor in Brazil
when looking out to 1997. In no particular order, the most pivotal issues which
will affect the market during 1997 are as follows: the Cardoso re-election
effort; the CVRD privatization; fiscal reform efforts; trade balance and foreign
exchange concerns; telecommunications and electric utility regulatory reform;
and economic activity.
RE-ELECTION -- the Cardoso administration's effort to amend the constitution to
allow him to run for re-election is probably the most important, and most
proximate, item facing the country and market in 1997. Simply put, if he is able
to run again for president in 1998, the chances are high that he would win.
Owing to Cardoso's huge electoral popularity, the splintered nature of the
opposition parties, and the president's proven ability to "horse trade" behind
closed doors, we are cautiously optimistic that he will secure the necessary
votes for the amendment.
CVRD PRIVATIZATION -- state mining conglomerate CVRD is scheduled to be
privatized sometime in the second quarter of 1997. The successful completion of
the first stage will be of significant psychological importance to the market,
because it will represent the first major privatization of a federal-level
company of national significance, and thereby considerably strengthen the
Cardoso administration's image as a serious, free-market reform oriented
government. We are confident that CVRD will be privatized in the first half of
1997.
FISCAL REFORM -- the fiscal accounts are perhaps one of the most vulnerable
elements of the outlook for 1997. The chief obstacle is congress and, behind
them, state governments. Our general outlook is that fiscal reform
- --------------------------------------------------------------------------------
Latin American Portfolio
69
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO (CONT.)
will take a back seat to the re-election issue; upon successful resolution of
same, the government will focus its energies on the vital administrative reform.
We are less optimistic on this front than the above two items, as we think that
congress will slow progress on fiscal reform to a snail's pace.
TRADE BALANCE/FOREIGN EXCHANGE -- the trade balance is an item that looms ahead
with the potential to tip the apple cart. At present rates the trade deficit
will be between 1-2% of GDP next year; hardly distressing levels, but with
interest payments the current account deficit will be a couple percentage points
higher. Although the treasury has sufficient international reserves to defend
the currency for the foreseeable future, we are monitoring this item very
closely. For the time being, we expect the rate of devaluation to trend with
relative inflation differentials between Brazil and the U.S.
TELECOMMUNICATIONS/ELECTRIC UTILITY REGULATORY REFORM -- this area is too
complex to fully describe in these pages, but we are closely analyzing the
pending regulatory, tariff, and privatization announcements over the next year
to assess which shape these two respective sectors will take in the years to
come. We are extremely bullish on the long-term outlook for both sectors, and on
the relative value presently obtained in the stock market therein, but need to
monitor events closely so as to identify how much shareholder value will be
enhanced by government action. The government has thus far showed itself to be
very astute at maximizing shareholder value, and we have no reason to believe
they will cease being so going forward.
ECONOMIC ACTIVITY -- the year ahead should not be particularly exciting from an
economic activity standpoint, although inflation should remain subdued. The
fiscal deficit will keep a lid on economic potential via higher-than-
otherwise-necessary interest rates, and the trade balance pressures will
marginally add to those interest rate pressures. Inflation, on the other hand,
will likely continue to be subdued and settle in at a high single digit level.
Private sector corporate profits, as a result of the aforementioned factors,
will be spotty. Thus, stock picking among the private sector companies will be
of paramount importance in 1997.
In short, we are bullish on the market for 1997. In terms of portfolio
positioning, we have an overweight stance on the electric utility and
telecommunications sectors among the government-owned companies, and an
overweight position in the retail sector among the private sector companies.
CHILE
The MSCI Chile Index declined 16% in 1996, reflecting a combination of
lackluster earnings and tight monetary policy. The Chilean market had a number
of things go wrong last year, all of which contributed to the surprisingly large
decline for the year. First, monetary authorities committed themselves to a
hawkish stance on inflation which, coupled with a rapidly growing economy in the
first part of the year, led to a tight monetary policy for the duration of the
year and caused fixed income investments to be tough competition for the equity
market. Second, corporate earnings were, in most cases, fairly ho-hum. Chile is
in many sectors a mature market and companies are increasingly looking outside
their borders for growth opportunities, which take longer to realize. Third, the
all-important electric utility sector suffered from two unrelated events. First,
the price of electricity generation fell markedly in the second half of the year
owing to additional (cheap) supply being factored into the wholesale price
equation. Second, an unprecedented severe drought affected the supply of
reservoir water and, with it, the cost at which electric utilities generate
electricity. As a result, revenues fell and costs increased, causing a severe
deterioration in profits and, consequently, the stock prices of the entire
sector. Fourth, the price of pulp fell dramatically in 1996, and this adversely
affected the profits of a couple of important companies, CMPC and Copec.
For 1997 we are more optimistic on the Chilean market than we have been in the
past given that market sentiment is extremely negative, the above confluence of
events is not likely to be repeated, and the country is underowned by dedicated
Latin American investors. Nevertheless, we find more attractive long-term
opportunities in other markets, and therefore are still relatively underweight
the market overall.
COLOMBIA
Colombia registered a modest rise during the fourth quarter, primarily a
function of the currency, which appreciated noticeably against the dollar. The
market, however, was able to weather a year plagued with political strife, fear
of economic sanctions from the
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
70
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO (CONT.)
U.S. and a slowing economy, and still extract respectable gains. The Portfolio
remains overweight Colombia, focusing on a few names which offer outstanding
value and exposure to key sectors in the economy.
MEXICO
The Mexican market's weak fourth quarter performance was due to concerns over
changing accounting practices and lower margins in the banking sector, a
continued sluggish recovery of the Mexican consumer and disappointing corporate
earnings reports. Interest rates remained stable throughout the fourth quarter
but there was a good deal of volatility in the stock market. This was partially
caused by the peso's 4.5% nominal devaluation -- the strongest in any quarter of
1996.
For 1996 overall, the peso actually surprised estimates strengthening over 23%
in real terms. GDP growth at 4.5% was also a positive surprise finishing the
year stronger than expectations at the beginning of the year. Unemployment fell
from 6.4% to below 5%, and the annual inflation rate dropped in half. For 1997
inflation should fall again from 28% to 18% and real interest rates are expected
to decline slightly. The trade balance is expected to worsen in 1997 but should
remain in surplus. The current account balance will remain in negative territory
but should be easily financed. The peso should weaken in line with inflation for
1997. GDP growth should be similar to that registered in 1996. Political risk
should increase throughout the year as the PRI may lose control of Congress and
will probably lose the mayoral race in Mexico City. Despite the rising political
risk, macroeconomic policy remains very sound and opposition victories by the
PAN will mean more of the same in economic policy terms.
The market continues to look attractive on a valuation basis after a weak fourth
quarter highlighted by underperformance in some of the large cap names. This
will be balanced by a continued weak consumer recovery and uncertainty about
accounting changes in the banking sector and competition in the
telecommunications sector. Under this scenario the Portfolio is emphasizing the
food and beverage, cement and media sectors.
PERU
Unexpectedly weak economic data exacerbated by a high profile guerrilla incident
led the Peruvian market to experience a sharp correction in the fourth quarter
and to end the year as one of the poorest performing in the region. The
government-induced recession engineered at the end of 1995 to halt a mounting
current account problem extended longer than anticipated and inflation proved
difficult to tackle in 1996, accumulating to a higher figure than in 1995. The
Portfolio reduced its holdings in the country during the third and fourth
quarters, though we anticipate a brighter outlook for the economy and market in
1997.
VENEZUELA
The Venezuelan market was the star performer in Latin America during 1996,
following the country's dramatic shift to free-market economic policies. The
AGENDA VENEZUELA, a plan launched in April, eliminated price and exchange
controls, reactivated the privatization program and vowed to address the
critical inflation and fiscal problems. The strength in the price of oil,
Venezuela's mainstay, along with surprisingly healthy tax collections
contributed to an unexpected primary surplus of roughly 0.9% for 1996. The
fourth quarter saw the successful execution of key asset sales by the public
sector in the telecommunications and banking sectors, though marginally
disappointed on the inflation front, which remained sticky at around the 3% per
month level. The Portfolio maintained an overweight in the country throughout
the quarter, emphasizing utility companies, and looks to a 1997 where recovery
of the domestic economy, further progress on inflation and other reform, and the
real appreciation of the exchange rate should benefit stocks.
Overall, we are positive on 1997. GNP growth should be higher and inflation
should be lower throughout the region. Valuations are among the cheapest in the
world. Finally we expect strong earnings growth and a return of capital to the
region.
Robert L. Meyer
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Latin American Portfolio
71
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (75.7%)
ARGENTINA (11.4%)
14,080 Banco de Galicia ADR.............................. $ 341
74,717 Banco del Suquia, Class B......................... 142
10,209 Quilmes........................................... 82
100,346 Siderar, Class A.................................. 289
(e)6,665 Siderar ADR....................................... 157
6,978 Telecom Argentina ADR............................. 282
70,528 Telefonica Argentina ADR.......................... 1,825
19,695 YPF ADR........................................... 497
----------
3,615
----------
BRAZIL (20.7%)
(e)1,855 CELESC GDR........................................ 168
4,874 CEMIG ADR......................................... 166
(e)1,042 CEMIG ADR......................................... 35
3,891,000 Copel............................................. 41
4,704,000 Eletrobras........................................ 1,684
32,075 Eletrobras ADR.................................... 571
296,000 Light............................................. 105
(a)3,203,000 Lightpar.......................................... 777
(a)23,940 Multicanal Participaccoes ADR..................... 307
(e)5,748 Pao de Acucar ADR................................. 100
4,575 Pao de Acucar GDR (Registered).................... 80
17,703,000 Telebras.......................................... 1,269
14,740 Telebras ADR...................................... 1,128
(a)669,663 Telesp............................................ 145
----------
6,576
----------
CHILE (3.7%)
10 Andina ADR........................................ --
36,405 CCU ADR........................................... 587
25,940 Santa Isabel ADR.................................. 587
----------
1,174
----------
COLOMBIA (4.4%)
2,110,817 Banco de Colombia GDR............................. 870
129,505 Bavaria........................................... 528
----------
1,398
----------
MEXICO (29.1%)
(a)213,505 Banacci, Class B.................................. 450
(a)78,246 Banacci, Class L.................................. 148
(a,e)52,067 Bancomer, Class B ADR............................. 423
(a)168,530 Banorte, Class B.................................. 167
118,478 Carso, Class A1................................... 624
510 Carso ADR, Class A1............................... 5
19,970 Casa Autrey ADR................................... 389
163,870 Cemex CPO......................................... 586
34,620 Cemex CPO ADR..................................... 248
42,435 Cemex, Class B.................................... 165
(a)46,420 Cifra, Class B.................................... 57
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(a)63,800 Cifra, Class C.................................... $ 78
23,680 Coca Cola Femsa ADR............................... 684
(a)9,070 Desc ADR.......................................... 200
326,975 FEMSA, Class B.................................... 1,120
(a)68,270 Gruma, Class B.................................... 416
(a)23,270 ICA ADR........................................... 340
(a)41,350 Industrias Campos Hermanos, Class B............... 128
(a)98,560 Interamericana.................................... 266
292,710 Maseca, Class B................................... 370
(a)21,660 Radio Centro ADR.................................. 149
(a)61,790 Sears de Mexico, Class B.......................... 106
(a)49,720 Tamsa, ADR........................................ 789
(a)44,110 Televisa GDR CPO.................................. 1,130
6,640 Telmex ADR, Class L............................... 218
----------
9,256
----------
PERU (1.3%)
14,790 Telefonica del Peru ADR........................... 279
69,960 Telefonica del Peru, Class B...................... 130
----------
409
----------
VENEZUELA (5.1%)
(a)41,250 CANTV, ADR........................................ 1,160
317,478 Electricidad de Caracas........................... 322
35,140 Sivensa ADR....................................... 132
----------
1,614
----------
TOTAL COMMON STOCKS (Cost $21,783)............................ 24,042
----------
PREFERRED (22.9%)
BRAZIL (NON-VOTING STOCKS) (22.9%)
61,997,006 Banco Bradesco.................................... 449
(a,d)11,847,000 Banco Nacional.................................... 1
(a,e)9,325 Bompreco GDR...................................... 167
(a)3,546,000 Casa Anglo........................................ 107
13,077,010 CEMIG............................................. 446
1,464,000 Coteminas......................................... 467
(a)5,770,000 CPFL.............................................. 527
(a)947,900 CRT............................................... 729
18,101 CVRD.............................................. 348
7,200 Eletrobras, Class B ADR........................... 134
917,000 Eletrobras, Class B............................... 341
(a)1,860 Globex............................................ 30
1,364,400 Itaubanco......................................... 591
2,235,000 Lojas Americanas.................................. 29
8,820,000 Lojas Arapua...................................... 163
21,580,000 Lojas Renner...................................... 997
5,599,000 Petrobras......................................... 892
8,495,000 Telebras.......................................... 654
874,000 Telesp............................................ 189
----------
TOTAL PREFERRED (Cost $6,708)................................. 7,261
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Latin American Portfolio
72
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
<C> <S> <C>
- --------------------------------------------------------------------------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a,d)35,389 CPFL (Cost $0).................................... $ --
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
UNITS
<C> <S> <C>
- ----------
UNITS (0.5%)
MEXICO (0.5%)
(a)9,195 Comerci ADR (Cost $170)........................... 164
----------
TOTAL FOREIGN SECURITIES (99.1%) (Cost $28,661)............... 31,467
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (0.6%)
REPURCHASE AGREEMENT (0.6%)
$ 185 Chase Securities Inc. 5.95%, dated 12/31/96, due
01/02/97 to be repurchased at $185,
collateralized by U.S. Treasury Notes, 6.625%,
due 7/31/01, valued at $190 (Cost $185)......... 185
----------
FOREIGN CURRENCY (0.8%)
ARP 4 Argentine Peso.................................... 4
BRL 11 Brazilian Real.................................... 11
COP 10,095 Colombian Peso.................................... 10
MXP 110 Mexican Peso...................................... 14
PSS 4 Peruvian Sol...................................... 2
VEB 94,636 Venezuelan Bolivar................................ 199
----------
TOTAL FOREIGN CURRENCY (Cost $242)............................ 240
----------
TOTAL INVESTMENTS (100.5%) (Cost $29,088)..................... 31,892
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.5%)
Dividends Receivable......................... $ 88
Receivable for Investments Sold.............. 63
Receivable for Portfolio Shares Sold......... 18
Other........................................ 1 170
-----
LIABILITIES (-1.0%)
Payable for Investments Purchased............ (220)
Custodian Fees Payable....................... (30)
Investment Advisory Fees Payable............. (25)
Administrative Fees Payable.................. (5)
Sub-Administrative Fees Payable.............. (3)
Directors' Fees and Expenses Payable......... (1)
Distribution Fees Payable.................... (1)
Other Liabilities............................ (35) (320)
----- --------
NET ASSETS (100%)........................................ $ 31,742
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 27,833
Overdistributed Net Investment
Income............................... (5 )
Accumulated Net Realized Gain.......... 1,114
Unrealized Appreciation on Investment
and Foreign Currency Translations
(Net of accrual for foreign tax of $3
on unrealized appreciation on
investments.)........................ 2,800
----------
NET ASSETS............................. $ 31,742
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $30,409
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 2,685,234 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $11.32
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $1,333
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 117,848 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $11.31
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver foreign currency in exchange for
U.S. 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>
- ----------- ------ ----------- ------------ ------ ------------
VEB 94,636 $ 198 1/02/97 U.S.$ 198 $ 198 $ --
------ ------ -----
------ ------ -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- See note A-1 to financial
statements
(e) -- 144A Security -- Certain conditions for public sale may exist
ADR -- American Depositary Receipt
CPO -- Ordinary Participating Certificates (no voting rights)
GDR -- Global Depositary Receipt
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment...................... $ 468 1.5%
Consumer Goods......................... 5,536 17.4
Energy................................. 6,705 21.1
Finance................................ 3,583 11.3
Materials.............................. 3,788 11.9
Multi-Industry......................... 1,836 5.8
Services............................... 9,551 30.1
-------- ---
$ 31,467 99.1%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Latin American Portfolio
73
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods/Construction 6.1%
Consumer Cyclical 30.7%
Consumer Staples 34.4%
Diversified 7.7%
Energy 0.5%
Finance 12.7%
Materials 0.7%
Technology 5.7%
Other 1.5%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AGGRESSIVE EQUITY PORTFOLIO-CLASS LIPPER CAPITAL APPRECIATION INDEX
A (1) S&P 500
<S> <C> <C> <C>
03/08/95* 500,000 500,000 500,000
12/31/95 706,250 629,000 650,860
12/31/96 995,106 723,098 800,285
*Commencement of operations
**Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE LIPPER CAPITAL
APPRECIATION INDEX AND THE S&P 500 INDEX(1)
- ----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 40.90% 45.98%
PORTFOLIO -- CLASS B(3)............................................................................ 39.72 N/A
LIPPER CAP. APPRECIATION INDEX..................................................................... 14.96 22.49
S&P 500 INDEX...................................................................................... 22.96 29.51
</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.
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. It is anticipated that the
Portfolio will hold thirty names or less, although it may hold more from time to
time.
The Portfolio achieved strong absolute and relative performance for the twelve
month and since inception periods ended December 31, 1996. For the year ended
December 31, 1996, the Portfolio had a total return of 40.90% for the Class A
shares and 39.72% for the Class B shares, as compared to a total return of
14.96% for the Lipper Capital Appreciation Index and 22.96% for the S&P 500
Index. The average annual total return for the period from inception on March 8,
1995 through December 31, 1996 was 45.98% for the Class A shares, as compared to
22.49% for the Lipper Capital Appreciation Index and 29.51% for the S&P 500
Index.
For the latter part of 1996 and going into 1997 the Portfolio has maintained a
barbell approach with exposure to large capitalization stable growth stocks
(mainly tobacco) at the one extreme, and high beta growth issues (generally mid
capitalization consumer cyclical issues) at the other extreme. Our investment
strategy is to take a substantial position (up to 25% in a single name) when we
have very high conviction in the business fundamentals and stock price potential
of a holding.
Throughout 1996 the largest holding in the Portfolio was Philip Morris. By
taking advantage of periodic selling panics caused by ubiquitous news headlines
regarding litigation and political risk, we were able to greatly enhance our
returns in the stock. For example, in April of 1996, with Philip Morris down
about 5% on the year and trading at $85 against a market that was up about 10%,
we took Philip Morris stock to about 22% of the Portfolio. By August, the stock
had hit $107 as litigation concerns had eased and investors focused more on the
company's strong growth fundamentals. We had reduced our Philip Morris holding
to about a 4% position when, in early August, the industry had a setback and
lost the first round of a product liability court case. The stock plunged back
into the $80's, a huge overreaction in our view, and we subsequently went back
to about a 15% weighting.
At year-end 1996, Philip Morris stock at $113 represented about 13% of our
Portfolio and RJR represented about 15%. RJR stock has not bounced back as
strongly as Philip Morris, however, business is strong, estimates are rising and
we believe the company may both raise its dividend and announce a
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
74
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO (CONT.)
major share repurchase in late February/early March. Our combined positions in
Philip Morris, RJR Nabisco and Consolidated Cigar total about 29%. While the
group will clearly be subject to bouts of selling pressure since the industry is
under attack from a number of directions, we nonetheless believe the tobacco
stocks are in the midst of a multi-year trend of upward revaluation. Combined
with strong underlying growth fundamentals, this creates a powerful investment
opportunity which we feel many growth investors are missing.
As we enter 1997, the S&P 500 Index has outperformed the vast majority of active
managers for three consecutive years. Also, the Index has outpaced the earnings
growth of the companies whose stocks are in it. One could argue that there are
many positive factors driving the United States markets higher and that these
factors could persist: stable interest rates, solid economic growth without
inflationary pressures, the opening up of emerging markets, the acceptance of
shareholder value as the key motivator of corporate managements, and the huge
flow of cash coming into stocks supported by powerful demographic trends.
Still, there is no doubt that many large cap, "blue chip" stocks, while enjoying
tremendous business fundamentals, have outperformed their own businesses. Take
General Electric as an example. In 1996, the stock was up 40%, while EPS grew
about 15%. Another example would be Merck, a stock up 77% in 1995 and 24% in
1996, with EPS in those two years up only 12% and 20%, respectively.
Our guess is that active managers may have an easier time beating the S&P 500
Index this year. This would be more likely to occur if smaller company stocks do
well. While we are large cap managers and continue to feel very comfortable with
many large cap names, at the margin we feel that there are currently many
opportunities in secondary stocks, especially high beta growth issues that have
missed the recent market move, but where fundamentals are intact. Examples
include HFS, Gtech, International Game Technology, Cracker Barrel, Petsmart and
Clear Channel Communications.
HFS is a great example of what we look for in a stock, and it is one of our
largest holdings currently. At $60, the stock has corrected 25% from its
mid-1996 and all-time high. During this period of stock price weakness,
consensus earnings expectations for 1997 have risen about 17% (from $2.20 in EPS
to $2.57). Moreover, we believe strongly that estimates will rise several more
times over the next few months and HFS will earn at least $2.80 per share in
1997. Driven by strong business trends, free cash flow generation and additional
acquisitions, we think HFS will earn $3.50 to $4.00 per share in 1998, up
sharply from 1997 and well above the $3.25 consensus estimate.
HFS is a conglomerate put together by CEO Henry Silverman, following his LBO and
subsequent IPO of several hotel franchises, including Ramada, Howard Johnson and
Days Inn. Since HFS owns management and franchise rights to these brands, as
opposed to bricks and mortar, the company generates significant free cash flow.
Mr. Silverman used this free cash flow to help finance the purchase of other
franchises, beginning two years ago with Century 21 and including Coldwell
Banker, Avis, RCI (the largest timeshare exchange company) and finally PHH, a
company which specializes in corporate relocation. Separately, each business has
solid growth prospects, some great and some only fair. But together, they form a
huge network of customer transactions, access to which the company is selling
back to corporate America. This in turn creates massive additional fee income
for HFS, enhances the market position of its businesses, and gives HFS an
advantage in competing for acquisitions.
At $60, HFS stock trades at 21 times our estimate of 1997 earnings. But free
cash flow is about $0.80 above stated earnings, so the multiple of free cash
flow is only 17 times. In other words, the stock's free cash flow yield is 6%.
Looking out to 1998, the free cash flow yield is 7.6%. We think this is
extremely compelling because HFS's savvy and shareholder driven management team
will look to leverage their big free cash flow ($600 million and $800 million in
1997 and 1998, respectively) through additional acquisitions.
Other large holdings include Campbell Soup, United Technologies, K-III and
Loews. At year end the Portfolio held 40 issues.
Kurt A. Feuerman
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
75
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (98.5%)
CAPITAL GOODS-CONSTRUCTION (6.1%)
AEROSPACE & DEFENSE (6.1%)
11,800 McDonnell Douglas Corp............................ $ 755
60,300 United Technologies Corp.......................... 3,980
----------
TOTAL CAPITAL GOODS-CONSTRUCTION............................ 4,735
----------
CONSUMER-CYCLICAL (30.7%)
BROADCAST-RADIO & TELEVISION (3.0%)
(a)56,200 Clear Channel Communications, Inc................. 2,030
(a)10,100 Heftel Broadcasting Corp., Class A................ 318
----------
2,348
----------
ENTERTAINMENT & LEISURE (3.5%)
(a)10,800 Family Golf Centers, Inc.......................... 325
(a)73,800 GTECH Holdings Corp............................... 2,362
----------
2,687
----------
FOOD SERVICE & LODGING (14.5%)
(a)15,300 Boston Chicken, Inc............................... 549
(a)17,600 Brinker International, Inc........................ 282
36,500 Cracker Barrel Old Country Store, Inc............. 926
(a)21,500 Einstein/Noah Bagel Corp.......................... 640
(a)140,000 HFS, Inc.......................................... 8,365
16,700 Hilton Hotels Corp................................ 436
----------
11,198
----------
LEISURE RELATED (3.5%)
123,800 International Game Technology..................... 2,259
(a)22,300 WMS Industries, Inc............................... 446
----------
2,705
----------
PUBLISHING (4.5%)
(a)322,200 K-III Communications Corp......................... 3,464
----------
RETAIL-FOOD (0.8%)
58,400 Food Lion Inc., Class B........................... 591
----------
RETAIL-GENERAL (0.9%)
(a)31,900 PetSmart, Inc..................................... 698
1,400 Stage Stores, Inc................................. 26
----------
724
----------
TOTAL CONSUMER-CYCLICAL..................................... 23,717
----------
CONSUMER-STAPLES (34.4%)
BEVERAGES & TOBACCO (14.8%)
337,100 RJR Nabisco Holdings Corp......................... 11,461
----------
CIGARETTES (14.1%)
(a)40,800 Consolidated Cigar Holdings, Inc.................. 1,010
88,000 Philip Morris Cos., Inc........................... 9,911
----------
10,921
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FOOD (5.5%)
52,400 Campbell Soup Co.................................. $ 4,205
----------
TOTAL CONSUMER-STAPLES...................................... 26,587
----------
DIVERSIFIED (7.7%)
(a)66 Berkshire Hathaway, Inc., Class A................. 2,251
31,900 Loews Corp........................................ 3,007
(a)19,500 U.S. Industries, Inc.............................. 670
----------
TOTAL DIVERSIFIED........................................... 5,928
----------
ENERGY (0.5%)
(a)8,300 AES Corp.......................................... 386
----------
FINANCE (12.7%)
BANKING (3.5%)
5,800 Citicorp.......................................... 597
7,900 Wells Fargo & Co.................................. 2,131
----------
2,728
----------
FINANCIAL SERVICES (4.5%)
10,500 American Express Co............................... 593
30,100 Franklin Resources, Inc........................... 2,058
9,100 Student Loan Marketing Association................ 848
----------
3,499
----------
INSURANCE (4.7%)
23,700 Ace Ltd........................................... 1,425
14,800 Aetna, Inc........................................ 1,184
18,100 PMI Group (The), Inc.............................. 1,002
----------
3,611
----------
TOTAL FINANCE............................................... 9,838
----------
MATERIALS (0.7%)
CHEMICALS (0.7%)
14,200 Olin Corp......................................... 534
----------
TECHNOLOGY (5.7%)
AEROSPACE & DEFENSE (1.3%)
18,500 Gulfstream Aerospace Corp......................... 449
(a)30,900 Loral Space & Communications...................... 568
----------
1,017
----------
COMPUTERS (0.8%)
(a)7,800 Microsoft Corp.................................... 644
----------
ELECTRONICS (2.0%)
11,500 Intel Corp........................................ 1,506
----------
OFFICE EQUIPMENT (1.6%)
8,000 International Business Machines Corp.............. 1,208
----------
TOTAL TECHNOLOGY............................................ 4,375
----------
TOTAL COMMON STOCKS (Cost $74,065)............................ 76,100
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
76
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (0.2%)
REPURCHASE AGREEMENT (0.2%)
$ 145 Chase Securities Inc. 5.95%, dated 12/31/96, due
1/2/97, to be repurchased at $145,
collateralized by U.S. Treasury Notes, 6.625%,
due 7/31/01, valued at $151 (Cost $145)......... $ 145
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.7%) (Cost $74,210)................. 76,245
--------
OTHER ASSETS (12.0%)
Receivable for Securities Sold Short....... $ 4,247
Receivable for Investments Sold............ 3,422
Receivable due from Broker................. 1,300
Dividends Receivable....................... 302
Receivable for Portfolio Shares Sold....... 7
Other...................................... 1 9,279
----------
LIABILITIES (-10.7%)
Securities Sold Short, at Value (Proceeds
$4,247).................................. (4,417)
Bank Overdraft............................. (2,450)
Payable for Investments Purchased.......... (735)
Payable for Portfolio Shares Redeemed...... (423)
Investment Advisory Fees Payable........... (91)
Dividends Payable on Securities Sold
Short.................................... (64)
Administrative Fees Payable................ (10)
Custodian Fees Payable..................... (5)
Distribution Fees Payable.................. (5)
Directors' Fees and Expenses Payable....... (1)
Other Liabilities.......................... (38) (8,239)
---------- --------
NET ASSETS (100%)........................................ $77,285
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 70,408
Undistributed Net Investment Income.... 32
Accumulated Net Realized Gain.......... 4,981
Unrealized Appreciation on
Investments.......................... 1,864
----------
NET ASSETS............................. $ 77,285
----------
----------
CLASS A
- ---------------------------------------
NET ASSETS............................. $ 68,480
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 4,746,588 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $14.43
----------
----------
CLASS B
- ---------------------------------------
NET ASSETS............................. $8,805
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 610,791 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $14.42
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------
SECURITIES SOLD SHORT (NOTE A-9)
33,500 Phillip Morris Cos., Inc......................... $ 3,773
7,800 Microsoft Corp................................... 644
-------
(Total Proceeds $4,247)..................................... $ 4,417
-------
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
77
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods Construction 1.3%
Consumer Cyclical 20.1%
Consumer Staples 22.2%
Finance 1.7%
Services 40.7%
Technology 11.1%
Other 2.9%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EMERGING GROWTH PORTFOLIO -- CLASS
A NASDAQ COMPOSITE INDEX (1)
<S> <C> <C>
11/01/89* $500,000 $500,000
10/31/90 $453,500 $362,000
10/31/91 $815,393 $596,214
10/31/92 $754,239 $664,779
12/31/92 $671,046 $767,487
12/31/93 $671,046 $881,075
12/31/94 $666,886 $852,881
12/31/95 $889,025 $1,193,350
12/31/96 $922,097 $1,464,360
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE NASDAQ
COMPOSITE INDEX(1)
- -----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 3.72% 4.10% 11.96%
PORTFOLIO -- CLASS
B(3).................. 3.58 N/A N/A
INDEX................. 22.71 17.10 15.63
</TABLE>
1. The NASDAQ Composite 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.
The Emerging Growth Portfolio invests primarily in growth-oriented equity
securities of small-to-medium sized domestic corporations and, to a limited
extent, foreign corporations. Such companies generally have gross revenues
ranging from $10 million to $750 million.
For the year ended December 31, 1996, the Portfolio had a total return of 3.72%
for the Class A shares and 3.58% for the Class B shares, as compared to a total
return of 22.71% for the NASDAQ Composite Index. The average annual total return
for the five-year period ended December 31, 1996 and for the period from
inception on November 1, 1989 through December 31, 1996 was 4.10% and 11.96%,
respectively, for the Class A shares, as compared to 17.10% and 15.63%,
respectively, for the Index.
The three months ended December 31, 1996, was the first quarterly decline in the
net asset value of the Portfolio since the June 1994 quarter. The previous nine
consecutive quarters of positive returns were a record for the Portfolio but,
markets being what they are, a break in the string of gains was inevitable at
some point in time. We do not detect any overriding issues as the cause of the
December quarter decline, rather it appears to be a normal correction following
a long rise. There were a couple of stocks in the Portfolio that experienced
negative fundamental changes during the quarter, the most notable being Health
Management Systems, Inc., which has been eliminated from our holdings. However,
much of the decline was caused by stock price erosion in companies with strong
underlying fundamentals. Since we expect the market to rotate back to these well
positioned small growth companies, we believe the December quarter decline is a
correction in an uptrend, not the beginning of a prolonged decline.
The most notable phenomenon for small capitalization investors in 1996 was the
continued outperformance of large capitalization stocks for the third year in a
row. The widely used Frank Russell Co. indexes showed the large capitalization
Russell 1000 Growth Index increased 23.1% in 1996, more than twice the 11.3%
gain of the small capitalization Russell 2000 Growth Index. The disparity was
particularly wide in the second half of the year when the large capitalization
indices surged to record highs while the small capitalization indexes failed to
get back to their May 1996 peaks.
- --------------------------------------------------------------------------------
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78
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OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO (CONT.)
The continued underperformance of small capitalization stocks is a bit puzzling
considering their generally good earnings prospects and historically reasonable
relative valuation levels. Some causes of the underperformance may be that the
trend toward internationally diversified portfolios is diverting fund flows away
from the domestic small company sector or, the extremely high level of initial
public offerings (IPO's) may be absorbing, at the margin, the supply of small
capitalization investment dollars. Also, as long as the large capitalization
stocks are outperforming, there is little incentive to invest in higher risk
small companies. Markets often take these trends to excess and then the pattern
reverses without anyone ringing a bell. We believe that the inflection point is
near and that after three years of lagging relative performance, smaller
capitalization should begin a period of outperformance, which would be normal in
the later stages of a long bull market.
The Portfolio is well balanced in the smaller company sector with a 11%
weighting in technology, 12% in health care, 20% in consumer-related stocks, and
40% in a wide range of business and financial services companies. During the
fourth quarter, the Portfolio acquired new positions in six companies and
eliminated holdings in 12 stocks. Some of the new investments include:
CATALINA MARKETING CORP. -- is a provider of in-store electronic marketing
services to consumer products manufacturers and supermarket retailers. Revenues
are $152 million for the past twelve months.
COHR INC. -- is a national outsourcing service organization providing equipment
servicing and group purchasing to hospitals, integrated health systems and
alternative site providers. Revenues are $77 million for the past twelve months.
CORRECTIONS CORP. OF AMERICA -- provides prison, detention, and corrections
services to governmental agencies in over 50 facilities in more than a dozen
states. Revenues are $268 million for the past twelve months.
COST PLUS INC. -- is a specialty retailer of casual home living and entertaining
products through 58 stores in ten states. Revenues are $106 million for the past
twelve months.
ON TRACK DATA INTERNATIONAL -- is a leading provider of recovery services to a
broad range of customers experiencing a loss of valuable computer data. Revenues
are $24 million for the past twelve months.
VANTIVE CORP. -- provides customer interaction applications software that
enables businesses to enhance customer satisfaction by automating customer
support, defect tracking, sales, and internal help desk functions. Revenues are
$52 million for the past twelve months.
At the end of December, the Portfolio was diversified among 58 stocks with the
top ten holdings representing 31.6% of net assets.
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF NET ASSETS
-----------------------
<S> <C>
G&K Services........................... 4.5%
SunGuard Data Systems.................. 4.1
Cintas Corp............................ 3.5
First Data Corp........................ 3.3
Sonic Corp............................. 2.9
Viking Office Products................. 2.8
BISYS Group............................ 2.8
Concord EFS............................ 2.7
Bed, Bath & Beyond..................... 2.5
Vivra Inc.............................. 2.5
---
Total.............................. 31.6%
---
---
</TABLE>
On December 27, 1996, the Portfolio made a capital gains distribution of $8.6242
per share, following a capital gains distribution of $0.0682 on July 15, 1996.
All of the capital gains distributions were long term, which reflects the
generally low portfolio turnover and consequent relatively tax-efficient
investment process.
Dennis G. Sherva
PORTFOLIO MANAGER
January 1997
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Emerging Growth Portfolio
79
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (97.1%)
CAPITAL GOODS-CONSTRUCTION (1.3%)
ENVIRONMENTAL CONTROLS (1.3%)
(a)25,400 United Waste Systems, Inc......................... $ 873
----------
CONSUMER-CYCLICAL (20.1%)
FOOD SERVICE & LODGING (10.2%)
(a)30,000 Boston Chicken, Inc............................... 1,076
(a)20,000 HFS, Inc.......................................... 1,195
60,000 La Quinta Inns, Inc............................... 1,148
(a)50,000 Promus Hotel Corp................................. 1,481
(a)75,000 Sonic Corp........................................ 1,913
----------
6,813
----------
PRINTING & PUBLISHING (1.0%)
(a)10,000 Scholastic Corp................................... 672
----------
RETAIL-GENERAL (8.9%)
(a)70,000 Bed, Bath & Beyond, Inc........................... 1,697
(a)27,500 Cost Plus, Inc.................................... 526
(a)35,000 General Nutrition Cos., Inc....................... 591
(a)35,000 Kohl's Corp....................................... 1,374
(a)25,200 Petco Animal Supplies, Inc........................ 523
(a)55,000 PetSmart, Inc..................................... 1,203
----------
5,914
----------
TOTAL CONSUMER-CYCLICAL..................................... 13,399
----------
CONSUMER-STAPLES (22.2%)
DRUGS (2.8%)
(a)30,000 Forest Laboratories, Inc.......................... 983
(a)40,000 Genzyme Corp.-General Division.................... 870
----------
1,853
----------
HEALTH CARE SUPPLIES & SERVICES (12.4%)
(a)75,000 American Oncology Resources, Inc.................. 769
50,000 Ballard Medical Products.......................... 931
(a)25,000 Boston Scientific Corp............................ 1,500
(a)31,000 Cohr, Inc......................................... 837
(a)30,000 HEALTHSOUTH Rehabilitation Corp................... 1,159
(a)39,200 OccuSystems, Inc.................................. 1,058
(a)8,900 Target Therapeutics, Inc.......................... 374
(a)60,000 Vivra, Inc........................................ 1,657
----------
8,285
----------
MISCELLANEOUS (7.0%)
(a)20,100 Catalina Marketing Corp........................... 1,108
(a)25,000 IDEXX Laboratories, Inc........................... 900
(a)36,500 Mail Boxes Etc.................................... 821
(a)70,000 Viking Office Products, Inc....................... 1,868
----------
4,697
----------
TOTAL CONSUMER STAPLES...................................... 14,835
----------
FINANCE (1.7%)
INSURANCE (1.7%)
30,000 Mutual Risk Management Ltd........................ 1,110
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SERVICES (40.7%)
BUSINESS SERVICES (20.8%)
(a)20,000 Acxiom Corp....................................... $ 480
(a)50,000 BISYS Group, Inc.................................. 1,853
(a)26,300 Black Box Corp.................................... 1,085
(a)65,000 Concord EFS, Inc.................................. 1,836
60,000 First Data Corp................................... 2,190
16,400 First USA Paymentech, Inc......................... 556
81,000 May & Speh, Inc................................... 992
22,450 Paychex, Inc...................................... 1,155
(a)70,000 SunGuard Data Systems, Inc........................ 2,765
(a)38,000 Whittman-Hart, Inc................................ 974
----------
13,886
----------
PROFESSIONAL SERVICES (19.9%)
(a)25,000 American Medical Response, Inc.................... 812
40,000 Cintas Corp....................................... 2,350
(a)18,500 Corrections Corp. of America...................... 567
(a)35,000 CRA Managed Care, Inc............................. 1,575
(a)50,000 CUC International, Inc............................ 1,187
80,000 G & K Services, Inc., Class A..................... 3,020
(a)17,000 NFO Research, Inc................................. 374
(a)40,000 Robert Half International, Inc.................... 1,375
(a)50,000 Sitel Corp........................................ 706
49,500 Wilmar Industries, Inc............................ 1,374
----------
13,340
----------
TOTAL SERVICES.............................................. 27,226
----------
TECHNOLOGY (11.1%)
ELECTRONICS (2.5%)
21,800 Linear Technology, Corp........................... 956
20,000 Molex, Inc., Class A.............................. 713
----------
1,669
----------
OFFICE EQUIPMENT (0.3%)
(a)15,400 ONTRACK Data International, Inc................... 231
----------
SOFTWARE SERVICES (5.8%)
(a)3,200 HCIA, Inc......................................... 111
(a)30,000 Informix Corp..................................... 611
45,000 Sterling Commerce, Inc............................ 1,586
(a)58,800 USCS International, Inc........................... 992
(a)17,500 Vantive Corp...................................... 547
----------
3,847
----------
TELECOMMUNICATIONS (2.5%)
(a)45,000 ADC Telecommunications, Inc....................... 1,401
(a)7,600 Tellabs, Inc...................................... 286
----------
1,687
----------
TOTAL TECHNOLOGY............................................ 7,434
----------
TOTAL COMMON STOCKS (Cost $43,080)............................ 64,877
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
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Emerging Growth Portfolio
80
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT (3.2%)
$ 2,109 Chase Securities, Inc. 5.95%, 12/31/96, due
1/2/97, to be repurchased at $2,110,
collateralized by U.S. Treasury Bonds, 8.875%,
due 8/15/17, valued at $2,153 (Cost $2,109)..... $ 2,109
----------
TOTAL INVESTMENTS (100.3%) (Cost $45,189)..................... 66,986
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.1%)
Cash....................................... $ 1
Receivable for Portfolio Shares Sold....... 57
Dividends Receivable....................... 6
Other...................................... 7 71
-----
LIABILITIES (-0.4%)
Investment Advisory Fees Payable........... (220)
Administrative Fees Payable................ (11)
Custodian Fees Payable..................... (5)
Directors' Fees and Expenses Payable....... (3)
Distribution Fees Payable.................. (3)
Other Liabilities.......................... (25) (267)
----- --------
NET ASSETS (100%)........................................ $66,790
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 34,724
Accumulated Net Investment Loss........ (3 )
Accumulated Net Realized Gain.......... 10,272
Unrealized Appreciation on
Investments.......................... 21,797
----------
NET ASSETS............................. $ 66,790
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $62,793
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 4,649,905 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $13.50
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $3,997
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 297,201 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $13.45
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
81
<PAGE>
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods/Construction 8.2%
Consumer Cyclical 28.2%
Consumer Staples 24.1%
Diversified 5.9%
Energy 0.5%
Finance 11.8%
Materials 1.7%
Services 1.9%
Technology 8.7%
Other 9.0%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EQUITY GROWTH PORTFOLIO-CLASS
S&P STOCK INDEX (1) A
<S> <C> <C>
4/2/91* $500,000 $500,000
10/31/1991 $533,090 $533,000
10/31/1992 $585,450 $582,330
12/31/1992 $612,760 $604,725
12/31/1993 $674,400 $630,900
12/31/1994 $683,250 $651,465
12/31/1995 $939,742 $944,733
12/31/1996 $1,155,507 $1,237,317
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 30.97% 16.99% 17.06%
PORTFOLIO -- CLASS
B(3).................. 29.92% N/A N/A
INDEX................. 22.96% 15.20% 15.86%
</TABLE>
1. 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.
The Equity Growth Portfolio employs a growth-oriented investment strategy
seeking long-term capital appreciation. The Portfolio seeks to accomplish its
objective by investing primarily in equities of medium and large capitalization
companies exhibiting sustainable earnings growth.
The Portfolio achieved strong absolute and relative performance for the twelve
month and since inception periods ended December 31, 1996. For the year ended
December 31, 1996, the Portfolio had a total return of 30.97% for the Class A
shares and 29.92% for the Class B shares, as compared to a total return of
22.96% for the S&P 500 Index. The average annual total return for the five year
period ended December 31, 1996 and for the period from inception on April 2,
1991 through December 31, 1996 was 16.99% and 17.06%, respectively, for the
Class A shares, as compared to 15.20% and 15.86%, respectively, for the Index.
For the third consecutive year, our substantial overweighting in the tobacco
sector contributed positively to relative performance. After a market-smashing
total return of 62% in 1995 (including dividends), Philip Morris stock surged
late in 1996 for a full-year total return of 25%. The S&P 500 total return in
1995 and 1996 was 37.6% and 23.0%, respectively.
Philip Morris was our largest single holding throughout most of 1995 and 1996.
By taking advantage of periodic selling panics caused by ubiquitous news
headlines regarding litigation and political risk, we were able to greatly
enhance our returns in the stock. For example, in April of 1996, with Philip
Morris down about 5% on the year and trading at $85 against a market that was up
about 10%, we took Philip Morris stock to about 10% of the Portfolio. By August,
the stock had hit $107 as litigation concerns had eased and investors focused
more on the company's strong growth fundamentals. We had reduced our Philip
Morris holding to about a 4% position when, in early August, the industry had a
setback and lost the first round of a product liability court case. The stock
plunged back into the $80's, a huge overreaction in our view, and we
subsequently went back to a 10% weighting.
At year-end 1996, with Philip Morris stock at $113, it represented about 6% of
our Portfolio. Combined with positions in RJR Nabisco, Loews and Consolidated
Cigar, our total tobacco exposure is
- --------------------------------------------------------------------------------
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO (CONT.)
about 16%. While the group will clearly be subject to bouts of selling pressure
since the industry is under attack from a number of directions, we nonetheless
believe the tobacco stocks are in the midst of a multi-year trend of upward
revaluation. Combined with strong underlying growth fundamentals, this creates a
powerful investment opportunity which we feel many growth investors are missing.
The next time you read an article about a state attorney general that is suing
the cigarette industry, or a senator that backs FDA control of cigarettes, or a
plaintiff attorney that claims the litigation dam is about to break open,
consider some of the following points:
1. Philip Morris is the largest taxpayer in the United States. In other words,
it could be argued that a compensation system is already in place for the
industry to repay society for the ills created by smoking.
2. Despite news headlines declaring the imminent demise of the industry, the law
in this country is generally on the side of the cigarette manufacturers because
the product is legal and a warning label has been mandated by Congress for over
30 years. Anything can happen in a jury-decided case, and two such cases have
now gone against the industry, but as cases move higher up in the court system
the principles of tort law are much tougher for plaintiffs to battle.
3. Since plaintiffs have never won a dime in over 30 years of suing the
industry, a legislated global settlement would clearly be attractive in their
eyes and in the eyes of their attorneys. The industry is in the position of
strength here, since its pockets are so much bigger, but news reports and
company statements over the past year indicate that they may finally agree to
such a settlement. This would be enormously bullish since it would put the
uncertainty of litigation behind the industry at a likely nominal cost. For
example, slapping a $0.20 per pack surcharge on cigarettes for a 20-year period
would generate approximately $100 billion and would have a negligible impact on
cigarette demand.
4. Like it or not, business is good. This is especially true for Philip Morris,
but is also the case for the other tobacco companies in our Portfolio. Domestic
consumption trends are improving and are actually as strong as they have been in
many years. And global growth is substantial while surplus cash flow generation
is huge. Despite paying out over half of earnings in dividends (a rare quality
for a growth company), Philip Morris grew earnings per share 19% in 1995, an
estimated 18% in 1996 and should grow 17%+ annually over the next 3-5 years.
5. Company managements are now much more committed to returning cash to
shareholders and enhancing shareholder value than ever before. In the 1980's,
Philip Morris spent over $20 billion on food acquisitions. This strategy
backfired because the acquisitions were dilutive and slowed growth while
lowering returns. Under new CEO, Geoff Bible, who in our view is an investor's
dream, the company has actually been divesting low-return food assets at
attractive prices, while buying back stock aggressively.
6. Valuation is extremely compelling in a market in which large cap stable
growth stocks like Coca Cola, Proctor and Gamble, Disney and GE have surged and
look expensive. At $113, Philip Morris trades at 12.6 times projected 1997
earnings, or 74% of its sustainable growth rate of 17%.
As we enter 1997, the S&P 500 Index has out-performed the vast majority of
active managers for three consecutive years. Also, the Index has outpaced the
earnings growth of the companies whose stocks are in it. One could argue that
there are many positive factors driving the United States markets higher and
that these factors could persist: stable interest rates, solid economic growth
without inflationary pressures, the opening up of emerging markets, the
acceptance of shareholder value as the key motivator of corporate managements,
and the huge flow of cash coming into stocks supported by powerful demographic
trends.
Still, there is no doubt that many large cap, "blue chip" stocks, while enjoying
tremendous business fundamentals, have outperformed their own businesses. Take
General Electric as an example. In 1996, the stock was up 40%, while EPS grew
about 15%. Another example would be Merck, a stock up 77% in 1995 and 24% in
1996, with EPS in those two years up only 12% and 20%.
Our guess is that active managers will have an easier time beating the S&P 500
this year. This would be more likely to occur if smaller company stocks do well.
While we are large cap managers and continue to feel very comfortable with many
large cap names, at the margin we feel that there are currently many
opportunities in secondary stocks, especially high beta
- --------------------------------------------------------------------------------
Equity Growth Portfolio
83
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- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO (CONT.)
growth issues that have missed the recent market move, but where fundamentals
are intact. Examples include HFS, Gtech, International Game Technology, Cracker
Barrel, Petsmart and Clear Channel Communications.
HFS is a great example of what we look for in a stock, and it is one of our
largest holdings currently. At $60, the stock has corrected 25% from its
mid-1996 and all-time high. During this period of stock price weakness,
consensus earnings expectations for 1997 have risen about 17% (from $2.20 in EPS
to $2.57). Moreover, we believe strongly that estimates will rise several more
times over the next few months and HFS will earn at least $2.80 per share in
1997. Driven by strong business trends, free cash flow generation and additional
acquisitions, we think HFS will earn $3.50 to $4.00 per share in 1998, up
sharply from 1997 and well above the $3.25 consensus estimate.
But perhaps HFS stock is too expensive, having quadrupled in less than two years
since the company started a buying binge by acquiring Century 21. We find it
very difficult to get the question of valuation right. But it is comforting that
the HFS price correction occurred at a time when high P/E, high quality growth
stocks went up. For example, as HFS fell 18% in the second half, Gillette rose
25%, Merck rose 21.3%, General Electric climbed 15% and Microsoft rallied 35%.
In a market that places a high value on stable and rapid growth, we believe
investors will gravitate back into HFS stock.
What is HFS and why are we so excited about this stock? At over $10 billion in
market cap (pro forma for the acquisition of PHH, which should close in March),
HFS is a large capitalization company with a unique and compelling growth
strategy. Yet many large cap investors either do not know the company or have
shied away from the stock due to its rapid ascent over the past few years. This
in itself is very bullish if we are right on the company's growth prospects,
because large investors will be forced to look at and buy the stock.
HFS is a conglomerate put together by CEO Henry Silverman, following his LBO and
subsequent IPO of several hotel franchises, including Ramada, Howard Johnson and
Days Inn. Since HFS owns management and franchise rights to these brands, as
opposed to bricks and mortar, the company generates significant free cash flow.
Mr. Silverman used this free cash flow to help finance the purchase of other
franchises, beginning two years ago with Century 21 and including Coldwell
Banker, Avis, RCI (the largest timeshare exchange company) and finally PHH, a
company which specializes in corporate relocation. Separately, each business has
solid growth prospects, some great and some only fair. But together, they form a
huge network of customer transactions, access to which the company is selling
back to corporate America. This in turn creates massive additional fee income
for HFS, enhances the market position of its businesses, and gives HFS an
advantage in competing for acquisitions.
At $60, HFS stock trades at 21 times our estimate of 1997 earnings. But free
cash flow is about $0.80 above stated earnings, so the multiple of free cash
flow is only 17 times. In other words, the stock's free cash flow yield is 6%.
Looking out to 1998, the free cash flow yield is 7.6%. We think this is
extremely compelling because HFS's savvy and shareholder driven management team
will look to leverage their big free cash flow ($600 million and $800 million in
1997 and 1998, respectively) through additional acquisitions.
We see virtually no risk to consensus earnings estimates and believe HFS could
even earn more than the high end of our $3.50-4.00 earnings per share range for
next year. This would imply free cash flow approaching $5 per share. With little
or no help from the market, we could see HFS stock at $80-100 in a year.
At year end the Portfolio was invested in a mix of "low-flying" growth, such as
Philip Morris, and higher beta growth, such as HFS. The fund held 98 issues at
December 31, 1996, and 9% in cash.
Kurt Feuerman
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
84
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (91.0%)
CAPITAL GOODS-CONSTRUCTION (8.2%)
AEROSPACE & DEFENSE (7.1%)
33,787 Boeing Co......................................... $ 3,594
30,900 General Dynamics Corp............................. 2,179
(a)40,600 Gulfstream Aerospace Corp......................... 985
(a)116,900 Loral Space & Communications...................... 2,148
48,300 McDonnell Douglas Corp............................ 3,091
37,600 Rockwell International Corp....................... 2,289
10,600 Sundstrand Corp................................... 451
164,200 United Technologies Corp.......................... 10,837
----------
25,574
----------
ELECTRICAL EQUIPMENT (0.5%)
(a)100 American Standard Cos............................. 4
18,900 Emerson Electric Co............................... 1,829
----------
1,833
----------
ENVIRONMENTAL CONTROLS (0.6%)
58,700 WMX Technologies, Inc............................. 1,915
----------
TOTAL CAPITAL GOODS-CONSTRUCTION............................ 29,322
----------
CONSUMER-CYCLICAL (28.2%)
AUTOMOTIVE (1.2%)
54,700 Ford Motor Co..................................... 1,744
52,400 Goodyear Tire & Rubber Co......................... 2,692
----------
4,436
----------
BROADCAST-RADIO & TELEVISION (3.0%)
(a)176,000 Clear Channel Communications, Inc................. 6,358
(a)33,400 Film Roman, Inc................................... 255
(a)33,450 Heftel Broadcasting Corp., Class A................ 1,053
(a)50,200 Infinity Broadcasting, Class A.................... 1,688
(a)34,400 Viacom, Inc., Class B............................. 1,200
----------
10,554
----------
ENTERTAINMENT & LEISURE (3.7%)
(a)35,000 Family Golf Centers, Inc.......................... 1,054
(a)243,600 GTECH Holdings Corp............................... 7,795
32,600 Walt Disney Co.................................... 2,270
(a)102,600 WMS Industries, Inc............................... 2,052
----------
13,171
----------
FOOD SERVICE (3.1%)
(a)102,800 Boston Chicken, Inc............................... 3,688
(a)70,500 Brinker International, Inc........................ 1,128
139,300 Cracker Barrel Old Country Store, Inc............. 3,535
(a)88,600 Einstein/Noah Bagel Corp.......................... 2,636
(a)28,900 Foodmaker, Inc.................................... 256
----------
11,243
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
GAMING & LODGING (9.4%)
(a)346,600 HFS, Inc.......................................... $ 20,709
104,700 Hilton Hotels Corp................................ 2,735
559,900 International Game Technology..................... 10,218
----------
33,662
----------
PHOTOGRAPHY & OPTICAL (1.0%)
42,600 Eastman Kodak Co.................................. 3,419
----------
PUBLISHING (3.3%)
23,800 Gannett Co., Inc.................................. 1,782
47,200 Hollinger International, Inc., Class A............ 543
(a)770,600 K-III Communications Corp......................... 8,284
31,900 New York Times Co., Class A....................... 1,212
----------
11,821
----------
RETAIL-FOODS (1.3%)
(a)83,200 Dominick's Supermarkets, Inc...................... 1,810
288,500 Food Lion Inc., Class B........................... 2,921
----------
4,731
----------
RETAIL-GENERAL (2.2%)
35,400 CVS Corp.......................................... 1,465
59,800 Home Depot, Inc................................... 2,997
(a)153,400 PetSmart, Inc..................................... 3,356
----------
7,818
----------
TOTAL CONSUMER-CYCLICAL..................................... 100,855
----------
CONSUMER-STAPLES (24.1%)
BEVERAGES AND TOBACCO (8.5%)
32,200 Coca Cola Enterprises, Inc........................ 1,562
850,300 RJR Nabisco Holdings Corp......................... 28,910
----------
30,472
----------
DRUGS (1.4%)
33,900 American Home Products Corp....................... 1,987
24,900 Pfizer, Inc....................................... 2,064
12,200 Schering-Plough Corp.............................. 790
----------
4,841
----------
FOOD (3.6%)
113,700 Campbell Soup Co.................................. 9,124
46,100 Interstate Bakeries Corp.......................... 2,265
25,700 McCormick & Co., Inc.............................. 606
12,600 Ralston Purina Group.............................. 924
----------
12,919
----------
HEALTH CARE SUPPLIES & SERVICES (1.0%)
58,550 Columbia/HCA Healthcare Corp...................... 2,386
30,200 U.S. Surgical Corp................................ 1,189
----------
3,575
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
85
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
CONSUMER-STAPLES (CONT.)
HOSPITAL SUPPLIES & SERVICES (2.5%)
(a)37,300 Acuson Corp....................................... $ 909
65,200 Aetna, Inc........................................ 5,216
63,400 Becton Dickinson & Co............................. 2,750
----------
8,875
----------
PERSONAL CARE PRODUCTS (0.7%)
34,100 Gillette Co....................................... 2,651
----------
TEXTILES & APPAREL (0.2%)
(a)55,100 Designer Holdings Ltd............................. 889
----------
CIGARETTES (6.2%)
(a)98,400 Consolidated Cigar Holdings Inc................... 2,435
174,300 Philip Morris Cos., Inc........................... 19,631
----------
22,066
----------
TOTAL CONSUMER-STAPLES...................................... 86,288
----------
DIVERSIFIED (5.9%)
56,100 Allied Signal, Inc................................ 3,759
(a)183 Berkshire Hathaway, Inc., Class A................. 6,240
85,200 Loews Corp........................................ 8,030
(a)65,900 U.S. Industries, Inc.............................. 2,265
50,600 Viad Corp......................................... 835
----------
TOTAL DIVERSIFIED........................................... 21,129
----------
ENERGY (0.5%)
(a)38,900 AES Corp.......................................... 1,809
----------
FINANCE (11.8%)
BANKING (3.8%)
30,368 Chase Manhattan Corp.............................. 2,710
9,300 Citicorp.......................................... 958
37,433 Wells Fargo & Co.................................. 10,098
----------
13,766
----------
FINANCIAL SERVICES (5.3%)
93,700 American Express Co............................... 5,294
11,700 CIGNA Corp........................................ 1,599
35,100 Dean Witter Discover & Co......................... 2,325
84,200 Franklin Resources, Inc........................... 5,757
42,300 Student Loan Marketing Association................ 3,939
----------
18,914
----------
INSURANCE (2.4%)
61,900 Ace Ltd........................................... 3,722
52,500 Exel Ltd.......................................... 1,988
50,700 PMI Group (The), Inc.............................. 2,807
----------
8,517
----------
REAL ESTATE (0.3%)
(a)45,000 Insignia Financial Group, Inc., Class A........... 1,013
----------
TOTAL FINANCE............................................... 42,210
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
MATERIALS (1.7%)
CHEMICALS (1.7%)
30,700 Hercules, Inc..................................... $ 1,328
58,700 Monsanto Co....................................... 2,282
66,700 Olin Corp......................................... 2,509
----------
TOTAL MATERIALS............................................. 6,119
----------
SERVICES (1.9%)
PROFESSIONAL SERVICES (1.2%)
(a)3,000 Catalina Marketing Corp........................... 165
(a)85,375 CUC International, Inc............................ 2,028
57,100 First Data Corp................................... 2,084
----------
4,277
----------
TRANSPORTATION (0.7%)
(a)28,700 AMR Corp.......................................... 2,529
----------
TOTAL SERVICES.............................................. 6,806
----------
TECHNOLOGY (8.7%)
COMPUTERS (0.1%)
(a)46,700 Larscom Inc., Class A............................. 531
----------
ELECTRONICS (3.1%)
(a)28,700 Applied Materials, Inc............................ 1,032
(a)43,900 Cisco Systems, Inc................................ 2,793
48,400 Intel Corp........................................ 6,337
16,100 Motorola, Inc..................................... 988
----------
11,150
----------
OFFICE EQUIPMENT (1.6%)
26,400 International Business Machines Corp.............. 3,986
23,900 U.S. Robotics Corp................................ 1,721
----------
5,707
----------
SOFTWARE SERVICES (3.1%)
39,600 Adobe Systems, Inc................................ 1,480
(a)51,600 Microsoft Corp.................................... 4,263
(a)28,000 Netscape Communications Corp...................... 1,593
(a)46,400 Oracle System, Corp............................... 1,937
(a)49,100 Sterling Commerce, Inc............................ 1,731
----------
11,004
----------
TELECOMMUNICATIONS (0.8%)
(a)48,300 AirTouch Communications, Inc...................... 1,220
(a)67,700 WorldCom, Inc..................................... 1,764
----------
2,984
----------
TOTAL TECHNOLOGY............................................ 31,376
----------
TOTAL COMMON STOCKS (Cost $298,740)......................... 325,914
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
86
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (29.2%)
REPURCHASE AGREEMENT (29.2%)
$ 104,658 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/2/97, to be repurchased at $104,693,
collateralized by various U.S. Treasury Bonds,
due 8/15/17-8/15/22, valued at $106,598 (Cost
$104,658)....................................... $ 104,658
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (120.2%) (Cost $403,398)............... 430,572
--------
OTHER ASSETS (3.3%)
Cash....................................... $ 8,912
Receivable for Portfolio Shares Sold....... 1,802
Receivable for Investments Sold............ 614
Dividends Receivable....................... 480
Interest Receivable........................ 17
Other...................................... 8 11,833
----------
LIABILITIES (-23.5%)
Payable for Investments Purchased.......... (83,615)
Investment Advisory Fees Payable........... (341)
Payable for Portfolio Shares Redeemed...... (142)
Administrative Fees Payable................ (32)
Custodian Fees Payable..................... (11)
Directors' Fees and Expenses Payable....... (5)
Distribution Fees Payable.................. (4)
Other Liabilities.......................... (54) (84,204)
---------- --------
NET ASSETS (100%)........................................ $358,201
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 324,250
Undistributed Net Investment Income.... 2
Accumulated Net Realized Gain.......... 6,775
Unrealized Appreciation on
Investments.......................... 27,174
----------
NET ASSETS............................. $ 358,201
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $352,703
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 23,608,569 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $14.94
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $5,498
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 368,438 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $14.92
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
87
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 1.8%
Banking 8.4%
Building 3.0%
Capital Goods 5.5%
Chemicals 5.2%
Computers 1.9%
Consumer - Durables 3.2%
Consumer - Retail 5.6%
Consumer - Staples 3.8%
Energy 3.9%
Entertainment 1.2%
Financial -
Diversified 6.2%
Health Care 5.8%
Industrial 2.6%
Insurance 5.7%
Metals 3.2%
Paper & Packaging 2.0%
Services 8.1%
Technology 7.9%
Transportation 1.8%
Utilities 7.9%
Other 5.3%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
RUSSELL 2500 INDEX SMALL CAP VALUE EQUITY PORTFOLIO-CLASS
(1) A
<S> <C> <C>
12/17/92* $500,000 500000
12/31/1992 515665 507000
12/31/1993 601000 564420
12/31/1994 595350 578700
12/31/1995 784076 698086
12/31/1996 933,443 858,576
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE RUSSELL 2500
AND S&P 500 INDICES(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 22.99% 14.32%
PORTFOLIO -- CLASS B(3)............................................................................ 22.33 N/A
RUSSELL 2500....................................................................................... 19.05 16.71
S&P 500............................................................................................ 22.96 17.08
</TABLE>
1. The Russell 2500 Index and the S&P 500 Index are unmanaged indices of common
stock.
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.
The Small Cap Value Equity Portfolio invests in small companies that our
research indicates are undervalued, of high quality, and will reward the
shareholder through high current dividend income. The Portfolio's disciplined
value approach seeks to outperform the Russell 2500 Small Company Index in the
longer term. We believe our emphasis on high quality companies will help the
Portfolio perform particularly well in difficult markets.
The Small Cap Value Equity Portfolio selects companies that can be purchased at
bargain prices. Bargains mostly arise as a result of public overreactions to
temporary problems associated with an otherwise healthy company, or because a
company is neglected and currently out-of-the limelight of investors' interest.
Often, these companies operate as major players in very focused markets and are
not widely followed by the investment community.
The Portfolio invests in all economic sectors of the market, and our strategy of
maintaining a well-diversified portfolio is intended to produce consistent and
reliable results over time. Our investment approach combines quantitative and
fundamental research, and is based on the premise that the prices of stocks move
more frequently, and in greater magnitude, than do the fundamentals of the
underlying companies. This discrepancy creates an opportunity for disciplined,
value-oriented investors. Our value approach importantly includes quality and
growth standards which are carefully designed to help avoid "value-traps", where
cheap stocks sometimes remain cheap (or become cheaper) because the company is
run by bad managers or is mired in a hopelessly difficult business environment.
The end result should be a portfolio with below-market valuation and an overall
growth rate as similar as possible to the Russell 2500 benchmark.
For the year ended December 31, 1996, the Portfolio had a total return of 22.99%
for the Class A shares and 22.33% for the Class B shares, as compared to a total
return of 19.05% and 22.96% for the Russell 2500 Index and S&P 500 Index,
respectively. The average annual total return for the period from inception on
December 17, 1992 through December 31, 1996 was 14.32% for the Class A shares,
as compared to 16.71% for the Russell 2500 Index and 17.08% for the S&P 500
Index.
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
88
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
FOURTH QUARTER PERFORMANCE REVIEW
The fourth quarter was especially strong for the market and the Portfolio. The
positive results stemmed from both stock and sector selection. In particular,
our overweighing in the energy sector provided strong returns. For the three
month period ended December 31, 1996, the Portfolio had a total return of 11.52%
for the Class A shares and 11.42% for the Class B shares, as compared to a total
return of 5.57% for the Russell 2500 and 8.35% for the S&P 500.
In the quarter we added to our weightings in energy, basic resources and
technology, while reducing weightings in financial services, health care and
utilities.
Looking forward, we are concerned that the effects of sustained wage and job
growth and rising food and energy prices will push inflation higher in 1997.
Real GDP growth in excess of 3% in the first half of 1997, will likely cause the
Federal Reserve to raise interest rates. While the strength of the dollar will
allow for the importation of lower cost goods and historically high interest
rates will serve to dampen economic growth, we are concerned that inflationary
pressures are building and will continue to carefully monitor the growth of the
economy.
In any case, we remain committed to our strategy of remaining fully-invested at
all times. In the event of higher inflation we would reduce our holdings of
financial service stocks and buy shares of companies in less interest sensitive
groups.
INVESTMENT STRATEGY
While our investment process is driven chiefly by bottom-up considerations, we
also take into account broad macroeconomic trends that influence the outlook for
certain industries. As long as we are not required to pay a premium price in the
stock market, we prefer to invest in industries which are beneficiaries of
favorable secular economic trends or positive changes in competitive conditions.
The two areas we have found most interesting recently are financial services and
aerospace manufacturing.
Though we have reduced our overall weight in financial stocks, we are still
adding to positions of selected asset management and brokerage stocks. Recent
purchases in this sector include Franklin Resources, a mutual fund company, and
additional purchases of United Asset Management, a skilled consolidator of
investment management companies, and Everen Capital, a well-run regional
brokerage concern. Our investment in Everen should benefit from future
regulatory changes making it easier for banks to acquire brokerage companies.
We continue to be interested in aerospace manufacturing. After several years of
little growth, new plane orders are rebounding strongly. We are focusing on
suppliers of parts and services to Boeing. As in many other industries, major
aerospace companies, such as Boeing, are reducing the number of suppliers they
use and are also relying more heavily on outside suppliers for value-added
services such as engineering design and just-in-time delivery of parts and
supplies. In addition to the upswing in the aerospace cycle, this concentration
of suppliers and extra services should create a boom in new business for
well-positioned aerospace supply companies. Our most recent purchase in this
sector is Crane Co.
CONCLUSION
The Portfolio is designed to outperform small cap indices over the long-term,
and to do so with lower volatility. In times of strong market advances such as
the ebullient bull market of 1996, the Portfolio should provide good absolute
returns but may not participate fully in speculative rallies. In times of
difficult market environments, we expect the Portfolio to perform very well, and
for the total long-term result to be measurably better than that of the Russell
2500 Index.
The Small Cap Value Equity Portfolio offers the consistent application of a
disciplined value-oriented investment process to its shareholders. As such, we
will diligently search for small companies that our research indicates are
undervalued, have strong balance sheets and possess reasonably good growth
prospects. We believe that selective investments in companies such as this
should provide superior long-term returns for our shareholders.
Gary G. Schlarbaum
PORTFOLIO MANAGER
William B. Gerlach
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
89
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (94.7%)
AEROSPACE (1.8%)
6,400 AAR Corp.......................................... $ 193
1,200 Penn Engineering & Manufacturing Corp............. 25
5,500 Thiokol Corp...................................... 246
----------
464
----------
BANKING (8.4%)
7,800 Astoria Financial Corp............................ 288
6,475 First Security Corp. (Delaware)................... 219
7,400 Onbancorp, Inc.................................... 275
3,337 Peoples Heritage Financial Group, Inc............. 93
8,500 Susquehanna Bancshares, Inc....................... 294
15,100 Trustmark Corp.................................... 385
8,500 Union Planters Corp............................... 332
6,400 Washington Mutual, Inc............................ 277
----------
2,163
----------
BUILDING (3.0%)
5,600 Ameron International Corp. (Delaware)............. 289
22,900 Gilbert Associates, Inc., Class A................. 315
12,300 Ryland Group, Inc................................. 169
----------
773
----------
CAPITAL GOODS (5.5%)
11,503 Binks Manufacturing Co............................ 462
17,300 Cascade Corp...................................... 279
13,400 Starret (L.S.) Co., Class A....................... 380
5,200 Tecumseh Products Co., Class A.................... 298
----------
1,419
----------
CHEMICALS (5.2%)
26,192 Aceto Corp........................................ 365
12,000 Crompton & Knowles, Corp.......................... 231
8,200 Dexter Corp....................................... 261
4,300 Learonal, Inc..................................... 99
1,100 Mississippi Chemical Corp......................... 27
10,400 Quaker Chemical Corp.............................. 170
6,300 Witco Corp........................................ 192
----------
1,345
----------
COMPUTERS (1.9%)
(a)15,900 Cirrus Logic, Inc................................. 246
10,000 Watts Industries, Inc., Class A................... 239
----------
485
----------
CONSUMER-DURABLES (3.2%)
9,700 Arvin Industries, Inc............................. 240
10,498 Knape & Vogt Manufacturing Co..................... 173
13,400 Oneida Ltd........................................ 241
5,400 Smith (A.O.) Corp., Class B....................... 162
----------
816
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
CONSUMER-RETAIL (5.6%)
5,000 American Greetings Corp., Class A................. $ 142
8,800 Guilford Mills, Inc............................... 234
6,700 Interface, Inc.................................... 135
21,400 Lillian Vernon Corp............................... 262
5,200 Springs Industries, Inc., Class A................. 224
8,400 Stanhome, Inc..................................... 223
(a)11,000 Zale Corp......................................... 210
----------
1,430
----------
CONSUMER-STAPLES (3.8%)
5,918 Block Drug Co., Inc., Class A..................... 272
10,600 Coors (Adolph), Inc., Class B..................... 201
6,600 International Multifoods Corp..................... 120
17,600 Nash Finch Co..................................... 374
----------
967
----------
ENERGY (3.9%)
7,700 Ashland Coal, Inc................................. 214
4,600 National Fuel Gas Co.............................. 190
5,500 Parker & Parsley Petroleum Co..................... 202
8,302 Ultramar Diamond Shamrock Corp.................... 262
5,800 Union Texas Petro Holdings, Inc................... 130
----------
998
----------
ENTERTAINMENT (1.2%)
3,000 First Hawaiian, Inc............................... 105
6,100 Universal Corp.................................... 196
----------
301
----------
FINANCIAL-DIVERSIFIED (6.2%)
26,800 EVEREN Capital Corp............................... 600
5,200 GATX Corp......................................... 252
11,500 Manufactured Home Communities, Inc. REIT.......... 267
10,000 United Asset Management, Inc...................... 266
8,800 Wellsford Residential Property Trust REIT......... 214
----------
1,599
----------
HEALTH CARE (5.8%)
10,400 Analogic Corp..................................... 348
6,100 Beckman Instruments, Inc.......................... 234
8,200 Bergen Brunswig Corp., Class A.................... 234
14,900 Bindley Western Industries, Inc................... 289
15,100 Kinetic Concepts, Inc............................. 185
8,000 United Wisconsin Services, Inc.................... 210
----------
1,500
----------
INDUSTRIAL (2.6%)
4,200 Barnes Group, Inc................................. 252
2,000 Franklin Resources, Inc........................... 137
16,000 Kaman Corp., Class A.............................. 208
(a)5,000 Renters Choice, Inc............................... 72
----------
669
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
90
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
INSURANCE (5.7%)
11,000 Argonaut Group, Inc............................... $ 338
6,200 Enhance Financial Services Group, Inc............. 226
5,600 Provident Companies, Inc.......................... 271
9,400 Selective Insurance Group, Inc.................... 357
8,350 USLife Corp....................................... 278
----------
1,470
----------
METALS (3.2%)
13,800 Birmingham Steel Corp............................. 262
5,800 Cleveland-Cliffs, Inc............................. 263
5,900 Precision Castparts Corp.......................... 293
----------
818
----------
PAPER & PACKAGING (2.0%)
6,700 Ball Corp......................................... 174
5,000 P.H. Glatfelter Co................................ 90
5,800 Potlatch Corp..................................... 250
----------
514
----------
SERVICES (8.1%)
11,600 Angelica Corp..................................... 222
12,200 Bowne & Co........................................ 300
10,900 Cross (A.T.) Co., Class A......................... 127
16,600 Jackpot Enterprises, Inc.......................... 162
10,900 New England Business Services, Inc................ 234
10,200 Ogden Corp........................................ 191
25,500 Piccadilly Cafeterias, Inc........................ 236
12,400 Russ Berrie & Co., Inc............................ 223
8,600 Sbarro, Inc....................................... 219
7,700 True North Communications, Inc.................... 169
----------
2,083
----------
TECHNOLOGY (7.9%)
14,900 Core Industries, Inc.............................. 246
11,900 Cubic Corp........................................ 275
12,100 Dallas Semiconductor Corp......................... 278
16,900 Gerber Scientific, Inc............................ 252
17,500 MTS Systems Corp.................................. 350
9,500 National Computer Systems, Inc.................... 242
6,600 Park Electrochemical Corp......................... 150
12,200 Scitex Ltd........................................ 116
(a)5,300 Tracor, Inc....................................... 113
----------
2,022
----------
TRANSPORTATION (1.8%)
8,800 Airborne Freight Corp............................. 206
1,600 Overseas Shipholding Group, Inc................... 27
15,600 SkyWest, Inc...................................... 216
----------
449
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
UTILITIES (7.9%)
8,200 Central Hudson Gas & Electric..................... $ 257
8,100 Commonwealth Energy Systems Cos................... 190
5,200 Eastern Enterprises............................... 184
7,800 Oneok, Inc........................................ 234
5,800 Orange & Rockland Utilities, Inc.................. 208
(a)5,000 Reading & Bates Corp.............................. 133
7,300 SJW Corp.......................................... 342
10,000 Washington Gas Light Co........................... 226
13,300 Washington Water Power Co......................... 248
----------
2,022
----------
TOTAL COMMON STOCKS (Cost $20,255)............................ 24,307
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (2.0%)
REPURCHASE AGREEMENT (2.0%)
$ 519 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $519,
collateralized by U.S. Treasury Bonds, 8.125%,
due 8/15/19, valued at $533 (Cost $519)......... 519
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (96.7%) (Cost $20,774)................. 24,826
--------
OTHER ASSETS (3.4%)
Receivable for Portfolio Shares Sold....... $ 531
Receivable for Investments Sold............ 283
Dividends Receivable....................... 55
Other...................................... 5 874
----------
LIABILITIES (-0.1%)
Investment Advisory Fees Payable........... (6)
Custodian Fees Payable..................... (6)
Administrative Fees Payable................ (4)
Directors' Fees and Expenses Payable....... (1)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (23) (41)
---------- --------
NET ASSETS (100%)........................................ $25,659
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................... $ 20,592
Undistributed Net Investment Income................ 3
Accumulated Net Realized Gain...................... 1,012
Unrealized Appreciation on Investments............. 4,052
--------
NET ASSETS......................................... $ 25,659
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
91
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $23,970
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 2,201,662 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.89
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $1,689
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 155,279 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.88
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
92
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE TECHNOLOGY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Communication Equipment 27.5%
Communication Services 7.1%
Business Services 7.6%
Electronic Computers 5.4%
Motion Picture & Video Tape Production 1.1%
Personal Services 0.7%
Semiconductors & Related Services 25.7%
Surgical & Medical Instruments & Apparatus 0.5%
Software 17.1%
Other 7.3%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $250,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TECHNOLOGY PORTFOLIO -- CLASS TECHNOLOGY PORTFOLIO -- CLASS
S&P 500 INDEX (1) A B
<S> <C> <C> <C>
9/16/1996* $250,000 $250,000 $50,000
12/31/96 272,200 267,750 53,550
*Commencement of operations
**Minimum Investment -- Class A
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The S&P 500 Index value at December 31, 1996
assumes a minimum initial investment of $250,000; if a minimum initial
investment of $50,000 is assumed the value at December 31, 1996 would be
$54,440.
PERFORMANCE COMPARED TO THE S&P 500 INDEX AND THE LIPPER SCIENCE AND TECHNOLOGY
FUNDS INDEX(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN(2)
SINCE INCEPTION
-----------------
<S> <C>
PORTFOLIO -- CLASS A(3)....................................................................................... 7.10%
PORTFOLIO -- CLASS B(3)....................................................................................... 7.10
S&P 500....................................................................................................... 8.88
LIPPER SCIENCE & TECHNOLOGY................................................................................... 8.45
</TABLE>
1. The S&P 500 Index is an unmanaged index of common stocks. The Lipper Science
and Technology Funds Index is a composite index of mutual funds that invest
at least 65% of their assets in science and technology 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 commenced operations on September 16, 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 investment objective of the Technology Portfolio is to achieve long term
capital appreciation by investing primarily in equity securities of companies
expected to benefit from their involvement in technology and technology-related
industries. The focus of the Portfolio is to identify significant long term
technology trends and to invest in those premier companies we believe are
positioned to materially gain from these trends. Stocks selected for the
Portfolio are also expected to meet comprehensive selection criteria. The
Portfolio may invest up to 35% of its total investments in securities of foreign
companies to participate sufficiently in the global technology market.
For the period from inception on September 16, 1996 through December 31, 1996
the Portfolio had a total return of 7.10% for the Class A shares and 7.10% for
the Class B shares, as compared to a total return of 8.88% for the S&P 500 Index
and 8.45% for the Lipper Science & Technology Funds Index. For the three-month
period ended December 31, 1996 the Portfolio had a total return of 3.18% for the
Class A shares and 3.08% for the Class B shares, as compared to a total return
of 8.35% for the S&P 500 Index and 4.51% for the Lipper Science & Technology
Funds Index for the same period.
The best performing stocks for the December quarter were large capitalization
stocks such as Microsoft, IBM and Intel and semiconductor and related companies,
while smaller cap stocks tended to lag the market. Fortunately, our largest
positions are Microsoft and Intel and we had over 25% of the Portfolio in
semiconductor and related stocks. Intel's momentum, led by its core product the
Pentium, lent credibility to the semiconductor turnaround story and most
secondary semiconductor stocks rallied as a result.
Networking stocks had a difficult quarter as some of the higher profile
companies encountered sooner than expected revenue deceleration and as a result
suffered valuation compression. Technology services stocks were negatively
effected when EDS, the stalwart of the group, commented on their cautious
outlook for the December quarter. The company attributed some of its concerns to
firm specific issues, but this indirectly pressured other related stocks.
Enterprise software stocks performed moderately as Oracle and Computer
Associates, two high profile companies, encountered difficulties in the European
market, thereby pressuring related stocks. The storage and
- --------------------------------------------------------------------------------
Technology Portfolio
93
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE TECHNOLOGY PORTFOLIO (CONT.)
computing categories performed well on the back of strong corporate PC demand
and effective execution among the respective industry leaders. Telecom equipment
companies performed well for most of the quarter but sold off near quarter-end
as the telecom/cable service war (and its implications for heightened levels of
competition) appeared to be entering a less aggressive phase and investors
became concerned about the level of future equipment purchases. We will continue
to selectively invest in telco service providers who have the most market share
to gain and the least to lose while maintaining profitability. The consumer
software sector performed poorly as the retail distribution channel encountered
structural difficulties and consumer PC sales were moderate for Christmas, 1996.
We are looking forward to 1997. The economy continues to grow at a moderate
pace, a positive for technology spending. Many of the industry leaders such as
Intel, Microsoft, and Cisco continue to execute well and are experiencing
healthy fundamental growth. As always with technology investing, we expect
significant volatility will continue. Our job will be to identify the premier
sectors and companies and avoid the losers while holding steadfast to the
principles which have provided us with a strong start and are expected to reward
us long term.
Christopher R. Blair
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
94
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE TECHNOLOGY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCK (92.7%)
COMMUNICATION EQUIPMENT (27.5%)
COMPUTER INTEGRATED SYSTEMS DESIGN (10.7%)
(a)3,900 Cisco Systems, Inc................................ $ 248
(a)4,900 Retix, Inc........................................ 33
(a)2,800 3Com Corp......................................... 205
(a)1,400 VideoServer, Inc.................................. 59
----------
545
----------
COMPUTER PERIPHERAL EQUIPMENT (4.4%)
(a)2,700 Adaptec, Inc...................................... 108
(a)1,100 Black Box Corp.................................... 45
(a)2,400 Quantum Corp...................................... 69
----------
222
----------
ELECTRONIC COMPONENTS & ACCESSORIES (0.9%)
1,313 Molex, Inc., Class A.............................. 47
----------
ELECTRONIC PARTS & EQUIPMENT (3.3%)
2,700 Motorola, Inc..................................... 166
----------
TELEPHONE & TELEGRAPH APPARATUS (8.2%)
(a)3,300 ADC Telecommunications, Inc....................... 103
1,200 Advanced Fibre Communications..................... 67
600 Northern Telecommunications Ltd................... 37
(a)2,300 Telco Systems, Inc................................ 44
3,100 Telefonaktiebolaget LM Ericsson ADR............... 94
(a)1,900 Tellabs, Inc...................................... 72
----------
417
----------
TOTAL COMMUNICATION EQUIPMENT............................... 1,397
----------
COMMUNICATION SERVICES (7.1%)
COMPUTER PROGRAMMING (4.0%)
1,000 ECsoft Group plc ADR.............................. 10
2,000 Electronic Data Systems Corp...................... 87
600 International Network Services.................... 18
700 XLConnect Solutions, Inc.......................... 20
2,600 Whittman-Hart, Inc................................ 67
----------
202
----------
DIRECT MAIL ADVERTISING SERVICE (0.2%)
1,000 May & Speh, Inc................................... 12
----------
RADIO/TELEPHONE COMMUNICATIONS (1.4%)
800 LCC International, Inc., Class A.................. 15
(a)3,800 Mobile Telecommunications Technologies Corp....... 32
1,100 Orion Network Systems, Inc........................ 14
(a)600 WinStar Communications, Inc....................... 13
----------
74
----------
TELEPHONE COMMUNICATIONS (1.5%)
1,000 MCI Communications Corp........................... 33
1,400 Teleport Communications Group, Inc., Class A...... 43
----------
76
----------
TOTAL COMMUNICATION SERVICES................................ 364
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
OTHER TECHNOLOGY (41.0%)
BUSINESS SERVICES (7.6%)
1,000 Automatic Data Processing, Inc.................... $ 43
500 BA Merchant Services, Inc., Class A............... 9
(a)800 BISYS Group, Inc.................................. 30
(a)500 CBT Group plc ADR................................. 27
(a)1,400 Gartner Group, Inc., Class A...................... 55
1,300 ONTRACK Data International, Inc................... 19
1,200 Paychex, Inc...................................... 62
1,800 Sterling Commerce, Inc............................ 56
(a)1,300 SunGuard Data Systems, Inc........................ 51
2,000 USCS International, Inc........................... 34
----------
386
----------
ELECTRONIC COMPUTERS (5.4%)
(a)1,400 Compaq Computer Corp.............................. 104
(a)1,400 Dell Computer Corp................................ 74
500 International Business Machines Corp.............. 76
(a)2,100 Network Computing Devices, Inc.................... 21
----------
275
----------
MOTION PICTURE & VIDEO TAPE PRODUCTION (1.1%)
700 News Corp. Ltd., ADR.............................. 14
(a)700 Tele-Communcations, Inc., Class A................. 20
300 The Walt Disney Co................................ 21
----------
55
----------
PERSONAL SERVICES (0.7%)
(a)1,550 CUC International, Inc............................ 37
----------
SEMICONDUCTORS & RELATED SERVICES (25.7%)
(a)1,900 Altera Corp....................................... 138
(a)1,500 ANADIGICS, Inc.................................... 59
(a)2,000 Applied Materials, Inc............................ 72
(a)1,900 ESS Technology, Inc............................... 53
(a)1,400 Fusion Systems Corp............................... 30
2,000 Intel Corp........................................ 262
(a)1,300 KLA Instruments Corp.............................. 46
(a)1,000 Lattice Semiconductor Corp........................ 46
(a)1,000 Level One Communications, Inc..................... 36
3,100 Linear Technology Corp............................ 136
(a)2,500 Maxim Integrated Products, Inc.................... 108
(a)2,700 Microchip Technology, Inc......................... 137
2,000 Micron Technology, Inc............................ 58
(a)1,100 Semtech Corp...................................... 19
(a)2,900 Xilinx, Inc....................................... 107
----------
1,307
----------
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS (0.5%)
(a)400 Boston Scientific Corp............................ 24
----------
TOTAL OTHER TECHNOLOGY...................................... 2,084
----------
SOFTWARE (17.1%)
COMMUNICATIONS SOFTWARE (0.4%)
(a)900 Objective Systems Integrators, Inc................ 21
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Technology Portfolio
95
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE TECHNOLOGY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SOFTWARE (CONT.)
<TABLE>
<C> <S> <C>
PREPACKAGED SOFTWARE (16.7%)
(a)1,100 Avant! Corp....................................... $ 35
(a)1,000 BMC Software, Inc................................. 41
(a)1,000 Broderbund Software, Inc.......................... 30
(a)500 Clarify, Inc...................................... 24
(a)1,300 Compuware Corp.................................... 65
100 CyberMedia, Inc................................... 2
(a)3,400 Microsoft Corp.................................... 281
(a)200 Netscape Communications Corp...................... 11
(a)2,400 Oracle Corp....................................... 100
(a)2,200 Peoplesoft, Inc................................... 105
(a)5,000 Proginet Corp..................................... 18
(a)600 Remedy Corp....................................... 32
600 Siebel Systems, Inc............................... 16
(a)1,700 Transaction Systems Architects, Inc., Class A..... 57
(a)1,000 Vantive Corp...................................... 31
----------
848
----------
TOTAL SOFTWARE.............................................. 869
----------
TOTAL COMMON STOCK (Cost $4,418).............................. 4,714
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (2.0%)
U.S. TREASURY BILL (2.0%)
$ 100 U.S. Treasury Bill, 5.00%, 1/16/97 (Cost $99)..... 99
----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -------------------------------------------------------------------
TOTAL INVESTMENTS (94.7%) (Cost $4,517).................. $4,813
--------
OTHER ASSETS (9.4%)
Receivable for Investments Sold.......... $ 269
Receivable due from Broker............... 92
Receivable for Investment Advisory
Fees..................................... 82
Other.................................... 33 476
-----
LIABILITIES (-4.1%)
Payable for Investments Purchased........ (143)
Bank Overdraft........................... (48)
Custodian Fees Payable................... (2)
Adminstrative Fees Payable............... (1)
Distribution Fees Payable................ (1)
Other Liabilities........................ (12) (207)
----- --------
NET ASSETS (100%)........................................ $5,082
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital..................................... $ 4,798
Accumulated Net Realized Loss....................... (12)
Unrealized Appreciation on Investments.............. 296
--------
NET ASSETS.......................................... $ 5,082
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ----------------------------------------------------
NET ASSETS.......................................... $3,595
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 335,562 outstanding $0.001 par value
shares (authorized 500,000,000 shares)............ $10.71
--------
--------
CLASS B:
- ----------------------------------------------------
NET ASSETS.......................................... $1,487
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 138,936 outstanding $0.001 par value
shares (authorized 500,000,000 shares)............ $10.71
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Technology Portfolio
96
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Apartment 15.7%
Healthcare 6.7%
Land 2.3%
Lodging/Leisure 13.8%
Manufactured Home 5.4%
Office and
Industrial 33.6%
Retail 10.2%
Self Storage 2.5%
Other 9.8%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. REAL ESTATE
NAREIT INDEX (1) PORTFOLIO-CLASS A
<S> <C> <C>
02/24/95* $500,000 $500,000
12/31/1995 $572,300 $605,350
12/31/1996 780,617 844,826
*Commencement of operations
**Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE NATIONAL ASSOCIATION
OF REAL ESTATE INVESTMENT TRUSTS (NAREIT) INDEX(1)
- ---------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 39.56% 32.73%
PORTFOLIO -- CLASS B(3)............................................................................ 38.23 N/A
INDEX.............................................................................................. 36.40 27.19
</TABLE>
1. The NAREIT Index is an unmanaged market weighted index of tax qualified REITs
listed on the New York Stock Exchange, American Stock Exchange and the NASDAQ
National Market System, including dividends.
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.
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.
For the year ended December 31, 1996, the Portfolio had a total return of 39.56%
for the Class A shares and 38.23% for the Class B shares, as compared to a total
return of 36.40% for the National Association of Real Estate Investment Trusts
(NAREIT) Index. The average annual total return for the period from inception on
February 24, 1995 through December 31, 1996 was 32.73% for the Class A shares as
compared to 27.19% for the Index.
The U.S. real estate securities markets exceeded the expectations of even the
most optimistic analysts during 1996 in terms of total performance, growth in
assets and other relevant benchmarks. The NAREIT Equity Index (the "Index")
registered a total return of 35.3%, of which approximately 18.9% came in the
fourth quarter (and a full 10.4% in the final month alone). In this report we
would like to examine a number of the major themes that defined this
record-breaking year, to review important developments in each of the major
industry sectors that together comprise the real estate business, and lastly to
review the Portfolio's position and strategy as we enter the new year 1997.
INVESTMENT THEMES: 1996
The most important theme of 1996 and the one which certainly dominated the
market during the second half of the year was the extraordinary growth of the
real estate sector. Driven by rapid appreciation in share prices and a
record-setting $9.5 billion in securities offerings, the equity market
capitalization of the U.S. REIT industry rose by 53% during 1996 to a year-end
total of $87 billion. Total assets of REITs rose 35% to $125 billion. Some
analysts now estimate that REITs may comprise as much as 20% of the total
commercial real estate owned by institutions in the United States, up from a
fraction just a few years ago. Virtually every major real estate investor
constituency participated in the market in 1996. Pension funds, which had stuck
their toes into the REIT waters for the first time in 1994, came back to REITs
in force during the second half of the year. As we write this letter,
consultants speak of a record number of pending proposals for pension funds
seeking to initiate or expand existing commitments to the REIT industry. Other
institutions, such as insurance companies, came to see REITs as a viable
alternative during 1996. Perhaps the most noteworthy convert was
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
97
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO (CONT.)
The Prudential Insurance Company, which during September 1996 announced the
appointment of a senior REIT executive to restructure their $5.5 billion real
estate portfolio, in part through an exchange of direct property into REIT
shares. And last, and perhaps of greatest import, individuals in 1996
discovered, or, we should say, rediscovered REITs. During the 1970's and 1980's,
of course, individual investors were the dominant owners of REIT shares, but
with the growth of the industry during the 1990's, institutions led by dedicated
REIT funds, came to set trends and pricing in the market. That seemed to change
during the second half of 1996, when, following the market turbulence of July,
analysts discovered that REITs had provided a measure of downside protection
while the broader market indices were falling. The rush was on, and during the
following five months investors, including dedicated REIT mutual funds (who
received an estimated $2.7 billion) and non-dedicated mutual funds who
re-allocated their portfolios to include exposure to the sector, invested
heavily in the sector. While it is impossible to tell at this juncture whether
this trend will prove to be long-lasting or short-lived, it has made REITs at
least temporarily a momentum sector, with funds flows into larger capitalization
stocks setting valuation levels for the industry.
The second major theme during 1996 was consolidation. With the proliferation
during the past three years in the number of REITs, a certain natural attrition
was to be expected. During 1996 this process of consolidation finally began to
unfold in a significant way, with 7 completed and 3 announced mergers between
public REITs for a total consideration of $6.1 billion. While the long-term
results of these transactions will not be known for some time, it does appear at
least during the short run that such transactions have had benefits for the
acquiring company and, as expected, for shareholders of the acquired company.
With much less fanfare, 1996 also witnessed a continuation of the sea change in
the consolidation of private real estate companies into public ones through cash
offers or property for share exchanges. The net result of both activities, the
public and the private M&A, is to begin what will undoubtedly be a multi-year
process of consolidating a heretofore highly fragmented industry.
The third theme, and one of at least technical interest to real estate portfolio
managers, was a significant shift in the composition of the various REIT indices
during 1996. Prior to the most recent year it could be argued with some
conviction that the property type or sector weights within the REIT sector did
not reflect well the composition of the U.S. real estate industry. At the
beginning of 1996, for example, the apartment and retail sectors accounted for
roughly 59.2% of the weight of the NAREIT Equity Index, while the NCREIF Index,
an index of private real estate gave those same sectors roughly a 49.5%
weighting. Rapid price appreciation in the share prices of office and hotel
companies coupled with a heavy slate of securities offerings in those two
sectors substantially changed that balance, however. As of year-end, apartment
and retail weightings had dropped by 11% (or 6.5 actual percentage points) in
the NAREIT Equity Index while the weights of hotel and office combined had risen
65% to 19% (or almost 8 percentage points) of the Index. A preliminary look at
expected share offerings for 1997 suggests that we should see more of the same
in the year to come.
The final theme was an intensification of the debate among industry analysts
between "value" and "growth" styles of investing. Value investors, as the name
implies, focus primarily on underlying property values or cash flow in selecting
securities for investment. Growth investors, by contrast, are more likely to
focus on momentum in earnings or investor sentiment in stock selection. As
alluded to above, 1996 gave reason for optimism to both camps, with the first
half of the year favoring "value" and the second half of the year clearly
favoring the "growth" camp. As dedicated proponents of value investing, we are
clearly biased observers in this ongoing debate, given our approach of selecting
securities that offer the best value relative to their underlying net property
assets. While we believe fervently in the thesis that efficient markets will, in
the long run drive values in the public and private markets to equilibrium, we
acknowledge the powerful nature of the recent funds flow momentum that maintains
prices of some securities at 30% to 50% premiums to net assets. In the coming
year we will strive to maintain our value discipline, while at the same time not
overlooking "growth" companies that are able to create incremental underlying
share value through superior property skills.
SECTOR REVIEW
A year ago, many real estate analysts proclaimed that 1996 would be a year for
stock picking after a year (1995) in which sector selection appeared to have
been dominant. The prevalence of sector selection again in 1996 no doubt came as
a surprise to many in the industry, as sector bets on the office and hotel
sectors again contributed significantly to excess
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
98
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO (CONT.)
performance. The chart below outlines the total return performance of the
various sectors in the real estate industry for 1995 and 1996:
<TABLE>
<CAPTION>
TOTAL PERFORMANCE
------------------------
SECTOR 1995 1996
- --------------------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Apartments............................................................................................... 12.3% 28.4%
Manufactured Homes....................................................................................... 10.7% 34.9%
Strip Centers............................................................................................ 7.4% 32.8%
Regional Malls........................................................................................... 3.0% 44.6%
Outlet Centers........................................................................................... -2.8% 3.5%
Industrial............................................................................................... 15.9% 37.0%
Office................................................................................................... 38.8% 51.8%
Self Storage............................................................................................. 34.9% 42.0%
Triple Net Lease......................................................................................... 31.6% 30.8%
Hotel.................................................................................................... 30.8% 49.2%
</TABLE>
As we have written in the past, the securities performance of a sector must
reflect in some fashion the performance differentials in the underlying real
estate markets. This was no doubt the case again in 1996, as those sectors that
generated superior returns generally were those that exhibited on balance the
following benign underlying property trends:
- - Strengthening tenant demand
- - Modest levels of new construction (particularly speculative building)
- - Asset values below replacement cost
- - High but declining property yields
Certainly this was the case with the full service hotel market and the office
sector, two groups that clearly outperformed during 1996. The outperformance of
the regional mall sector is frankly a bit more difficult to explain insofar as
underlying tenant demand remains spotty at best, competitive retail construction
levels remain robust and property values are in fact declining rather than
firming. It would appear in this case that some of the improvement in regional
mall retail relates to the fact that as bad as conditions are in this market,
they have failed to worsen in 1996, and some of the stronger players now have an
opportunity for the first time to purchase assets on an opportunistic basis.
Self storage, manufactured housing and industrial sectors produced returns that
approximately matched the overall industry. All three markets are generally in
equilibrium today, with a modest upward bias in underlying property values in
the face of continuing steady tenant growth and a resumption of selective new
development. While the fundamentals for these sectors are unlikely to improve
during the next twelve months and may, in certain circumstances, deteriorate, we
expect these groups to be market performers overall. Lastly, the strip shopping
center, apartment and factory outlet sectors clearly underperformed the REIT
market generally, with the outlet REITs bringing up the bottom of industry
performance for the second year in a row. While the circumstances of each sector
differ in important respects, all three suffer from a pace of new construction
that is accelerating and that in most cases match or exceed the level of tenant
demand. All three also suffer from a flattening or in some cases a softening of
private market investor demand, leading to mediocre valuation trends.
INVESTMENT STRATEGY
Against this backdrop, we continue to pursue a strategy of over-weighting those
sectors that offer the best underlying real estate fundamentals. Based on our
analysis we categorize the sectors as follows:
<TABLE>
<CAPTION>
UNDERPERFORM
- ------------------------------------------------------
<S> <C>
Class A Apartments Factory Outlets
Strip Shopping Centers Class B Regional Malls
Economy Lodging Sunbelt
<CAPTION>
MARKET PERFORMER
- ------------------------------------------------------
<S> <C>
Class B Apartments Industrial
Self Storage Class A Regional Malls
Suburban Office Midwest
<CAPTION>
OUTPERFORM
- ------------------------------------------------------
<S> <C>
CBD Office Manufactured Housing
Full-service Hotels Northeast/Pacific Coast
</TABLE>
Within this framework, we will, as discussed above, continue to select those
securities that we believe offer the best value relative to our estimate of
their intrinsic asset value.
Finally, on an administrative note, we had been using the NAREIT Equity Index
(excluding healthcare REITs) as our primary benchmark. During 1996, NAREIT (the
REIT industry association) decided that it would provide calculations for the
NAREIT Equity Index and discontinue providing information for the NAREIT Equity
Index excluding healthcare. As a result we will alter our primary benchmark to
be the NAREIT Equity Index. The following are the total return numbers for each
index for the full year 1996 and fourth quarter of 1996: for the NAREIT Equity
Index: 35.3% and 18.9%, for the NAREIT Equity Index excluding healthcare: 36.4%
and 19.4%.
Russell C. Platt
PORTFOLIO MANAGER
Theodore R. Bigman
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
99
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (90.2%)
APARTMENT (15.7%)
99,300 Avalon Properties, Inc. REIT...................... $ 2,855
207,600 Essex Property Trust, Inc. REIT................... 6,098
40,100 Evans Withycombe Residential, Inc. REIT........... 842
278,600 Irvine Apartment Communities, Inc. REIT........... 6,965
143,400 Merry Land & Investment Company, Inc. REIT........ 3,083
243,100 Oasis Residential, Inc. REIT...................... 5,531
306,200 Paragon Group, Inc. REIT.......................... 5,435
215,200 South West Property Trust REIT.................... 3,631
----------
34,440
----------
HEALTHCARE (6.7%)
11,900 Assisted Living Concepts, Inc..................... 181
7,200 Healthcare Realty Trust, Inc...................... 191
92,000 LTC Properties, Inc. REIT......................... 1,702
302,800 Nationwide Health Properties, Inc. REIT........... 7,343
154,600 Omega Healthcare Investors, Inc. REIT............. 5,140
----------
14,557
----------
LAND (2.3%)
449,400 Atlantic Gulf Communities Corp.................... 1,938
271,500 Catellus Development Corp......................... 3,088
----------
5,026
----------
LODGING/LEISURE (13.8%)
356,400 American General Hospitality Corp. REIT........... 8,465
57,100 Bristol Hotel Company............................. 1,813
68,800 Capstar Hotel Co.................................. 1,350
319,200 Host Marriott Corp................................ 5,107
473,000 John Q Hammons Hotels, Inc........................ 4,020
333,500 Servico, Inc...................................... 5,378
262,600 Suburban Lodges of America, Inc................... 4,202
----------
30,335
----------
MANUFACTURED HOME (5.4%)
179,200 Chateau Properties, Inc. REIT..................... 4,749
257,250 ROC Communities, Inc. REIT........................ 7,139
----------
11,888
----------
OFFICE AND INDUSTRIAL (33.6%)
INDUSTRIAL (9.3%)
193,600 East Group Properties REIT........................ 5,300
386,072 Meridian Industrial Trust, Inc. REIT.............. 8,107
(a)184,843 Meridian Industrial Trust, Inc., REIT
(Warrants)...................................... 1,155
11,100 Meridian Point Realty Trust '83 REIT.............. 32
296,900 Pacific Gulf Properties, Inc. REIT................ 5,790
150 Security Capital Industrial Trust REIT............ 3
----------
20,387
----------
OFFICE (18.4%)
263,200 Arden Realty Group, Inc........................... 7,304
538,354 Brandywine Realty Trust REIT...................... 10,498
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(d,e)610,000 Great Lakes, Inc. REIT............................ $ 7,930
39,500 Koger Equity, Inc. REIT........................... 741
244,000 Parkway Properties, Inc........................... 6,344
342,818 Trizec Hahn Corp. REIT............................ 7,542
----------
40,359
----------
OFFICE AND INDUSTRIAL (5.9%)
279,900 Bedford Property Investors, Inc. REIT............. 4,898
317,000 Prentiss Properties Trust REIT.................... 7,925
----------
12,823
----------
TOTAL OFFICE AND INDUSTRIAL................................. 73,569
----------
RETAIL (10.2%)
FACTORY OUTLET CENTER (0.4%)
118,400 Fac Realty, Inc. REIT............................. 784
----------
REGIONAL MALL (4.0%)
58,100 Taubman Centers, Inc. REIT........................ 748
273,000 Urban Shopping Centers, Inc. REIT................. 7,917
----------
8,665
----------
SHOPPING CENTER (0.1%)
22,000 IRT Property Co. REIT............................. 253
----------
STRIP CENTER (5.7%)
311,100 Alexander Haagen Properties, Inc. REIT............ 4,589
532,600 Burnham Pacific Property Trust REIT............... 7,989
----------
12,578
----------
TOTAL RETAIL................................................ 22,280
----------
SELF STORAGE (2.5%)
184,300 Shurgard Storage Centers, Inc., Series A, REIT.... 5,460
----------
TOTAL COMMON STOCKS (Cost $165,201)........................... 197,555
----------
PREFERRED STOCKS (0.0%)
OFFICE (0.0%)
(d,e)33,150 Great Lakes, Inc. REIT (Cost $0).................. --
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (9.4%)
REPURCHASE AGREEMENT (9.4%)
$ 20,579 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/2/97, to be repurchased at $20,586,
collateralized by U.S. Treasury Bonds, 6.625%,
due 7/31/01, valued at $21,140 (Cost $20,579)... 20,579
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
100
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%) (Cost $185,780)................ $218,134
--------
OTHER ASSETS (2.5%)
Cash....................................... $ 559
Receivable for Portfolio Shares Sold....... 2,179
Receivable for Investments Sold............ 1,486
Dividends Receivable....................... 1,204
Interest Receivable........................ 3
Other...................................... 3 5,434
----------
LIABILITIES (-2.1%)
Payable for Investments Purchased.......... (3,256)
Payable for Portfolio Shares Redeemed...... (825)
Investment Advisory Fees Payable........... (285)
Administrative Fees Payable................ (25)
Custodian Fees Payable..................... (10)
Directors' Fees and Expenses Payable....... (3)
Distribution Fees Payable.................. (5)
Other Liabilities.......................... (57) (4,466)
---------- --------
NET ASSETS (100%)........................................ $219,102
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSISTS OF:
Paid in Capital................................... $181,156
Overdistributed Net Investment Income............. (2)
Accumulated Net Realized Gain..................... 5,594
Unrealized Appreciation on Investments............ 32,354
--------
NET ASSETS........................................ $219,102
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $210,368
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 14,597,483 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $14.41
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $8,734
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 606,905 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $14.39
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- see Note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
101
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 2.5%
Banking 14.5%
Capital Goods 2.0%
Chemicals 1.8%
Communications 4.8%
Consumer-Durables 3.2%
Consumer-Retail 4.9%
Consumer-Service & Growth 4.0%
Consumer-Staples 9.7%
Energy 9.8%
Financial-Diversified 2.2%
Health Care 4.2%
Industrial 3.3%
Insurance 6.4%
Metals 0.6%
Paper & Packaging 4.0%
Services 1.1%
Technology 5.3%
Transportation 3.5%
Utilities 10.4%
Other 1.8%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
VALUE EQUITY PORTFOLIO-CLASS
S&P 500 STOCK INDEX (1) A
<S> <C> <C>
1/31/90* $500,000 500000
10/31/1991 633500 557460
10/31/1992 695700 604880
12/31/1992 728150 638765
12/31/1993 801400 735485
12/31/1994 811900 726000
12/31/1995 1116687 970589
12/31/1996 1,373,078 1,162,086
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE S&P 500
AND THE INDATA EQUITY-MEDIAN INDICES(1)
- ----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A.................... 19.73% 14.92% 12.95%
PORTFOLIO -- CLASS
B(3)................. 18.57 N/A N/A
S&P 500............... 22.96 15.20 15.72
INDATA
EQUITY-MEDIAN........ 21.32 10.05 14.89
</TABLE>
1. The Indata Equity-Median Index and the S&P 500 Index are unmanaged indices of
common stocks. The Indata Equity-Median Index includes an average asset
allocation of 7.4% cash and 92.6% equity based on $464.9 billion in assets
among 1,277 portfolios for the year ended December 31, 1996.
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.
Our value investment philosophy for the Value Equity Portfolio is based on the
premise that a diversified portfolio of undervalued securities will outperform
the market over the long-term, and can be expected to preserve principal in a
difficult market environment.
Key aspects of our philosophy are as follows:
Reversion to mean valuation levels (return to the long term average) is the
most consistent and powerful force in investing.
We buy companies selling at less than our research measures to be their true
worth.
Our Portfolio is characterized by a distinctly below average
price-to-earnings ratio, price-to-book ratio, and a high dividend yield.
We limit our universe of investments to larger, liquid stocks. This is a
list similar to the S&P 500.
Investment decisions are based on research undertaken by the Morgan Stanley
Asset Management/Chicago investment team.
For the year ended December 31, 1996, the Portfolio had a total return of 19.73%
for the Class A shares and 18.57% for the Class B shares, as compared to a total
return of 22.96% for the S&P 500 Index and 21.32% for the Indata Equity-Median
Index. The average annual total return for the five-year period ended December
31, 1996 and for the period from inception on January 31, 1990 through December
31, 1996 was 14.92% and 12.95%, respectively, for the Class A shares as compared
to 15.20% and 15.72%, respectively, for the S&P 500 Index and 10.05% and 14.89%,
respectively for the Indata Equity-Median Index. According to LIPPER MUTUAL
FUNDS QUARTERLY, the average Equity Income mutual fund (value-style fund) had a
return of 18.83% for the year ended December 31, 1996.
The Portfolio holds undervalued companies with a wide valuation gap as compared
to the characteristics of the S&P 500:
<TABLE>
<CAPTION>
P/E P/B
--------- ---
<S> <C> <C>
Value Equity Portfolio......................... 15.1x 2.4x
S&P 500........................................ 18.7x 4.3x
</TABLE>
Performance in 1996 was driven primarily by investment style and market
capitalization size. Growth stocks outperformed value stocks within the large
cap universe, and large cap stocks outperformed smaller cap stocks. For the
year, the S&P/Barra Growth Index
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
102
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO (CONT.)
returned 23.97% and the S&P/Barra Value Index returned 22.99%. The larger cap
Russell 1000 returned 22.45% while the small cap Russell 2000 returned 16.49%.
Equity markets were very volatile during the year, although they continued the
strong advance from 1995 to set record highs. Moderate economic growth, low core
inflation trends, strong employment growth, slightly rising treasury rates, and
record stock mutual fund inflows characterized the first half of 1996. Mid-year,
however, the market deteriorated on fears of an overheating economy, rising
inflation and interest rate increases as the job market marched upward. When
clear signs of inflation failed to materialize and economic indicators became
mixed, the markets resumed the advance later in the second half. Large,
blue-chip stocks led the rally as investors sought safety and earnings certainty
in these names. Markets received a big boost from post-election optimism in
November, only to be spooked in December by comments from the Federal Reserve
Chairman.
Our bottom up value driven stock selection process resulted in certain industry
over/under weightings relative to the S&P 500. On a relative basis, an
overweighting in consumer durables and retail enhanced the performance of the
Portfolio, while underweightings in health care and consumer non-durables
detracted from performance. On an absolute basis, the best performing sectors in
the Portfolio for the year were retail, aerospace and defense, financial
services, energy, and consumer durables. Underperforming sectors included
industrials, health care, and business equipment and services.
The biggest contributor to performance was our overweighting in the retail
sector and the specific stocks held. Woolworth, the leading stock of the Dow
Jones Industrial Average this year, returned 69%. New management has been
successful in improving the company's financial position, paying down debt and
cutting costs. TJ Maxx was another strong performer, up 92% through the third
quarter, as it realized the benefits from acquiring Marshalls, and consolidated
its leading position in the off-price apparel segment. We pared back gradually
on the stock throughout the year as it moved toward our estimate of fair
valuation, and sold the remaining position in November. We also sold Kmart early
in the year, concerned over the increasing cash flow pressures and continued
management turnover at the company, and reinvested the proceeds in Woolworth.
Our aerospace and defense holding, United Technologies, returned 42% for the
year. The company has leading positions in its markets worldwide and is
benefiting from the current commercial airline cycle upturn.
Financial services holdings delivered extremely strong performance in 1996. The
banking industry continued to benefit from consolidation and a low interest rate
environment. BankAmerica returned 58%; Chase Manhattan 57%; Banker's Trust 44%;
Sallie Mae 44%; First of America 41%; Mellon Bank 38%. We continue to overweight
the sector as additional gains from consolidation and deregulation are possible.
During the year, we established a position in Bank of Boston.
A big surprise of the year was the continuing strength of oil prices. We
benefited from the strong fundamentals of the energy sector by maintaining a
market weight position in the sector throughout the year. We sold Royal Dutch
Petroleum and Texaco in the second quarter, while adding Mobil in the third
quarter. Mobil continues to benefit from cost cutting, yet lags somewhat in
performance compared to other major international oil companies. We also added
to our existing holdings of Atlantic Richfield and Exxon during the year.
The consumer durable sector had a good year due to the auto industry. Solid
personal income growth, low unemployment levels and high consumer confidence
drove consumer spending on items such as cars and appliances. We sold the
position in Ford after a strong run in the stock, and reinvested the proceeds in
Chrysler, after it dropped to the $26-27 range. Chrysler subsequently rebounded,
ending the year at $33, returning 25% for the year.
With the market up strong in the past two years, and valuations becoming
extended, we have focused more on stocks with above-market dividend yields. We
added to our existing high-yielding utility holdings and, in December,
established a new position in Northeast Utilities, yielding 7.5%. In the
telecommunications sector, the uncertainty from deregulation and a changing
competitive environment has resulted in attractive valuations in certain
companies. We sold Nynex and added US West Communications, which offers a higher
yield and potentially better price appreciation. We sold SBC Communications, a
relatively expensive regional phone company, and added AT&T. During the year,
AT&T spun-off both the
- --------------------------------------------------------------------------------
Value Equity Portfolio
103
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO (CONT.)
communications equipment manufacturing unit, Lucent Technologies, and the
computer unit, NCR, and has begun re-focusing on the core communications
business. The company appears undervalued compared to its peers and offers an
above-market yield.
The tobacco companies were excellent buying opportunities this year, although
they were very volatile. We added RJR Nabisco to the Portfolio in the first
quarter, and Philip Morris in the second quarter. The fear of tobacco litigation
and settlements against the industry caused both stocks to drop significantly in
the third quarter, which we saw as a buying opportunity. Subsequently, both
rebounded strongly in the fourth quarter. Philip Morris ended the year up 31%,
while RJR still lags somewhat, up only 17% for the year. Both continue to offer
attractive yields and are the two biggest holdings in the Portfolio. In other
consumer staple holdings, we sold Heinz early in the year and continue to pare
back American Brands. One of the Portfolio's weakest performers included
Fleming, down 15% for the year. The company faces legal problems that included a
large settlement awarded against them which was later reversed.
In the services and growth sector, in which the Portfolio is underweight versus
the S&P 500, we added McGraw-Hill in the fourth quarter. As the economic cycle
has lengthened, concern has grown in the market about the possible slowing of
future corporate earnings. We felt McGraw-Hill addressed this concern as it
offers good earnings growth prospects at reasonable valuation levels.
The technology sector included the weakest performer in the Portfolio, Apple
Computer. Apple was down 35% for the year, as the company continues to
restructure its business. Harris Corporation was a strong contributor to the
sector, returning 28%. Early in the year, we added Texas Instruments when the
semiconductor industry and valuations were depressed. Texas Instruments has
since recovered, returning approximately 25% for the year.
The commodity industry sectors contained several weak performers in the
Portfolio. Eastman Chemical was down 9%, and Louisiana-Pacific, a forest
products company, was down 11% for the year, as overcapacity in key products of
both companies builds. Monsanto, another chemical holding, was a strong
performer, returning approximately 60% for the full year. We sold the position
in the fourth quarter as it reached what we believe was full valuation. We
reduced the exposure to the paper industry, by selling Weyerhauser, as the
industry struggles with a lack of pricing power and overcapacity. However,
Willamette Industries, another paper concern, returned 26% for the year.
We maintain a cautious view going into 1997 as valuation levels have become
somewhat extended. We continue to overweight financial services and utilities,
and underweight technology and health care.
Stephen C. Sexauer
PORTFOLIO MANAGER
Alford E. Zick, Jr.
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
104
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (98.2%)
AEROSPACE (2.5%)
40,900 United Technologies Corp.......................... $ 2,699
----------
BANKING (14.5%)
17,750 BankAmerica Corp.................................. 1,771
26,400 Bank of Boston Corp............................... 1,696
25,700 Bankers Trust (New York) Corp..................... 2,217
27,400 Chase Manhattan Corp.............................. 2,445
47,400 First of America Bank Corp........................ 2,850
35,350 Mellon Bank Corp.................................. 2,510
59,600 PNC Bank Corp..................................... 2,242
----------
15,731
----------
CAPITAL GOODS (2.0%)
52,100 Deere & Co........................................ 2,117
----------
CHEMICALS (1.8%)
34,575 Eastman Chemical Co............................... 1,910
----------
COMMUNICATIONS (4.8%)
44,900 AT&T Corp......................................... 1,953
46,700 Sprint Corp....................................... 1,862
44,700 U.S. West, Inc.................................... 1,442
----------
5,257
----------
CONSUMER-DURABLES (3.2%)
52,100 Chrysler Corp..................................... 1,719
32,500 General Motors Corp............................... 1,812
----------
3,531
----------
CONSUMER-RETAIL (4.9%)
53,000 J.C. Penney Co., Inc.............................. 2,584
(a)126,800 Woolworth Corp.................................... 2,774
----------
5,358
----------
CONSUMER-SERVICE & GROWTH (4.0%)
20,400 Eastman Kodak Co.................................. 1,637
144,700 Ogden Corp........................................ 2,713
----------
4,350
----------
CONSUMER-STAPLES (9.7%)
20,600 American Brands, Inc.............................. 1,022
145,700 Fleming Cos., Inc................................. 2,514
32,000 Philip Morris Cos., Inc........................... 3,604
101,300 RJR Nabisco Holdings Corp......................... 3,444
----------
10,584
----------
ENERGY (9.8%)
54,800 Ashland, Inc...................................... 2,404
24,200 Atlantic Richfield Co............................. 3,207
29,000 Exxon Corp........................................ 2,842
17,500 Mobil Corp........................................ 2,139
----------
10,592
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FINANCIAL-DIVERSIFIED (2.2%)
25,850 Student Loan Marketing Association................ $ 2,407
----------
HEALTH CARE (4.2%)
66,400 Bausch & Lomb, Inc................................ 2,324
55,700 Baxter International, Inc......................... 2,284
----------
4,608
----------
INDUSTRIAL (3.3%)
112,100 Hanson plc ADR.................................... 757
47,100 Rockwell International Corp....................... 2,867
----------
3,624
----------
INSURANCE (6.4%)
59,000 American General Corp............................. 2,412
43,300 Lincoln National Corp............................. 2,273
38,600 St. Paul Cos., Inc................................ 2,263
----------
6,948
----------
METALS (0.6%)
10,000 Phelps Dodge Corp................................. 675
----------
PAPER & PACKAGING (4.0%)
107,900 Louisiana-Pacific Corp............................ 2,279
29,400 Willamette Industries, Inc........................ 2,047
----------
4,326
----------
SERVICES (1.1%)
25,700 McGraw-Hill Cos., Inc............................. 1,185
----------
TECHNOLOGY (5.3%)
(a)35,500 Apple Computer, Inc............................... 737
41,800 Harris Corp....................................... 2,868
33,689 Texas Instruments, Inc............................ 2,148
----------
5,753
----------
TRANSPORTATION (3.5%)
(a)18,300 AMR Corp.......................................... 1,613
75,900 Ryder System, Inc................................. 2,135
----------
3,748
----------
UTILITIES (10.4%)
80,100 GPU, Inc.......................................... 2,693
72,600 NIPSCO Industries, Inc............................ 2,877
37,900 Northeast Utilities System........................ 502
83,600 Pinnacle West Capital Corp........................ 2,654
62,400 Texas Utilities Co................................ 2,543
----------
11,269
----------
TOTAL COMMON STOCKS (Cost $89,447)............................ 106,672
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Value Equity Portfolio
105
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (2.4%)
REPURCHASE AGREEMENT (2.4%)
$ 2,623 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $2,623,
collateralized by U.S. Treasury Bonds, 8.875%,
due 8/15/17, valued at $2,670 (Cost $2,623)..... $ 2,623
----------
TOTAL INVESTMENTS (100.6%) (Cost $92,070)..................... 109,295
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.3%)
Dividends Receivable....................... $ 339
Receivable for Portfolio Shares Sold....... 32
Interest Receivable........................ 1
Other...................................... 6 378
-----
LIABILITIES (-0.9%)
Payable for Investments Purchased.......... (801)
Investment Advisory Fees Payable........... (122)
Administrative Fees Payable................ (16)
Payable for Portfolio Shares Redeemed...... (13)
Custodian Fees Payable..................... (6)
Directors' Fees and Expenses Payable....... (4)
Distribution Fees Payable.................. (2)
Other Liabilities.......................... (26) (990)
----- --------
NET ASSETS (100%)........................................ $108,683
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSISTS OF:
Paid in Capital........................ $ 87,025
Undistributed Net Investment Income.... 7
Accumulated Net Realized Gain.......... 4,426
Unrealized Appreciation on
Investments.......................... 17,225
----------
NET ASSETS............................. $ 108,683
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $106,128
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 7,638,343 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $13.89
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $2,555
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 184,013 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $13.89
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Value Equity Portfolio
106
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 1.2%
Banking 7.6%
Capital Goods 0.9%
Chemicals 0.8%
Communications 2.5%
Consumer - Durables 1.7%
Consumer - Retail 2.2%
Consumer - Service & Growth 1.8%
Consumer - Staples 4.7%
Energy 4.8%
Financial -Diversified 1.2%
Health Care 1.8%
Industrial 1.8%
Insurance 2.8%
Metals 1.3%
Paper & Packaging 1.6%
Services 0.6%
Technology 2.7%
Transportation 1.4%
Utilities 5.3%
U.S. Treasury Notes 42.0%
Other 9.3%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- --------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
BALANCED PORTFOLIO-CLASS
INDATA BALANCED MEDIAN INDEX(1) A
<S> <C> <C>
2/20/90* $500,000 500000
10/31/1991 601750 582845
10/31/1992 659000 638635
12/31/1992 680250 656635
12/31/1993 747350 736015
12/31/1994 743800 718950
12/31/1995 929081 888838
12/31/1996 1,062,776 985,988
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO INDATA BALANCED-MEDIAN INDEX(1)
- ---------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 10.93% 10.15% 10.39%
PORTFOLIO -- CLASS
B(3).................. 10.24 N/A N/A
INDEX................. 14.39 11.01 11.61
</TABLE>
1. The Indata Balanced-Median Index is an unmanaged index and includes an asset
allocation of 2.5% cash, 38.2% bonds and 59.3% equity based on $52.6 billion
in assets among 579 portfolios for the year ended December 31, 1996 (assumes
dividends reinvested). The index returns are gross of management fees; the
Portfolio returns are net of management fees and expenses.
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.
The Balanced Portfolio's value investment philosophy is based on the premise
that a diversified portfolio of undervalued equity securities and fixed income
securities will outperform the market over the long-term and can be expected to
preserve principal in a difficult market environment.
The Balanced Portfolio's asset allocation strategy between equities, fixed
income and cash is based upon our estimate of the portfolio's risk. Since
equities are the highest risk asset class, we have maintained a below average
equity exposure during past periods of high market valuation. Typically, our
equity exposure will range between 35% and 65% with an expected long term
average of 55%.
For the year ended December 31, 1996, the Portfolio had a total return of 10.93%
for the Class A shares and 10.24% for the Class B shares, as compared to a total
return of 14.39% for the Indata Balanced-Median Index. The average annual total
return for the five-year period ended December 31, 1996, and for the period from
inception on February 20, 1990 through December 31, 1996 for the Class A shares
was 10.15% and 10.39%, respectively, as compared to 11.01% and 11.61%,
respectively, for the Index.
Our asset allocation, based on market value at December 31, 1996, is as follows:
<TABLE>
<S> <C>
Equities............................................. 48.7%
Fixed Income......................................... 42.0
Cash................................................. 9.3
---------
100%
---------
---------
</TABLE>
EQUITIES
For the year ended December 31, 1996, the equity component of the Portfolio had
a gross return of 22.80%, compared to the S&P 500 return of 22.96%.
Performance in 1996 was driven primarily by investment style and market
capitalization size. Growth stocks outperformed value stocks within the large
cap universe, and large cap stocks outperformed smaller cap stocks. For the
year, the S&P/Barra Growth Index returned 23.97% and the S&P/Barra Value Index
returned 22.99%. The larger cap Russell 1000 returned 22.45% while the small cap
Russell 2000 returned 16.49%.
Equity markets were very volatile during the year, although they continued the
strong advance from 1995 to set record highs. Moderate economic growth, low core
inflation trends, strong employment growth,
- --------------------------------------------------------------------------------
Balanced Portfolio
107
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO (CONT.)
slightly rising treasury rates, and record stock mutual fund inflows
characterized the first half of 1996. Mid-year, however, the market deteriorated
on fears of an overheating economy, rising inflation and interest rate increases
as the job market marched upward. When clear signs of inflation failed to
materialize and economic indicators became mixed, the markets resumed the
advance later in the second half. Large, blue-chip stocks led the rally as
investors sought safety and earnings certainty in these names. Markets received
a big boost from post-election optimism in November, only to be spooked in
December by comments from the Federal Reserve Chairman.
The equity component of the Balanced Portfolio holds the same undervalued
companies that are held in the Value Equity Portfolio. The equity portion of the
Portfolio has a wide valuation gap as compared to the characteristics of the S&P
500.
<TABLE>
<CAPTION>
P/E P/B
--------- ---
<S> <C> <C>
Portfolio-equity portion....................... 15.1x 2.4x
S&P 500........................................ 18.7x 4.3x
</TABLE>
Our bottom up value driven stock selection process resulted in certain industry
over/under weightings relative to the S&P 500. On a relative basis, an
overweighting in consumer durables and retail enhanced the performance of the
Portfolio, while underweightings in health care and consumer non-durables
detracted from performance. On an absolute basis, the best performing sectors in
the Portfolio for the year were retail, aerospace and defense, financial
services, energy, and consumer durables. Underperforming sectors included
industrials, health care, and business equipment and services.
The biggest contributor to performance was our overweighting in the retail
sector and the specific stocks held. Woolworth, the leading stock of the Dow
Jones Industrial Average this year, returned 69%. New management has been
successful in improving the company's financial position, paying down debt and
cutting costs. TJ Maxx was another strong performer, up 92% through the third
quarter, as it realized the benefits from acquiring Marshalls, and consolidated
its leading position in the off-price apparel segment. We pared back gradually
on the stock throughout the year as it moved toward our estimate of fair
valuation, and sold the remaining position in November. We also sold Kmart early
in the year, concerned over the increasing cash flow pressures and continued
management turnover at the company, and reinvested the proceeds in Woolworth.
Our aerospace and defense holding, United Technologies, returned 42% for the
year. The company has leading positions in its markets worldwide and is
benefiting from the current commercial airline cycle upturn.
Financial services holdings delivered extremely strong performance in 1996. The
banking industry continued to benefit from consolidation and a low interest rate
environment. BankAmerica returned 58%; Chase Manhattan 57%; Banker's Trust 44%;
Sallie Mae 44%; First of America 41%; Mellon Bank 38%. We continue to overweight
the sector as additional gains from consolidation and deregulation are possible.
During the year, we established a position in Bank of Boston.
A big surprise of the year was the continuing strength of oil prices. We
benefited from the strong fundamentals of the energy sector by maintaining a
market weight position in the sector throughout the year. We sold Royal Dutch
Petroleum and Texaco in the second quarter, while adding Mobil in the third
quarter. Mobil continues to benefit from cost cutting, yet lags somewhat in
performance compared to other major international oil companies. We also added
to our existing holdings of Atlantic Richfield and Exxon during the year.
The consumer durable sector had a good year due to the auto industry. Solid
personal income growth, low unemployment levels and high consumer confidence
drove consumer spending on items such as cars and appliances. We sold the
position in Ford after a strong run in the stock, and reinvested the proceeds in
Chrysler, after it dropped to the $26-27 range. Chrysler subsequently rebounded,
ending the year at $33, returning 25% for the year.
With the market up strong in the past two years, and valuations becoming
extended, we have focused more on stocks with above-market dividend yields. We
added to our existing high-yielding utility holdings, and in December,
established a new position in Northeast Utilities, yielding 7.5%. In the
telecommunications sector, the uncertainty from deregulation and a changing
competitive environment has resulted in attractive valuations in certain
companies. We sold Nynex and added US West Communications, which offers a higher
yield and potentially better price
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
108
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO (CONT.)
appreciation. We sold SBC Communications, a relatively expensive regional phone
company, and added AT&T. During the year, AT&T spun-off both the communications
equipment manufacturing unit, Lucent Technologies, and the computer unit, NCR,
and has begun re-focusing on the core communications business. The company
appears undervalued compared to its peers and offers an above-market yield.
The tobacco companies were excellent buying opportunities this year, although
they were very volatile. We added RJR Nabisco to the Portfolio in the first
quarter, and Philip Morris in the second quarter. The fear of tobacco litigation
and settlements against the industry caused both stocks to drop significantly in
the third quarter, which we saw as a buying opportunity. Subsequently, both
rebounded strongly in the fourth quarter. Philip Morris ended the year up 31%,
while RJR still lags somewhat, up only 17% for the year. Both continue to offer
attractive yields and are the two biggest holdings in the Portfolio. In other
consumer staple holdings, we sold Heinz early in the year and continue to pare
back American Brands. One of the Portfolio's weakest performers included
Fleming, down 15% for the year. The company faces legal problems that included a
large settlement awarded against them which was later reversed.
In the services and growth sector, in which the Portfolio is underweight versus
the S&P 500, we added McGraw-Hill in the fourth quarter. As the economic cycle
has lengthened, concern has grown in the market about the possible slowing of
future corporate earnings. We felt McGraw-Hill addressed this concern as it
offers good earnings growth prospects at reasonable valuation levels.
The technology sector included the weakest performer in the Portfolio, Apple
Computer. Apple was down 35% for the year, as the company continues to
restructure its business. Harris Corporation was a strong contributor to the
sector, returning 28%. Early in the year, we added Texas Instruments when the
semiconductor industry and valuations were depressed. Texas Instruments has
since recovered, returning approximately 25% for the year.
The commodity industry sectors contained several weak performers in the
Portfolio. Eastman Chemical was down 9%, and Louisiana-Pacific, a forest
products company, was down 11% for the year, as overcapacity in key products of
both companies builds. Monsanto, another chemical holding, was a strong
performer, returning approximately 60% for the full year. We sold the position
in the fourth quarter as it reached what we believe was full valuation. We
reduced the exposure to the paper industry, by selling Weyerhauser, as the
industry struggles with a lack of pricing power and overcapacity. However,
Willamette Industries, another paper concern, returned 26% for the year.
We maintain a cautious view going into 1997 as valuation levels have become
somewhat extended. We continue to overweight financial services and utilities,
and underweight technology and health care.
FIXED INCOME
The fixed income component of the Balanced Portfolio continues to maintain 100%
exposure to intermediate-term U.S. Government securities. For the year ended
December 31, 1996, the fixed income portion of the Portfolio had a total return
of 4.21% compared to a return of 4.05% for the Lehman Intermediate-
Government/Corporate Index (MSAM/Chicago's fixed-income benchmark).
The fixed income portion of the Portfolio began the year at a weighted average
maturity of 3.1 years. During the year, interest rates rose across all maturity
spectrums, with the largest increase occurring in the five and ten-year
maturities. This upward shift in the yield curve has depressed the performance
of the Portfolio. With inflation at approximately the 3% level, and intermediate
yields (5 year maturity) at the 6.2% level, we are comfortable with our current
position at a weighted average maturity of 3.3 years and an average duration of
3.0.
Stephen C. Sexauer
PORTFOLIO MANAGER
Alford E. Zick, Jr.
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Balanced Portfolio
109
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (48.7%)
AEROSPACE (1.2%)
1,550 United Technologies Corp.......................... $ 102
----------
BANKING (7.6%)
850 BankAmerica Corp.................................. 85
1,200 Bank of Boston Corp............................... 77
950 Bankers Trust (New York) Corp..................... 82
950 Chase Manhattan Corp.............................. 85
1,800 First of America Bank Corp........................ 108
1,300 Mellon Bank Corp.................................. 92
2,450 PNC Bank Corp..................................... 92
----------
621
----------
CAPITAL GOODS (0.9%)
1,900 Deere & Co........................................ 77
----------
CHEMICALS (0.8%)
1,225 Eastman Chemical Co............................... 68
----------
COMMUNICATIONS (2.5%)
2,000 AT&T Corp......................................... 87
1,450 Sprint Corp....................................... 58
1,800 U.S. West, Inc.................................... 58
----------
203
----------
CONSUMER-DURABLES (1.7%)
2,050 Chrysler Corp..................................... 68
1,350 General Motors Corp............................... 75
----------
143
----------
CONSUMER-RETAIL (2.2%)
1,950 J.C. Penney Co., Inc.............................. 95
3,800 Woolworth Corp.................................... 83
----------
178
----------
CONSUMER-SERVICE & GROWTH (1.8%)
700 Eastman Kodak Co.................................. 56
4,700 Ogden Corp........................................ 88
----------
144
----------
CONSUMER-STAPLES (4.7%)
850 American Brands, Inc.............................. 42
4,900 Fleming Cos., Inc................................. 85
1,175 Philip Morris Cos., Inc........................... 132
3,800 RJR Nabisco Holdings Corp......................... 129
----------
388
----------
ENERGY (4.8%)
2,000 Ashland, Inc...................................... 88
950 Atlantic Richfield Co............................. 126
1,075 Exxon Corp........................................ 105
600 Mobil Corp........................................ 73
----------
392
----------
FINANCIAL-DIVERSIFIED (1.2%)
1,050 Student Loan Marketing Association................ 98
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
HEALTH CARE (1.8%)
2,450 Bausch & Lomb, Inc................................ $ 86
1,500 Baxter International, Inc......................... 61
----------
147
----------
INDUSTRIAL (1.8%)
4,450 Hanson plc ADR.................................... 30
1,950 Rockwell International Corp....................... 119
----------
149
----------
INSURANCE (2.8%)
1,650 American General Corp............................. 67
1,650 Lincoln National Corp............................. 87
1,300 St. Paul Cos., Inc................................ 76
----------
230
----------
METALS (1.3%)
1,550 Phelps Dodge Corp................................. 105
----------
PAPER & PACKAGING (1.6%)
2,400 Louisiana-Pacific Corp............................ 51
1,100 Willamette Industries, Inc........................ 76
----------
127
----------
SERVICES (0.6%)
1,000 McGraw-Hill Companies, Inc........................ 46
----------
TECHNOLOGY (2.7%)
900 Apple Computer, Inc............................... 19
1,625 Harris Corp....................................... 112
1,400 Texas Instruments, Inc............................ 89
----------
220
----------
TRANSPORTATION (1.4%)
(a)700 AMR Corp.......................................... 62
1,950 Ryder System, Inc................................. 55
----------
117
----------
UTILITIES (5.3%)
3,350 GPU, Inc.......................................... 113
2,900 NIPSCO Industries, Inc............................ 115
1,400 Northeast Utilities System........................ 18
3,000 Pinnacle West Capital Corp........................ 95
2,350 Texas Utilities Co................................ 96
----------
437
----------
TOTAL COMMON STOCKS (Cost $3,191)............................. 3,992
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
FIXED INCOME SECURITY (42.0%)
US TREASURY NOTE (42.0%)
$ 3,503 U.S. Treasury Note, 5.50%, 4/15/00 (Cost $3,408).. 3,441
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Balanced Portfolio
110
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (4.2%)
REPURCHASE AGREEMENT (4.2%)
$ 342 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $342,
collateralized by U.S. Treasury Bonds, 8.875%,
due 8/15/17, valued at $348 (Cost $342)......... $ 342
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (94.9%) (Cost $6,941).................. 7,775
--------
OTHER ASSETS (5.8%)
Cash....................................... $ 1
Receivable for Investments Sold............ 403
Interest Receivable........................ 41
Dividends Receivable....................... 12
Receivable from Investment Adviser......... 9
Receivable for Fund Shares Sold............ 6 472
-----
LIABILITIES (-0.7%)
Payable for Investments Purchased.......... (28)
Custodian Fees Payable..................... (4)
Administrative Fees Payable................ (2)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (23) (58)
----- --------
NET ASSETS(100%)......................................... $8,189
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 7,141
Overdistributed Net Investment
Income............................... (1 )
Accumulated Net Realized Gain.......... 215
Unrealized Appreciation on
Investments.......................... 834
----------
NET ASSETS............................. $ 8,189
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $5,992
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 731,464 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $8.19
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $2,197
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 268,688 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $8.18
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Balanced Portfolio
111
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Algeria 2.2%
Argentina 14.4%
Brazil 20.3%
Bulgaria 9.2%
Croatia 1.5%
Ecuador 7.4%
Ivory Coast 0.7%
Jamaica 2.6%
Mexico 14.8%
Morocco 3.3%
Panama 2.9%
Peru 5.5%
Philippines 1.8%
Russia 11.2%
Venezuela 7.6%
Other -5.4%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- --------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EMERGING MARKETS DEBT PORTFOLIO-CLASS
JP MORGAN EMERGING MARKETS BOND INDEX (1) A
<S> <C> <C>
2/1/94* $500,000 $500,000
12/31/1994 $406,550 $429,500
12/31/1995 $518,514 $550,748
12/31/1996 $694,653 $828,986
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE J.P. MORGAN
EMERGING MARKETS BOND INDEX(1)
- -------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. 50.52% 18.94%
PORTFOLIO -- CLASS B............. 48.52 N/A
INDEX............................ 33.97 11.94
</TABLE>
1. The J.P. Morgan Emerging Markets Bond Index is a market weighted index
composed of all Brady bonds outstanding and includes Argentina, Brazil,
Bulgaria, Mexico, Nigeria, the Philippines, Poland and Venezuela.
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. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS CHANGE.
The investment objective of the Emerging Markets Debt Portfolio is high total
return through investment primarily in debt securities of government,
government-related and corporate issuers located in emerging countries.
For the year ended December 31, 1996, the Portfolio had a total return of 50.52%
for the Class A shares and 48.52% for the Class B shares as compared to a total
return of 33.97% for the J.P. Morgan Emerging Markets Bond Index. The average
annual total return for the period from inception on February 1, 1994 through
December 31, 1996 was 18.94% for the Class A shares as compared to 11.94%,
respectively, for the Index. As of December 31, 1996, the Portfolio had a 30-day
yield of 10.46% for the Class A shares and 10.16% for the Class B shares. This
yield has been computed using the SEC formula modified to exclude the effect of
the Portfolio's per share amount of realized gains distributed during December
1996. Including this amount, the 30-day yield would be 16.37% for the Class A
shares and 15.89% for the Class B shares.
For the three months ended December 31, 1996 the Portfolio had a total return of
8.96% for the Class A shares and 8.82% for the Class B shares as compared to a
total return of 7.05% for the Index.
1996 was a stellar year for emerging markets debt. The market experienced a
dramatic re-pricing of credit risk despite a volatile year for U.S. bonds. The
underlying improvement in credit fundamentals finally was recognized by
investors. The inflow of liquidity into this market resulted in a credit spread
tightening of about 400 basis points on average. The average masks a wide
dispersion in performance of various individual countries. Argentina, Mexico and
Brazil lagged the market during the first half of the year and made up some
relative performance during the second. The high-yielding, oil exporting
countries such as Algeria, Venezuela, Ecuador and Nigeria steadily outperformed
for most of the year and the smaller Brady countries like Peru and Panama
benefited from lower liquidity as their economic performance improved during
1996.
Greater institutional participation in the market gradually led to a decline in
volatility as long-term investors replaced the trading oriented accounts as the
dominant players in the market. Volatility in the
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
112
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)
options markets declined steadily throughout the year to end the year at roughly
50% of the levels seen at the beginning of the period.
The market also became more efficient in terms of relative pricing of securities
both within one country as well as across countries. Arbitrage activity made
sure that relative spreads were more closely aligned to levels dictated by bond
fundamentals.
As we look into 1997, we expect the market to benefit from some of the positive
undercurrents that we have experienced in 1996. Emerging markets debt has
finally been accepted as a part of the mainstream global fixed income markets.
Equity-type returns earned in the first few years of its development will
obviously be a thing of the past. Lower and more stable expected returns will be
the norm for the years to come. Lower volatility and falling correlations with
other major asset classes will provide the fundamental underpinnings of
increased allocations to this sector. Continued spread tightening to "fair
value" will result in outperformance relative to other fixed income markets in
the world.
By our estimates "fair value" on average is another 100 basis points away in
terms of credit spreads. The improvement in individual economic environments
justifies further tightening in credit spreads. Emerging countries are not
vulnerable, to the same extent as in 1994, to a financial shock. We do not
currently see the usual warning signs such as overvalued currencies, excessive
concentration of funding in the short end of the market, vulnerable banking
systems and excessive speculative activity. Potential areas of concern remain
those linked to domestic politics, as some countries face important elections
during second half of 1997. The political landscape at the beginning of the year
does not signal any major reverses to the climate of a continued commitment to
economic reform. Voter displeasure over the severity of the 1995 recessions and
only slight relief from the recovery so far for the beleaguered consumer should
not result in any reversal in the nature of orthodox economic policies.
To summarize, we believe the emerging debt markets can look forward to a year of
12-18% total return, an outcome fixed income investors should be extremely
comfortable with. Any major corrections, not driven by changes in credit risk
perceptions, should be viewed as opportunities to increase commitments to the
asset class.
The major risk to the story remains a possible tightening of monetary policy by
the Federal Reserve Bank, which could temporarily derail the trend for continued
spread tightening. In that environment, we believe there will be few places to
hide barring cash and emerging markets fixed income could end up in the
outperforming camp even in a down year. Currently, we do not have sufficient
data to be able to offer reasonable estimates of the probability of such an
event, but it does not seem likely of being more than 20%.
During 1996 we were successful in terms of picking up the major currents in the
markets and employed investment strategies that helped us outperform. We were,
for the most part of the year overweight the oil rich, high-yielding sector of
Venezuela, Algeria, Ecuador and Nigeria as we expected these countries to
endeavor to make some progress in stabilization and structural reform as well as
benefit from strong revenues from their oil exporting sectors. Exposures to Peru
and Panama remained at a steady 3-4% of the Portfolio as we believed that their
improving economic prospects, closure of their Brady restructuring and low
floating stock should buoy asset prices. Argentina and Mexico were underweighted
during the first half of the year as the market remained skeptical about the
strength of the economic recoveries and overweighted during the second half as
evidence of their strong rebounds surfaced.
Brazil remains a solid economic story but was buffeted by political headwinds as
the reform process lost momentum during the year. The long-term viability of the
Real plan in the absence of fiscal reform remains in doubt and questions emerged
within the investment community of the similarities of Brazil's position with
that of Mexico in 1994/1995. An appreciating currency, emerging trade deficits,
a loose fiscal and tight monetary policy were not healthy signs. In our opinion,
the political process is key to long-term sustainable growth and progress on
reducing the fiscal deficit is vital during 1997. Any delays in tackling this
key issue is bound to result in instability in the foreign exchange, interest
rates and other financial markets of Brazil later during the year.
Russia was one of our success stories in 1996. Cheap assets because of a murky
political situation during the pre-election period prompted us to build a
substantial overweight in the non-performing loans of the sovereign. Our
analysis indicated that whatever the complexion of the new government the
economic
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
113
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)
situation and future policies could not justify credit spreads in excess of 2000
basis points. The elections subsequently turned out in favor of the reformers
and market oriented parties and continued official and IMF assistance resulted
in a dramatic rally in the prices of Russian assets for most of the year.
Our non-hard currency exposure was limited for the most part to those situations
where we were receiving high real interest rates and buying undervalued
currencies. Mexico and Turkey's local markets were two profitable investments. A
foray into the South African Rand market did not prove to be profitable as we
misjudged the lack of political will to defend the currency from speculative
attack.
During the first few weeks of 1997, allocations are relatively unchanged barring
an increase in Bulgaria. A lack of alternatives to a currency board and
continued IMF assistance seems to make these assets cheap. Political turbulence
and civil unrest should only strengthen the case of the reformers as the
incumbent Socialist party has allowed the situation to drift to the point of
economic collapse. Fresh elections could improve the caliber of the governing
elites. Delays in the adoption of the IMF program will bring up the issue of a
potential default if no changes to economic policies are made. We believe that
it is in nobody's interest in Bulgaria and outside to precipitate the first
Brady default.
Paul Ghaffari
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
114
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
DEBT INSTRUMENTS (105.3%)
ALGERIA (2.2%)
LOAN AGREEMENT (2.2%)
U.S.$ (r)4,400 Algeria Refinanced Loan Agreements, Tranche A,
(Floating Rate), 7.00%, 12/31/00................ $ 3,399
----------
ARGENTINA (14.4%)
BONDS (14.4%)
3,800 Republic of Argentina BOCON, Series 2, (Floating
Rate), PIK, 5.375%, 9/01/02..................... 4,068
5,000 Republic of Argentina Discount Bonds, (Floating
Rate), 6.375%, 3/31/23.......................... 3,856
(s)16,856 Republic of Argentina, Series L, "Euro", (Floating
Rate), 6.625%, 3/31/05.......................... 14,649
----------
22,573
----------
BRAZIL (20.3%)
BONDS (20.3%)
11,000 Brazil MYDFA Trust Certificates, (Floating Rate),
6.688%, 9/15/07................................. 9,432
(e)3,000 Comtel Brasileira Ltd., (Yankee), 10.75%,
9/26/04......................................... 3,096
2,750 Federative Republic of Brazil Debt Conversion
Bond, Series Z-L, (Floating Rate) 6.563%,
4/15/12......................................... 2,087
(s)17,550 Federative Republic of Brazil, Series C, "Euro,"
(Floating Rate), PIK, 8.00%, 4/15/14............ 12,938
3,225 Federative Republic of Brazil Par Bonds, Series
Z-L, (Floating Rate), 5.00%, 4/15/24............ 2,026
2,100 TV Filme Inc., 12.875%, 12/15/04.................. 2,110
----------
31,689
----------
BULGARIA (9.1%)
BONDS (9.1%)
(s)5,100 Bulgaria Discount Bond, Series A, "Euro,"
(Floating Rate) 6.688%, 7/28/24................. 2,897
(n)14,600 Bulgaria Front Loaded Interest Reduction Bond,
Series A, 2.25%, 7/28/12........................ 5,612
11,000 Bulgaria Interest Arrears PDI Bond, (Floating
Rate), 6.688%, 7/28/11.......................... 5,665
----------
14,174
----------
CROATIA (1.5%)
BOND (1.5%)
2,500 Government of Croatia, Series B, (Floating Rate),
6.688%, 7/31/06................................. 2,428
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
ECUADOR (7.4%)
BOND (7.4%)
U.S.$(s)18,769 Republic of Ecuador PDI Bond, (Floating Rate),
PIK, 6.50%, 2/27/15............................. $ 11,537
----------
IVORY COAST (0.7%)
LOAN AGREEMENT (0.7%)
FRF (b)15,000 Ivory Coast Loan Agreement........................ 1,019
----------
JAMAICA (2.6%)
BOND (2.6%)
U.S.$(e)4,000 Mechala Group, Jamaica, 12.75%, 12/30/99.......... 4,013
----------
MEXICO (14.8%)
BONDS (14.8%)
MXP 19,092 Banamex Pagare Discount Bond, 4/03/97............. 2,255
32,143 Banamex Pagare Discount Bond, 10/09/97............ 3,346
ZAR 8,000 Nacional Financiera SNC, 17.00%, 2/26/99.......... 1,646
U.S.$ 1,500 United Mexican States Discount Bond, Series A,
(Floating Rate), 6.453%, 12/31/19 (Value
Recovery Rights Attached)....................... 1,290
2,000 United Mexican States Discount Bond, Series C,
(Floating Rate) 6.375%, 12/31/19 (Value Recovery
Rights Attached)................................ 1,720
12,300 United Mexican States Global Bond, 11.375%,
9/15/16......................................... 12,900
----------
23,157
----------
MOROCCO (3.3%)
LOAN AGREEMENT (3.3%)
(l)6,300 Kingdom of Morocco Restructuring and Consolidating
Agreement, Tranche A, (Floating Rate), 6.375%,
1/01/09 (Participation: J.P. Morgan)............ 5,201
----------
PANAMA (2.9%)
BONDS (2.9%)
(e,r)2,962 Republic of Panama Interest Reduction Bond,
(Floating Rate), 3.50%, 7/17/14................. 2,062
(r)3,200 Republic of Panama PDI Bond, (Floating Rate), PIK,
6.75%, 7/17/16.................................. 2,505
----------
4,567
----------
PERU (5.5%)
NOTE (5.5%)
(b,k)9,699 Peru Working Capital Lines........................ 8,535
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
115
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
PHILIPPINES (1.8%)
BOND (1.8%)
U.S.$ 2,600 Philippine Long Distance Telephone Global Bond,
9.25%, 6/30/06.................................. $ 2,815
----------
RUSSIA (11.2%)
BONDS (3.6%)
(e)9,050 Ministry of Finance Tranche IV, GDR, 3.00%,
5/14/03......................................... 5,537
112 Ministry of Finance Tranche IV, (Letter of
Entitlement), 3.00%, 5/14/03.................... 69
----------
5,606
----------
LOAN AGREEMENT (4.8%)
(b,k)9,450 Bank for Foreign Economic Affairs................. 7,542
----------
NOTE (2.8%)
(e,v) Russia Principal Notes, 12/29/49.................. 2,705
4,600
(e,v) Russian Interest Arrears Note, 12/29/49........... 1,736
2,500
----------
4,441
----------
17,589
----------
VENEZUELA (7.6%)
BONDS (7.6%)
750 Republic of Venezuela Front Loaded Interest
Reduction Bonds, Series A, (Floating Rate),
6.625%, 3/31/07................................. 670
(s)10,000 Republic of Venezuela Front Loaded Interest
Reduction Bonds, Series B, (Floating Rate),
6.438%, 3/31/07................................. 8,937
2,750 Republic of Venezula Discount Bonds, Series A,
(Floating Rate), 6.438%, 3/31/20................ 2,283
----------
11,890
----------
TOTAL DEBT INSTRUMENTS (Cost $157,730)........................ 164,586
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANTS (0.0%)
VENEZUELA (0.0%)
(a)19,635 Republic of Venezuela Oil, expiring 3/31/20 (Cost
$0)............................................. --
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
CONTRACTS
<C> <S> <C>
- ----------
PURCHASED OPTIONS (0.1%)
BULGARIA (0.1%)
(a)75,000 Bulgaria Front Loaded Interest Reduction Bond,
expiring 3/24/97, strike price U.S.$40.57....... 169
(a)90,000 Bulgaria Interest Arrears Bond, expiring 1/06/97,
strike price U.S.$51.50......................... 38
----------
TOTAL PURCHASED OPTIONS (Cost $443)........................... 207
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (11.6%)
REPURCHASE AGREEMENT (11.6%)
U.S.$18,194 Chase Securities, Inc. 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at 18,200,
collateralized by U.S. Treasury Bonds, 7.25%,
due 5/15/16, valued at $18,361 (Cost $18,194)... $ 18,194
----------
FOREIGN CURRENCY (0.0%)
DEM 1 Deutsche Mark (Cost $1)........................... 1
----------
TOTAL INVESTMENTS (117.0%) (Cost $176,368).................... 182,988
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (28.7%)
Cash....................................... $ 374
Receivable for Investments Sold............ 29,482
Receivable due from Broker................. 11,226
Interest Receivable........................ 3,789
Receivable for Portfolio Shares Sold....... 18
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 11
Other...................................... 10 44,910
----------
LIABILITIES (-45.7%)
Payable for Reverse Repurchase Agreement... (34,545)
Payable for Investments Purchased.......... (26,715)
Securities Sold Short, at Value (Proceeds
$8,832).................................. (9,172)
Investment Advisory Fees Payable........... (457)
Interest Payable on Securities Sold Short.. (173)
Custodian Fees Payable..................... (47)
Administrative Fees Payable................ (22)
Payable for Portfolio Shares Redeemed...... (21)
Directors' Fees and Expenses Payable....... (5)
Distribution Fees Payable.................. (3)
Other Liabilities.......................... (343) (71,503)
---------- --------
NET ASSETS (100%)........................................ $156,395
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $139,098
Overdistributed Net Investment Income............. (76)
Accumulated Net Realized Gain..................... 11,231
Unrealized Appreciation on Investments, Foreign
Currency Translations and Securities Sold
Short........................................... 6,142
--------
NET ASSETS........................................ $156,395
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
116
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $152,142
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 20,192,678 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $7.54
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $4,253
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 564,768 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $7.53
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(b) -- Non-income producing -- in default.
(e) -- 144A Security -- certain conditions for public sale may exist.
(k) -- Under restructuring at December 31, 1996 -- See Note A-7 to financial
statements
(l) -- Participation interests were acquired through the financial
institutions listed parenthetically.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1996. Maturity date disclosed is the
ultimate maturity.
(r) -- Issuer is making partial interest payments
(s) -- Denotes all or a portion of securities subject to repurchase under
Reverse Repurchase Agreements as of December 31, 1996 -- See Note A-4
to financial statements.
(v) -- When-issued security -- see Note A-7 to financial statements.
FRF -- French Franc
GDR -- Global Depositary Receipt
MXP -- Mexican Peso
PDI -- Past Due Interest
PIK -- Payment-In-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.
ZAR -- South African Rand
Floating Rate -- Interest rate changes on these instruments are based on changes
in a designated base rate. The rates shown are those in effect at
December 31, 1996.
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
SECURITIES SOLD SHORT (NOTE A-9)
ECUADOR
BONDS
$ 5,287 Republic of Ecuador PDI Bond, (Floating Rate),
PIK , 6.50%, 2/27/15........................... $ 3,250
--------
MEXICO
BOND
5,600 United Mexican States 11.50%, 5/15/26............ 5,922
--------
TOTAL SECURITIES SOLD SHORT (Proceeds $8,832)............... $ 9,172
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver U.S. dollars in exchange for
foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ----------- ------ ----------- ------------ ------ ------------
U.S.$ 958 $ 958 1/02/97 FRF 5,025 $ 969 $ 11
------
------ ------ ---
------ ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
117
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Asset Backed Securities 5.6%
Corporate Bonds & Notes 24.5%
Foreign Government & Agency Obligations 11.2%
U.S. Government & Agency Obligations 54.9%
Other 3.8%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
BALANCED PORTFOLIO-CLASS
LEHMAN AGGREGATE BOND INDEX (1) A
<S> <C> <C>
5/15/91* 500000 500000
10/31/91 537100 535590
10/31/92 589900 592415
12/31/92 599400 598440
12/31/93 657800 652710
12/31/94 638650 632500
12/31/95 756673 751157
12/31/96 784,140 785,785
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE LEHMAN AGGREGATE
BOND INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------
AVERAGE ANNUAL
ONE YEAR FIVE YEARS
------------- ------------------
<S> <C> <C>
PORTFOLIO - CLASS A..................................................................... 4.61% 7.00%
PORTFOLIO - CLASS B(3).................................................................. 4.35 N/A
INDEX................................................................................... 3.63 7.04
<CAPTION>
AVERAGE ANNUAL
SINCE INCEPTION
------------------
<S> <C>
PORTFOLIO - CLASS A..................................................................... 8.35%
PORTFOLIO - CLASS B(3).................................................................. N/A
INDEX................................................................................... 8.31
</TABLE>
1. The Lehman Aggregate Bond Index is an unmanaged index made up of the
Government/Corporate Index, the Mortgage-Backed Securities Index and the
Asset-Backed Securities Index.
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. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Fixed Income Portfolio invests 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.
Targeted rates of return for the Portfolio are based on current and projected
market and economic conditions and on a conservative investment management
approach.
For the year ended December 31, 1996, the Portfolio had a total return of 4.61%
for the Class A shares and 4.35% for the Class B shares as compared to a total
return of 3.63% for the Lehman Aggregate Bond Index. The average annual total
return for the five years ended December 31, 1996 and for the period from
inception on May 15, 1991 through December 31, 1996 was 7.00%, and 8.35%,
respectively, for the Class A shares as compared to 7.04% and 8.31%,
respectively, for the Index. As of December 31, 1996, the Portfolio had an SEC
30-day yield of 6.39% for the Class A shares and 6.27% for the Class B shares.
After excellent performance in 1995, the fixed income markets provided rather
disappointing results in 1996. In fact, the 3.63% total return of the Lehman
Aggregate Index and the 2.90% return for the Lehman Government/ Corporate Index
were their third lowest returns over the past fifteen years.
Investors began 1996 in a very optimistic, upbeat mood. The shift in psychology
was gradual. Winter storms, producing one of the snowiest winters on record, led
to declines in most economic indicators. On January 31, 1996 the Federal Reserve
lowered both the discount rate and Federal Funds rate by 1/4%. This would be the
only change in monetary policy for 1996.
Concerns began to rise that there may be a change coming on the political
landscape particularly if control of Congress were to shift back to the
Democrats. This, along with significant gains in employment growth and other
better than expected economic comparisons sent bond prices lower. During the
first half of 1996 long Treasury prices declined almost fourteen points.
Unlike the first half of the year, in which a consensus developed that the
economy was growing rapidly, the second half of 1996 was characterized by
considerable debate over the strength of the economy. Even though there were few
signs of inflationary pressures, market participants generally agreed that
without a slowdown in growth, the Federal Reserve would need to tighten to
prevent such pressures from emerging.
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
118
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO (CONT.)
In contrast to the third quarter when interest rates fluctuated within a narrow
trading range, rates moved much more sharply during the fourth quarter. Over the
course of October and November, yields fell between 50 and 60 basis points
across the yield curve as the market responded to signals of a slowing economy
and subdued inflation. During much of the third quarter, market participants had
feared that without a slowdown in economic growth, the Federal Reserve would
tighten to prevent the emergence of inflationary pressures. As such, they sought
confirmation that the economy was slowing sufficiently to eliminate the risk of
a Fed tightening. The economic data that emerged early in the quarter did indeed
provide the necessary confirmation that growth had slowed, inflation remained
well under control and the Fed was unlikely to tighten. With no need to price in
the risk of a Fed tightening, interest rates rallied substantially.
During December, however, rates backed up almost 30 basis points. Cautionary
comments concerning the level of equity valuations by Fed Chairman Greenspan
started the backup in yields. A view that interest rates may have fallen too
quickly and some signs of a return to a stronger growth path late in the month
contributed to further increases.
Overall, although the level of rates was lower at the end of the fourth quarter
than at the start, market uncertainty remains high. With growth picking up again
following its earlier slowdown, market participants will continue to seek more
information to discern whether the faster growth pace is representative of the
fundamental trend and the earlier slowdown merely a temporary deviation from
that trend or whether the reverse is true. The uncertainty again leaves market
participants questioning the future course of Fed policy.
From a sector standpoint, non-Treasury sectors continued to exhibit the strong
performance that they have all year as investor demand for yield spread product
remained exceptionally strong. While corporate spreads have frequently shown a
tendency to widen during the fourth quarter, they did not do so in 1996. Despite
heavy issuance, spreads generally ended the year at their tightest levels of the
year, supported by continued credit strength and excellent market technicals.
Mortgage-backed securities continued to outperform comparable duration
Treasuries despite the increased market volatility. Likewise, asset-backed
securities continued to provide incremental return over the quarter.
Helped by the backup in U.S. rates in December, foreign bond markets continued
to outperform the U.S. market. German bond yields fell slightly more than U.S.
bond yields during the quarter. Higher yielding European bond markets were again
standout performers, with interest rate declines approximating 100 basis points
over the quarter.
FOURTH QUARTER STRATEGY REVIEW
While our strategy emphasis during the fourth quarter continued to focus on
sector allocation, we also felt that a slight extension in duration was
appropriate for our portfolio. We viewed such an extension as providing some
protection against a potential lag in the performance of our non-Treasury
holdings in an ongoing market rally. In terms of sectors, we maintained our
overweight in discount mortgage-backed securities, simply fine tuning our
security selection as opportunities arose. We found a number of opportunities to
increase our corporate holdings during the quarter. In particular, Yankee issues
and bank capital notes (a new structure with over $15 billion of issuance during
the quarter) represented attractive relative value. Finally, we maintained a
weighting in hedged foreign bonds.
FIRST QUARTER 1997 OUTLOOK
Our focus in the first quarter of 1997 should remain one of identifying
attractive sector and security specific opportunities. We recognize that in a
compressed yield spread environment such as we have currently, this may be
particularly challenging. The outlook for yield spread product remains
favorable, however, and we expect to continue overweighting spread advantaged
sectors. In terms of interest rate risk, we reduced our portfolio duration to
slightly short of our benchmark at the start of the quarter, viewing the market
somewhat less favorably in a risk/reward context. Finally, we expect to continue
our use of hedged foreign bonds. Although the prospective return advantages
relative to U.S. bonds are less than in 1996, total return opportunities are
still favorable relative to the U.S. markets.
Warren Ackerman, III
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Fixed Income Portfolio
119
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FIXED INCOME SECURITIES (96.2%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (54.9%)
U.S. TREASURY BOND (1.8%)
$ 2,500 6.25%, 8/15/23.................................... $ 2,344
----------
U.S. TREASURY NOTES (15.6%)
10,000 6.25%, 5/31/00.................................... 10,041
10,000 7.25%, 8/15/04.................................... 10,525
----------
20,566
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION (0.0%)
11 13.00%, 9/01/10................................... 13
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (19.8%)
4,613 6.00%, 9/01/10.................................... 4,455
5,591 6.00%, 2/01/11.................................... 5,400
3,818 7.00%, 3/01/11.................................... 3,821
1,642 6.00%, 5/01/11.................................... 1,579
2,239 6.00%, 5/01/11.................................... 2,152
9,166 6.50%, 4/01/24.................................... 8,802
----------
26,209
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (17.7%)
7,524 6.00%, 2/15/24.................................... 7,013
8,883 7.00%, 5/15/24.................................... 8,728
7,890 7.00%, 3/15/26.................................... 7,718
----------
23,459
----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS................ 72,591
----------
FOREIGN GOVERNMENT AND AGENCY OBLIGATION (11.2%)
2,500 Republic of Colombia (Yankee) 7.25%, 2/23/04...... 2,444
DEM 13,500 Treuhandanstalt 6.75%, 5/13/04.................... 9,402
$ (e)3,000 United Mexican States 7.563%, (Floating Rate),
8/06/01......................................... 3,007
----------
TOTAL FOREIGN GOVERNMENT AND AGENCY OBLIGATION.............. 14,853
----------
CORPORATE BONDS AND NOTES (24.5%)
BROADCAST -- RADIO & TELEVISION (1.8%)
2,500 News America Holdings 7.75%, 12/01/45............. 2,328
----------
FINANCE (22.7%)
2,000 Capital One Bank 6.47%, 7/31/98................... 2,003
4,000 Ford Motor Credit Co. 6.25%, 11/08/00............. 3,962
5,000 General Motors Acceptance Corp. 7.375%, 6/22/00... 5,135
(e)4,000 Goldman Sachs Group 6.25%, 2/01/03................ 3,894
(e)2,500 First Chicago NBD Corp., Series B, 7.75%,
12/01/26........................................ 2,417
3,000 Lehman Brothers Holdings, Inc. 7.25%, 4/15/03..... 3,019
(e)2,500 Liberty Mutual 7.875%, 10/15/26................... 2,509
(e)2,500 Lumbermens Mutual Casualty Co., Series AI, 9.15%,
7/01/26......................................... 2,714
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
$ 3,000 Travelers Capital, Series III, 7.625%, 12/01/36... $ 2,911
(e)1,500 USF&G Capital Corp., Series 1, 8.50%, 12/15/45.... 1,516
----------
30,080
----------
TOTAL CORPORATE BONDS AND NOTES............................. 32,408
----------
ASSET BACKED SECURITIES (5.6%)
12 Federal National Mortgage Association, REMIC
92-59F, (Floating Rate), 6.112%, 8/25/06........ 12
3,220 Resolution Trust Corp., Series 1991-M5, Class A,
9.00%, 3/25/17.................................. 3,296
4,000 Standard Credit Card Trust 6.75%, 6/07/00......... 4,040
----------
TOTAL ASSET BACKED SECURITIES............................... 7,348
----------
TOTAL FIXED INCOME SECURITIES (Cost $125,360)................. 127,200
----------
SHORT-TERM INVESTMENT (2.6%)
REPURCHASE AGREEMENT (2.6%)
3,367 Chase Securities, Inc., 5.95%, dated 12/31/96, due
1/02/97, to be repurchased at $3,368,
collateralized by U.S. Treasury Bonds, 8.875%,
due 8/15/17, valued at $3,458 (Cost $3,367)..... 3,367
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.8%) (Cost $128,727)................ 130,567
--------
OTHER ASSETS (1.4%)
Interest Receivable........................ $ 1,723
Net Unrealized Gain on Forward Foreign
Currency Exchange Contracts.............. 108
Other...................................... 12 1,843
----------
LIABILITIES (-0.2%)
Investment Advisory Fees Payable........... (85)
Payable for Portfolio Shares Redeemed...... (73)
Adminstrative Fees Payable................. (20)
Custodian Fees Payable..................... (5)
Directors' Fees and Expenses Payable....... (5)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (26) (215)
---------- --------
NET ASSETS (100%)........................................ $132,195
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $135,919
Overdistributed Net Investment Income............. (14)
Accumulated Net Realized Loss..................... (5,652)
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 1,942
--------
NET ASSETS........................................ $132,195
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Fixed Income Portfolio
120
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $ 130,733
NET ASSET VALUE, OFFERING REDEMPTION
PRICE PER SHARE
Applicable to 12,361,468 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.58
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $1,462
NET ASSET VALUE, OFFER AND REDEMPTION
PRICE PER SHARE
Applicable to 138,201 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.58
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of forward foreign currency exchange contracts open at
December 31, 1996, the Portfolio is obligated to deliver foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ---------- ------- ----------- ------------ ------- ------------
DEM 3,550 $ 2,309 1/15/97 U.S.$ 2,336 $ 2,336 $ 27
DEM 940 612 1/15/97 U.S.$ 618 618 6
DEM10,318 6,712 1/15/97 U.S.$ 6,787 6,787 75
DEM 155 100 1/15/97 U.S.$ 100 100 --
------- ------- -----
$ 9,733 $ 9,841 $ 108
------- ------- -----
------- ------- -----
</TABLE>
- ------------------------------------------------------------
(e) -- 144A Security -- certain conditions for public sale may exist
DEM -- Deutsche Mark
Floating Rate -- 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, 1996.
REMIC -- Real Estate Mortgage Investment Conduit
Yankee -- Bond issued in the USA by a foreign borrower in U.S. dollars and
registered with the Securities and Exchange Commission.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Fixed Income Portfolio
121
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australian Dollar 0.9%
British Pound 10.3%
Canadian Dollar 6.8%
Danish Krone 4.2%
Deutsche Mark 14.8%
French Franc 2.8%
Irish Punt 2.1%
Italian Lira 5.7%
Japanese Yen 9.7%
Spanish Peseta 2.4%
Swedish Krona 6.1%
United States Dollar 24.2%
Other 10.0%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
J.P. MORGAN TRADED GLOBAL BOND INDEX GLOBAL FIXED INCOME PORTFOLIO-CLASS
(1) A
<S> <C> <C>
5/1/91* 500,000 500,000
10/31/1991 538,720 530,500
10/31/1992 606,455 585,090
12/31/1992 601,365 577,395
12/31/1993 675,100 665,985
12/31/1994 683,750 625,500
12/31/1995 815,782 746,347
12/31/1996 851,676 794,412
*Commencement of operations
**Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE J.P. MORGAN TRADED
GLOBAL BOND INDEX(1)
- --------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------
AVERAGE ANNUAL
ONE YEAR FIVE YEARS
------------- ------------------
<S> <C> <C>
PORTFOLIO -- CLASS A.................................................................... 6.44% 7.17%
PORTFOLIO -- CLASS B(3)................................................................. 6.12 N/A
INDEX................................................................................... 4.40 8.17
<CAPTION>
AVERAGE ANNUAL
SINCE INCEPTION
------------------
<S> <C>
PORTFOLIO -- CLASS A.................................................................... 8.50%
PORTFOLIO -- CLASS B(3)................................................................. N/A
INDEX................................................................................... 9.84
</TABLE>
1. The J.P. Morgan Traded Global Bond Index is an unmanaged index of securities
and includes Australia, Belgium, Canada, Denmark, France, Germany, Italy,
Japan, The Netherlands, Spain, Sweden, the United Kingdom and the United
States.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
EAFE INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED
AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS
NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN
RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING. YIELDS WILL
FLUCTUATE AS MARKET CONDITIONS CHANGE.
The Global Fixed Income Portfolio aims to produce an attractive rate of return
by investing in fixed income securities issued by governments, agencies,
supranational entities and corporations with varying maturities in various
currencies.
For the year ended December 31, 1996, the Portfolio had a total return of 6.44%
for the Class A shares and 6.12% for the Class B shares as compared to a total
return of 4.40% for the J.P. Morgan Traded Global Bond Index (the "Index"). The
average annual total return for the five-year period ended December 31, 1996 and
for the period from inception on May 1, 1991 through December 31, 1996 was 7.17%
and 8.50%, respectively, for the Class A shares as compared to 8.17% and 9.84%,
respectively, for the Index. As of December 31, 1996, the Portfolio had an SEC
30-day yield of 4.91% for the Class A shares and 4.76% for the Class B shares.
Global bond markets turned in mixed performances in 1996. Early in the year
returns were quite poor across the globe as U.S. 10-year yields rose over 100
basis points on the back of much stronger than expected economic activity. The
second half of the year was a different story with all markets generating good
returns as fears of a Fed tightening receded. The benchmark U.S. market provided
a solid backdrop for the rest of the world as 10-year yields fell 40 basis
points, partially retracing their first half rise. Most of the world was not
immune to the U.S. market's volatility and only the high-yielding European bond
markets -- Italy, Spain, Sweden -- were able to produce consistently high
returns throughout the year. Measured in local currency terms, 1996 returns
ranged from 3% in the U.S. to 24% in Italy. In U.S. dollar terms the dispersion
was even greater as Japan returned -6% while Italy returned almost 30%. Country
and currency selection were richly rewarded.
There were three truly dominant themes in 1996: a stronger U.S. dollar, superior
European bond performance and a dramatic convergence of intra-European bond
yield spreads as optimism regarding the possibility and breadth of European
Monetary Union (EMU) grew. The strength of the dollar detracted over 3% from
returns as the JP Morgan Global Government Bond Index returned 7.6% in local
currency terms but only 4.4% in U.S. dollar terms. Despite the strength of the
dollar, only the Japanese and German bond markets had negative returns in U.S.
dollar terms. The difference between unhedged and hedged returns was even more
dramatic
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
122
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
as the currency hedged JP Morgan Traded Global Bond Index returned 8.6%, a
whopping 4.2% more than unhedged returns.
The rise in the U.S. dollar over the course of the year was steady and
undramatic. Indeed, one of the characteristics of much of 1996 was the low level
of foreign exchange market volatility with much of the volatility occurring in
the cross exchange rates, e.g., Italian lira/Deutschemark. British
pound/Deutschemark. Faster economic growth in the U.S. and low and falling
interest rates abroad contributed to the dollar's strength. In terms of numbers,
the U.S. dollar moved from 1.43 Deutschemark to 1.54 (7.7%) and from 103
Japanese yen to 116 (12.6%) during the year. The U.S. dollar did weaken versus
the Australian dollar (6.8%), Irish pound (5.6%), Italian lira (4.3%), and
British pound (10.2%), significantly contributing to returns from those
countries. The rise of the British pound was notable as it had been very stable
until the fourth quarter when it suddenly appreciated over 9% against both the
U.S. dollar and Deutschemark as U.K. economic activity surged.
European bonds far outperformed their U.S. and Japanese counterparts over the
course of the year. The European component of the Index returned 12% while the
U.S. and Japanese markets returned 3% and 6% respectively, in local currency
terms. This outperformance was driven by falling inflation expectations
(Italian, Spanish and Swedish inflation are at decades lows), central bank
easing, fiscal tightening, and most importantly, positive expectations about
EMU.
EMU optimism grew steadily over the course of 1996, but it was not until late in
the third quarter that it became apparent that the Spanish and Italian
governments were moving aggressively to meet the monetary union convergence
criteria. This triggered a major re-rating of these markets and Italian bond
yields subsequently fell 200 basis points, narrowing in yield spread to Germany
by 140 basis points. While Sweden has not stated a desire to participate in
monetary union in 1999, excellent macroeconomic fundamentals allowed its bond
market to generally keep pace with the southern European countries. Italian,
Spanish and Swedish bond markets returned 24%, 22% and 18%, respectively, in
local currency terms in 1996.
The Portfolio benefited from many of these themes during the year. On the
currency front, a substantial portfolio of European and Japanese bond holdings
were hedged while an above Index weighting was maintained in the U.S. dollar,
British and Irish pounds for much of the time that they were appreciating. On
the bond side, above Index weightings were maintained in European bonds with the
majority of the overweight concentrated in the higher-yielding Italian, Spanish
and Swedish markets. During the course of the year, we rotated among these
countries to take advantage of the best relative values, but overall the
Portfolio kept an above Index exposure to these markets at all times. The
Portfolio also benefited from a below Index weighting of the U.S. and Japanese
markets (to the advantage of European bond holdings). The duration of the
Portfolio was kept fairly close to the Index much of the year as country
selection rather than duration management was viewed as the more important
decision.
Our overall global fixed income strategy remained broadly unchanged over the
course of the year as the themes that were dominant continued to dominate later
in the year. During the fourth quarter we did reduce our Irish and Japanese bond
holdings to fund modest increases in Canadian and U.K. bonds. Holdings of Irish
pounds were also reduced in response to the outperformance of the U.K. and Irish
currencies. Similarly, exposure to dollar bloc currencies was cut back
approximately 4% and European currency holdings were increased commensurately as
the dollar rose. The Portfolio, however, still remains slightly overweight the
dollar bloc currencies. The duration of the Portfolio at the end of 1996 was
slightly shorter than its benchmark, primarily due to the underweighting of the
Japanese bond market. However, the overall interest-rate sensitivity -- after
adjusting for the yield curve, country and currency exposure -- remained about
10% longer than the Index.
Going forward, we regard global fixed income markets as offering reasonable but
not great value. Although real interest rates (the key driver to our relative
value driven approach) are below their averages of the 1980s and 1990s, they are
still above 3% and inflation continues to be well contained. Importantly,
governments are focused on reducing budget deficits. This process should help
reduce required real interest rates and, while we expect European and Japanese
economies to strengthen over the course of 1997, should allow their governments
to continue following the tight fiscal, easy monetary policy for a while
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
123
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
longer. In addition, EMU should put additional pressure on European governments
to reduce bloated public sectors especially with the stability pact agreed to.
Thus, we see no reason to change our current strategy of overweighting the high
real interest rate markets -- British, Swedish and German bond markets -- and
underweighting the Japanese and U.S. bond markets where real interest rates are
relatively low.
On the foreign exchange front, the U.S. dollar remains well supported by above
average growth (by global standards), quiescent inflation and the Fed's
asymmetric policy stance. However, the Japanese yen has depreciated over 40%
from its 1995 lows and no longer looks overvalued. While current economic and
financial problems will continue to plague Japan, a repeat of 1996 is unlikely.
Therefore, absent the likelihood of dramatic currency moves, we expect to keep
the Portfolio's current long dollar bloc currency position modest.
J. David Germany
PORTFOLIO MANAGER
Michael B. Kushma
PORTFOLIO MANAGER
Paul F. O'Brien
PORTFOLIO MANAGER
Robert M. Smith
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
124
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
FIXED INCOME SECURITIES (90.0%)
AUSTRALIAN DOLLAR (0.9%)
GOVERNMENT BONDS (0.9%)
AUD 1,200 Government of Australia 9.50%, 8/15/03........... $ 1,067
---------
BRITISH POUND (10.3%)
GOVERNMENT BONDS (10.3%)
GBP 2,550 United Kingdom Treasury Gilt 7.00%, 11/06/01..... 4,322
1,850 United Kingdom Treasury Gilt 10.00%, 9/08/03..... 3,595
2,250 United Kingdom Treasury Gilt 7.75%, 9/08/06...... 3,912
---------
11,829
---------
CANADIAN DOLLAR (6.8%)
GOVERNMENT BONDS (6.8%)
CAD 3,600 Government of Canada 7.50%, 3/01/01.............. 2,836
5,000 Government of Canada 6.50%, 6/01/04.............. 3,726
1,300 Government of Canada 9.75%, 6/01/21.............. 1,244
---------
7,806
---------
DANISH KRONE (4.2%)
GOVERNMENT BONDS (4.2%)
DKK 9,600 Kingdom of Denmark 8.00%, 5/15/03................ 1,805
16,300 Kingdom of Denmark 8.00%, 3/15/06................ 3,044
---------
4,849
---------
DEUTSCHE MARK (14.8%)
EUROBOND (4.5%)
DEM 7,500 Landeskreditbank Baden-Wuerttemberg Financial
6.625%, 8/20/03................................ 5,167
---------
GOVERNMENT BONDS (10.3%)
2,000 Deutschland Republic 6.25%, 1/04/24.............. 1,234
8,350 German Unity Bond 8.00%, 1/21/02................. 6,178
1,800 Treuhandanstalt 6.75%, 5/13/04................... 1,255
4,300 Treuhandanstalt 7.50%, 9/09/04................... 3,122
---------
11,789
---------
16,956
---------
FRENCH FRANC (2.8%)
GOVERNMENT BONDS (2.8%)
FRF 14,700 French Treasury Bill 7.75%, 4/12/00.............. 3,151
---------
IRISH PUNT (2.1%)
GOVERNMENT BONDS (2.1%)
IEP 1,400 Irish Government 6.25%, 4/01/99.................. 2,385
---------
ITALIAN LIRA (5.7%)
GOVERNMENT BONDS (5.7%)
ITL 4,640,000 BTPS 10.50%, 7/15/00............................. 3,427
800,000 BTPS 10.00%, 8/01/03............................. 604
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
ITL 1,700,000 BTPS 9.50%, 1/01/05.............................. $ 1,261
1,600,000 BTPS 9.50%, 2/01/06.............................. 1,202
---------
6,494
---------
JAPANESE YEN (9.7%)
EUROBONDS (9.7%)
JPY 240,000 European Investment Bank 6.625%, 3/15/00......... 2,427
120,000 Export Import Bank of Japan 4.375%, 10/01/03..... 1,171
130,000 International Bank for Reconstruction &
Development 4.75%, 12/20/04.................... 1,308
290,000 International Bank for Reconstruction &
Development 4.50%, 6/20/00..................... 2,781
145,000 Republic of Austria 6.25%, 10/16/03.............. 1,563
200,000 Japan Development Bank 5.00%, 10/01/99........... 1,914
---------
11,164
---------
SPANISH PESETA (2.4%)
GOVERNMENT BOND (2.4%)
ESP 290,000 Spanish Government 10.50%, 10/30/03.............. 2,716
---------
SWEDISH KRONA (6.1%)
GOVERNMENT BONDS (6.1%)
SEK 19,300 Swedish Government 13.00%, 6/15/01............... 3,651
13,000 Swedish Government 10.25%, 5/05/03............... 2,321
6,700 Swedish Government 6.00%, 2/09/05................ 953
---------
6,925
---------
UNITED STATES DOLLAR (24.2%)
CORPORATE BONDS AND NOTES (5.2%)
U.S.$ (e)750 Asset Securitization Corp., CMO, 7.21%,
10/13/26....................................... 766
985 Asset Securitization Corp., CMO, 7.10%,
8/13/29........................................ 996
(e)150 First Chicago, 7.75%, 12/01/26,.................. 146
(e)385 Goldman Sachs Group 6.25%, 2/01/03............... 375
(e)400 Liberty Mutual 7.875%, 10/15/26.................. 401
881 LB Commercial Conduit Mortgage Trust (Floating
Rate), CMO, 7.14%, 8/25/04..................... 894
(e)300 Lumbermens Mutual Casualty Co., Series AI, 9.15%,
7/01/26........................................ 327
2,000 UCFC, CMO, Series 1995-C1, Class A3, 6.775%,
9/10/17........................................ 2,001
---------
5,906
---------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (18.3%)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (9.1%)
491 6.00%, 5/01/03................................... 479
7,540 6.00%, 9/01/03................................... 7,351
2,710 6.50%, 1/01/26................................... 2,585
---------
10,415
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
125
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (CONT.)
U.S. TREASURY BONDS (3.4%)
U.S.$ 2,000 8.125%, 8/15/19.................................. $ 2,311
750 8.75%, 5/15/20................................... 922
650 7.625%, 2/15/25.................................. 722
---------
3,955
---------
U.S. TREASURY NOTES (5.8%)
2,300 5.125%, 11/30/98................................. 2,268
1,800 5.75%, 8/15/03................................... 1,746
2,500 7.25%, 5/15/04................................... 2,631
---------
6,645
---------
21,015
---------
YANKEE BOND (0.7%)
U.S.$ 765 Hydro-Quebec 7.50%, 4/01/16...................... 772
---------
27,693
---------
TOTAL FIXED INCOME SECURITIES (90.0%) (Cost $100,812).............. 103,035
---------
SHORT-TERM INVESTMENTS (3.8%)
REPURCHASE AGREEMENT (1.2%)
1,435 Chase Securities, Inc. 5.95% dated 12/31/96, due
1/02/97, to be repurchased at $1,435,
collaterlized by U.S. Treasury Bonds, 8.875%,
due 8/15/17, valued at $1,464 (Cost $1,435).... 1,435
---------
FEDERAL HOME LOAN DISCOUNT NOTE (2.6%)
2,935 4.92%, 1/09/97................................... 2,926
---------
TOTAL SHORT-TERM INVESTMENTS (Cost $4,361)......................... 4,361
---------
FOREIGN CURRENCY (3.5%)
DEM 2 Deutsche Mark.................................... 1
JPY 282,082 Japanese Yen..................................... 2,436
ESP 208,002 Spanish Peseta................................... 1,602
---------
TOTAL FOREIGN CURRENCY (Cost $4,071)............................... 4,039
---------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -------------------------------------------------------------------
TOTAL INVESTMENTS (97.3%) (Cost $109,244)................ $111,435
--------
OTHER ASSETS (2.9%)
Cash....................................... $ 640
Interest Receivable........................ 2,682
Foreign Withholding Tax Reclaim
Receivable............................... 2
Other...................................... 8 3,332
----------
LIABILITIES (-0.2%)
Net Unrealized Loss on Foreign Currency
Exchange Contracts....................... (192)
Investment Advisory Fees Payable........... (67)
Administrative Fees Payable................ (15)
Custodian Fees Payable..................... (12)
Directors' Fees and Expenses Payable....... (3)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (30) (320)
---------- --------
NET ASSETS (100%)........................................ $114,447
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $116,590
Undistributed Net Investment Income............... 612
Accumulated Net Realized Loss..................... (4,738)
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 1,983
--------
NET ASSETS........................................ $114,447
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $112,888
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,986,975 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $11.30
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $1,559
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 138,082 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $11.29
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
126
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1996, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
UNREALIZED
CURRENCY TO IN EXCHANGE GAIN
DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------- -------- ---------- ------------- -------- --------
*DEM 2 $ 1 1/02/97 U.S.$ 1 $ 1 $ --
U.S.$ 1 1 1/02/97 DEM 2 2 1
CAD 1,200 877 1/17/97 U.S.$ 896 896 19
DKK 9,000 1,529 1/17/97 U.S.$ 1,541 1,541 12
DEM 450 293 1/17/97 U.S.$ 290 290 (3)
DEM 1,250 814 1/17/97 U.S.$ 805 805 (9)
GBP 2,000 3,425 1/17/97 U.S.$ 3,281 3,281 (144)
U.S.$ 1,522 1,522 1/17/97 DKK 9,000 1,529 7
U.S.$ 1,315 1,315 1/17/97 DEM 2,000 1,301 (14)
U.S.$ 4,936 4,936 1/17/97 DEM 7,600 4,945 9
CAD 850 622 1/24/97 U.S.$ 624 624 2
DEM 12,200 7,941 1/24/97 U.S.$ 7,874 7,874 (67)
SEK 11,000 1,616 1/24/97 DEM 2,493 1,623 7
SEK 19,450 2,857 1/24/97 U.S.$ 2,845 2,845 (12)
-------- -------- --------
$ 27,749 $ 27,557 $ (192)
--------
-------- -------- --------
-------- --------
</TABLE>
- ------------------------------------------------------------
(e) -- 144A Security - certain conditions for public sale may exist
CMO -- Collateralized Mortgage Obligation
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, 1996.
* -- Transaction is with Morgan Stanley Trust Co.
- ------------------------------------------------------------
SUMMARY OF FIXED INCOME SECURITES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Finance................................ $ 24,372 21.3%
Foreign Government & Agency
Obligations.......................... 57,648 50.4
U.S. Government and Agency
Obligations.......................... 21,015 18.3
--------- ---
$ 103,035 90.0%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
127
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace & Defense 2.0%
Banking 2.3%
Broadcast - Radio & Television 14.7%
Chemicals 1.2%
Computers 2.3%
Construction 1.9%
Consumer Staples 0.6%
Electrical Equipment 0.2%
Energy 1.0%
Entertainment & Leisure 3.6%
Environmental Controls 2.5%
Financial Services 6.6%
Food Services & Lodging 1.6%
Gaming & Lodging 4.1%
Health Care Supplies &
Services 1.3%
Machinery 1.3%
Materials 2.5%
Metals 1.9%
Multi-Industry 5.0%
Packaging & Container 5.1%
Publishing 0.1%
Real Estate 1.2%
Retail - General 5.6%
Technology 1.3%
Telecommunications 16.2%
Utilities 3.2%
Foreign Government Bonds 5.3%
Other 5.4%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HIGH YIELD PORTFOLIO-CLASS CS FIRST BOSTON HIGH YIELD INDEX
A (1)
<S> <C> <C>
9/28/92* 500,000 500,000
10/31/1992 490,500 494,800
12/31/1992 503,435 507,897
12/31/1993 593,400 603,940
12/31/1994 598,050 591,250
12/31/1995 729,122 701,991
12/31/1996 838,563 789,038
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE CS FIRST BOSTON
HIGH YIELD INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............................................................................... 15.01% 12.91%
PORTFOLIO -- CLASS B(3)............................................................................ 14.37 N/A
INDEX.............................................................................................. 12.40 11.30
</TABLE>
1. The CS First Boston High Yield Index is an unmanaged index of high yield
corporate bonds.
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. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The High Yield Portfolio seeks to maximize total return by investing in a
diversified portfolio of fixed income securities that offer a higher yield than
that offered by debt securities in the three highest rating categories.
For the year ended December 31, 1996, the Portfolio had a total return of 15.01%
for the Class A shares and 14.37% for the Class B shares, as compared to a total
return of 12.40% for the CS First Boston High Yield Index (the "Index"). The
average annual total return for the period from inception on September 28, 1992
through December 31, 1996 was 12.91% for the Class A shares, as compared to
11.30% for the Index. As of December 31, 1996, the Portfolio had an SEC 30-day
yield of 9.31% for the Class A shares and 9.05% for the Class B shares.
The High Yield market performed well in 1996 far outpacing high quality bonds
for the year. This performance occurred in the face of ten-year Treasury yields
rising nearly eighty-five basis points over the course of the year. This infers
that the spread to Treasuries narrowed about one hundred basis points. The
strong performance in the high yield market can be traced to the sound economy
as was reflected in the outstanding performance of the stock market in 1996.
Several factors helped our Portfolio outperform the Index for the year. The
communications sector performed very well for the Portfolio. The entire sector
responded favorably when MFS and Worldcom announced they would merge. We were
favorably positioned when this announcement was made and continued to add to our
positions subsequent to the announcement. This sector also performed well
because the securities in it tend to have bullish characteristics. Many of the
securities in the sector are zero coupon or deferred pay bonds. Thus, in a
rallying high yield market, they tend to outperform.
The cable television sector had a mixed year, performing poorly in the first
half of the year and well in the second half. We added to our positions at wide
spreads and reaped the benefits as spreads narrowed in the second half. Our
exposure to emerging markets also continued to add to performance.
As spreads narrowed over the year, we continually upgraded the quality of the
Portfolio. We believe this will protect the Portfolio if either the economy
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
128
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
weakens or spreads widen generally. We still believe this is the prudent
position to take in the current market environment.
Robert Angevine
PORTFOLIO MANAGER
Thomas L. Bennett
PORTFOLIO MANAGER
Stephen F. Esser
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
High Yield Portfolio
129
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
CORPORATE BONDS AND NOTES (75.5%)
BANKING (2.0%)
$ 775 Bank United Corp., (Floating Rate), 8.05%,
5/15/98........................................ $ 781
(e)450 First Nationwide Escrow, 10.625%, 10/01/03....... 484
735 First Nationwide Holdings, 9.125%, 1/15/03....... 745
---------
2,010
---------
BROADCAST-RADIO & TELEVISION (14.7%)
650 Cablevision Systems Corp., 9.25%, 11/01/05....... 640
1,770 Cablevision Systems Corp., 9.875%, 5/15/06....... 1,814
500 Comcast Cellular Corp., Series A,
Zero Coupon, 3/05/00........................... 359
1,350 Comcast Cellular Corp., Series B,
Zero Coupon, 3/05/00........................... 972
430 Comcast Corp., 9.125%, 10/15/06.................. 440
1,925 Comcast Corp., 9.375%, 5/15/05................... 1,997
1,965 Lenfest Communications, 8.375%, 11/01/05......... 1,878
(n)2,400 Marcus Cable Co., 0.00%, 12/15/05................ 1,716
1,100 Rogers Cablesystems Ltd., Series B, 10.00%,
3/15/05........................................ 1,172
3,715 Viacom, Inc., 8.00%, 7/07/06..................... 3,585
(e)350 Tevecap S.A., 12.625%, 11/26/04.................. 358
---------
14,931
---------
CHEMICALS (1.2%)
(e)1,210 ISP Holdings Inc., 9.00%, 10/15/03............... 1,225
---------
COMPUTERS (2.3%)
1,600 Advanced Micro Devices, Inc.,
11.00%, 8/01/03................................ 1,732
650 Digital Equipment Corp., 8.625%, 11/01/12........ 631
---------
2,363
---------
CONSTRUCTION (1.9%)
1,090 Flores & Rucks, 9.75%, 10/01/06.................. 1,147
(e)710 Parker Drilling Corp., 9.75%, 11/15/06........... 739
---------
1,886
---------
CONSUMER-STAPLES (0.6%)
(e)575 International Home Foods,
10.375%, 11/01/06.............................. 595
---------
ENERGY (1.0%)
1,000 Nuevo Energy Co., 9.50%, 4/15/06................. 1,053
---------
ENVIRONMENTAL CONTROLS (2.5%)
(n)2,300 Norcal Waste Systems, 13.00%, 11/15/05........... 2,553
---------
FINANCIAL SERVICES (0.9%)
1,985 Home Holdings, Inc., 8.625%, 12/15/03............ 437
400 Homeside, Inc., 11.25%, 5/15/03.................. 446
---------
883
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
FOOD SERVICE & LODGING (1.5%)
$ 1,475 Courtyard by Marriott, Series B, 10.75%,
2/01/08........................................ $ 1,560
---------
GAMING & LODGING (4.1%)
1,185 Boyd Gaming Corp., 9.25%, 10/01/03............... 1,158
2,090 Grand Casinos, Inc., 10.125%, 12/01/03........... 2,098
496 Louisiana Casino Cruises, 11.50%, 12/01/98....... 501
375 Station Casinos, Inc., 9.625%, 6/01/03........... 371
---------
4,128
---------
HEALTH CARE SUPPLIES & SERVICES (0.5%)
430 Quest Diagnostic Inc., 10.75%, 12/15/06.......... 451
---------
MACHINERY (1.3%)
1,245 SD Warren Co., 12.00%, 12/15/04.................. 1,338
---------
MATERIALS (2.5%)
(n)3,000 Brooks Fiber Properties, Inc.,
0.00%, 3/01/06................................. 1,999
(e,n)755 Brooks Fiber Properties, Inc.,
0.00%, 11/01/06................................ 481
---------
2,480
---------
METALS (1.9%)
(e)525 Jet Equipment Trust, Series 95-D, 11.44%,
11/01/14....................................... 623
1,050 Jet Equipment Trust, Series C1,
11.79%, 6/15/13................................ 1,249
---------
1,872
---------
MULTI-INDUSTRY (5.0%)
430 Ivaco, Inc., 11.50%, 9/15/05..................... 429
(e)615 Maxxam Group Holdings, Inc.,
12.00%, 8/01/03................................ 625
(n)4,025 MFS Communications Co., Inc.,
0.00%, 1/15/06................................. 2,938
1,050 TLC Beatrice International Holdings, 11.50%,
10/01/05....................................... 1,112
---------
5,104
---------
PACKAGING & CONTAINER (5.1%)
1,800 Gaylord Container Corp., 11.50%, 5/15/01......... 1,917
425 Gaylord Container Corp., 12.75%, 5/15/05......... 469
1,710 Owens-Illinois, Inc., 11.00%, 12/01/03........... 1,902
(e)510 Stone Container Corp., 11.50%, 8/15/06........... 526
(e)280 U.S. Can Corp., 10.125%, 10/15/06................ 294
---------
5,108
---------
PUBLISHING (0.1%)
(u)500 Marvel Parent Holdings,
Zero Coupon, 4/15/98........................... 70
---------
REAL ESTATE (1.2%)
1,250 HMC Acquisition Properties,
9.00%, 12/15/07................................ 1,250
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
130
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
RETAIL-GENERAL (5.6%)
$ 1,400 Host Marriott Travel Plaza, Series B, 9.50%,
5/15/05........................................ $ 1,459
2,321 Revlon Worldwide, Series B, Zero Coupon,
3/15/98........................................ 2,002
2,710 Southland Corp., 5.00%, 12/15/03................. 2,236
---------
5,697
---------
TECHNOLOGY (1.3%)
(e)1,295 Cole National Group, 9.875%, 12/31/06............ 1,327
---------
TELECOMMUNICATIONS (15.1%)
(n)3,225 Dial Call Communications, 0.00%, 4/15/04......... 2,286
(n)3,010 Echostar Satellite Broadcasting, 0.00%,
3/15/04........................................ 2,269
(e)350 Globo Communicacoes e Participacoes Ltda.,
10.50%, 12/20/06............................... 351
890 IXC Communications Inc., 12.50%, 10/01/05........ 979
(e)850 Net Sat Servicos Ltda., 12.75%, 8/05/04.......... 887
(n)2,425 Nextel Communications, Inc., 0.00%, 8/15/04...... 1,649
(e,n)1,075 Occidente y Caribe, 0.00%, 3/15/04............... 632
(e)1,125 Paging Network, 10.00%, 10/15/08................. 1,135
380 Paging Network, 10.125%, 8/01/07................. 384
475 Philippines Long Distance Telephone, 9.25%,
6/30/06........................................ 514
690 Rogers Communications, 9.125%, 1/15/06........... 681
(n)1,295 Teleport Communications, 0.00%, 7/01/07.......... 892
(n)1,900 Telewest plc, 0.00%, 10/01/07.................... 1,318
1,475 TCI Communications, Inc., 7.875%, 2/15/26........ 1,323
---------
15,300
---------
TRANSPORTATION (0.0%)
42 America West Airlines, 6.00%, 3/31/97............ 39
---------
UTILITIES (3.2%)
60 Cleveland Electric Illuminating Co., 8.375%,
12/01/11....................................... 59
1,650 Cleveland Electric Illuminating Co., 9.50%,
5/15/05........................................ 1,768
198 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02................................ 211
465 Midland Cogeneration Ventures, Series C-94,
10.33%, 7/23/02................................ 495
650 Midland Funding II, Series A, 11.75%, 7/23/05.... 717
---------
3,250
---------
TOTAL CORPORATE BONDS AND NOTES (Cost $74,917).................... 76,473
---------
ASSET BACKED SECURITIES (8.0%)
AEROSPACE & DEFENSE (2.0%)
(e)1,949 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1 P1, Class D, 12.75%, 6/15/06..... 2,022
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
BANKING (0.3%)
$ 346 PNC Mortgage Securities Corp., Series 1995-2,
Class B4, REMIC, 7.50%, 9/25/25................ $ 289
---------
FINANCIAL SERVICES (5.7%)
952 DR Securitized Lease Trust, Series 1993-K1, Class
A1, 6.66%, 8/15/10............................. 792
2,702 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07............................. 2,486
(e)900 FMAC Series 1996-B, Class C, 7.929%, 11/01/18.... 762
(e)309 GE Capital Mortgage Services, Inc., Series
1995-12, Class B3, REMIC, 7.86%, 8/25/25....... 256
(e)1,359 Prudential Home Mortgage Securities Inc., Series
1995-F, Class 2B, REMIC, 6.62%, 4/28/24........ 939
(e)875 Prudential Home Mortgage Securities, Inc., Series
1996-A, Class B1, REMIC, 7.96%, 5/28/26........ 594
---------
5,829
---------
TOTAL ASSET BACKED SECURITIES (Cost $7,831)....................... 8,140
---------
FOREIGN GOVERNMENT BONDS (5.3%)
BONDS (5.3%)
1,225 Federative Republic of Brazil, Series L, 4.50%,
4/15/09........................................ 882
(n)1,250 Republic of Argentina Par, Series L, "Euro",
(Floating Rate), 5.25%, 3/31/23................ 790
1,470 Republic of Argentina, Series L, "Euro",
(Floating Rate), 6.625%, 3/31/05............... 1,278
400 Republic of Columbia, 8.70%, 2/15/16............. 399
(n)1,250 Republic of Venezuela Front Loaded Interest
Reduction Bond, Series A, (Floating Rate),
6.625%, 3/31/07................................ 1,117
1,225 United Mexican States, Series A, 6.25%,
12/31/19....................................... 899
---------
TOTAL FOREIGN GOVERNMENT BONDS (Cost $4,703)...................... 5,365
---------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- -------------
COMMON STOCKS (0.1%)
FINANCIAL SERVICES (0.0%)
(a)1,268 WestFed Holdings, Inc., Class B.................. --
---------
FOODSERVICE & LODGING (0.1%)
(a,e)1,300 Motels of America, Inc........................... 71
---------
TOTAL COMMON STOCKS (Cost $85).................................... 71
---------
PREFERRED STOCKS (4.4%)
ENTERTAINMENT & LEISURE (3.6%)
3,389 Time Warner Inc., Series M, 10.25%, 7/01/16...... 3,677
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
131
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
FINANCIAL SERVICES (0.0%)
3,239 WestFed Holdings, Inc., Series A, PIK............ $ --
---------
HEALTH CARE SUPPLIES & SERVICES (0.8%)
800 Fresensius Medical Care, 9.00%, 12/01/06......... 814
---------
TOTAL PREFERRED STOCKS (Cost $4,260).............................. 4,491
---------
CONVERTIBLE PREFERRED STOCKS (1.1%)
TELECOMMUNICATIONS (1.1%)
12,815 TCI Pacific Communications, 5.00%, 7/31/06....... 1,182
---------
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $1,156).................. 1,182
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -------------
RIGHTS (0.0%)
BROADCAST-RADIO & TELEVISION (0.0%)
(a)35,000 SpectraVision, Inc., expiring 10/08/97........... --
---------
FOREIGN GOVERNMENT (0.0%)
(a)1,225,000 United Mexican States, 6.25%, 12/31/19........... --
---------
TOTAL RIGHTS (Cost $133).......................................... --
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- -------------
WARRANTS (0.2%)
AEROSPACE & DEFENSE (0.0%)
(a)500 Sabreliner Corp., expiring 4/15/03............... --
---------
ELECTRICAL EQUIPMENT (0.2%)
(a,e)28,000 Protection One Alarm, Inc., expiring 4/03/03..... 168
---------
GAMING & LODGING (0.0%)
(a)1,725 Louisiana Casino Cruises, expiring 12/01/98...... 11
---------
INSURANCE (0.0%)
(a,d)500 Horace Mann Educators Corp., expiring 4/03/99.... 7
---------
PACKAGING & CONTAINER (0.0%)
(a,e)1,000 Crown Packaging Holdings, expiring 11/01/03...... --
---------
TELECOMMUNICATIONS (0.0%)
(a)3,000 Nextel Communications, Inc. expiring 4/25/99..... --
(a)7,300 Occidente y Caribe, expiring 3/15/04............. --
---------
--
---------
TOTAL WARRANTS (Cost $154)........................................ 186
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (4.0%)
REPURCHASE AGREEMENT (4.0%)
$ 4,004 Chase Securities, Inc., 5.95%, dated 12/31/96,
due 1/02/97, to be repurchased at $4,005,
collateralized by U.S. Treasury Bonds, 8.125%,
due 8/15/19, valued at $4,110 (Cost $4,004).... $ 4,004
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.6%) (Cost $97,243)................. 99,912
--------
OTHER ASSETS (2.1%)
Interest Receivable........................ $ 1,596
Receivable for Investments Sold............ 480
Other...................................... 7 2,083
----------
LIABILITIES (-0.7%)
Bank Overdraft............................. (439)
Investment Advisory Fees Payable........... (122)
Payable for Portfolio Shares Redeemed...... (39)
Administrative Fees Payable................ (14)
Custodian Fees Payable..................... (4)
Distribution Fees Payable.................. (3)
Dividends Payable.......................... (2)
Directors' Fees and Expenses Payable....... (2)
Other Liabilities.......................... (42) (667)
---------- --------
NET ASSETS (100%)........................................ $101,328
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $102,703
Overdistributed Net Investment Income............. (4)
Accumulated Net Realized Loss..................... (4,040)
Unrealized Appreciation on Investments............ 2,669
--------
NET ASSETS........................................ $101,328
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
132
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A
- ---------------------------------------
NET ASSETS............................. $95,663
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 8,765,159 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.91
----------
----------
CLASS B
- ---------------------------------------
NET ASSETS............................. $5,665
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 519,838 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................... $10.90
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- See note A-1 to financial
statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1996. Maturity date disclosed is the
ultimate maturity date.
(u) -- Issuer in Default -- filed for bankruptcy
PIK -- Payment-In-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.
REMIC -- Real Estate Mortgage Investment Conduit
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, 1996.
At December 31, 1996, approximately 95% 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.
Certain securities may be valued on the basis of bid prices provided by one
principal market maker.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
133
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Daily Variable Rate Bonds 7.9%
Fixed Rate Instruments 90.3%
Other 1.8%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MUNICIPAL BOND PORTFOLIO-CLASS
LEHMAN 7 YR MUNICIPAL BOND INDEX (1) A
<S> <C> <C>
1/18/95* 500,000 500,000
12/31/1995 560,150 544,000
12/31/1996 584,629 563,965
*Commencement of operations
**Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that Class.
PERFORMANCE COMPARED TO THE LEHMAN
7 YR. MUNICIPAL BOND INDEX(1)
- ----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------
ONE YEAR
----------------
<S> <C>
PORTFOLIO -- CLASS A............................................................................... 3.67%
PORTFOLIO -- CLASS B(3)............................................................................ 3.55
INDEX.............................................................................................. 4.37
<CAPTION>
AVERAGE ANNUAL
SINCE INCEPTION
-----------------
<S> <C>
PORTFOLIO -- CLASS A............................................................................... 6.36%
PORTFOLIO -- CLASS B(3)............................................................................ N/A
INDEX.............................................................................................. 8.34
</TABLE>
1. The Lehman 7-Year Municipal Bond Index consists of investment grade bonds
with maturities between 6-8 years, rated BAA or better.All bonds have been
taken from issues of at least $50 million in size sold within the last five
years.
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. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Municipal Bond 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
interest on which is exempt from Federal income tax.
For the year ended December 31, 1996, the Portfolio had a total return of 3.67%
for the Class A shares and 3.55% for the Class B shares as compared to a total
return of 4.37% for the Lehman 7-Year Municipal Bond Index. The average annual
total return for the period from inception on January 18, 1995 through December
31, 1996 was 6.36% for the Class A shares as compared to 8.34% for the Index. As
of December 31, 1996, the Portfolio had an SEC 30-day yield of 4.35% for the
Class A shares and 4.11% for the Class B shares.
The year 1996 was a year of uncertainty and volatility in the U.S. fixed income
markets. The year started off with a positive tone when on January 31 the
Federal Reserve lowered by 25 basis points both the Federal Funds Rate and
Discount Rate. Soon after that Fed easing, economic releases for the first
quarter of 1996 dispelled the notion of a slowing economy, and instead pointed
in the direction of an expanding economy. The U.S. bond markets spent the
remainder of the year reacting to the inflationary threat usually associated
with a strong growth period. All thoughts of further Federal Reserve easings
were put on hold, and instead the focus became if and when the Fed would tighten
monetary policy to keep inflation at bay. During the year, economic releases
showing signs of growth in the economy, including continued strength in new and
existing home sales, a robust employment picture and hints of inflationary
pressure beginning to creep into the labor market, all combined to put upward
pressure on interest rates. The markets were subjected to day-to-day volatility
caused by sharp movements in commodity prices and a keen interest in the value
of the U.S. dollar compared to the Japanese yen and the German mark. There was
much speculation and anticipation leading up to each Federal Open Market
Committee meeting. The Federal Reserve, not viewing inflation as enough of a
threat, was content during the remainder of 1996 to leave the Federal Funds Rate
and Discount Rate unchanged. The 30-year U.S. Treasury bond, which had started
off the year at a yield of 5.95% and closed at a high yield of 7.20% during mid
June, ended the year at a yield of 6.64%. Indications of a
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
134
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO (CONT.)
strengthening economy during the 4th quarter cast a cautious tone on the bond
market as the year came to a close.
During 1996, the municipal bond market outperformed the U.S. Treasury market.
The elimination of the threat of major tax reform, including the potential for a
consumption-based or flat tax structure, lifted a heavy weight off of the
municipal market; this caused yield ratios versus U.S. Treasuries to decline
dramatically from January through August. A decline in interest rates and
increased supply caused the ratios to creep slightly higher from September
through the end of the year. New issue supply topped $180 billion in 1996, the
highest volume level since the peak refunding years of 1992 and 1993. Issuers
sold more new money issues than in any year since 1985. On the demand side,
insurance company interest remained strong and individual investors continued to
support the one to ten year maturity range. Demand from long term municipal bond
funds continued to wane, never quite recovering from a combination of the poor
bond market performance of 1994, the flat tax scare of 1995 and the competition
coming from the roaring U.S. equity market.
The Portfolio is invested in high quality premium coupon securities with an
average maturity of 6.78 years. At December 31, 1996, the Portfolio composition
included 29% state general obligation bonds, 15% state agency bonds, 15% city
and county general obligation bonds, 12% city and county revenue bonds, 21%
prerefunded bonds escrowed in U.S. Treasury securities and an 8% cash position.
Bond positions we added to the Portfolio during the year included an
overweighting in premium coupon noncallable securities with maturities out
longer than ten years. The noncallable structure is difficult to find in the
municipal market and the scarcity value of this type of bond makes it a good
trading vehicle. The entire Portfolio is invested in securities rated in the two
highest rating categories (AAA and AA); with quality spreads at very tight
levels, there is much better value in owning the highest rated securities.
We believe the bond markets will tread slowly during the 1st quarter of 1997, as
investors continue to wrestle with whether recent signs of strength in the
economy are a temporary aberration or a trend that has some momentum. The focus
will be on how much of an inflationary threat the Federal Reserve perceives at
current growth levels and what the implications are for Fed policy over the next
few months. If the economy does show above trend growth, a correction in the
bond markets would probably ensue that could push yields up to levels last seen
during the summer of 1996.
Lori A. Cohane
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
135
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (98.2%)
DAILY VARIABLE RATE BONDS (7.9%)
$ 600 Hapeville, Georgia, Industrial Development
Authority, Revenue Bonds, Hapeville Hotel LP,
Series 85, 5.00%, 11/01/15..................... $ 600
600 Monroe County, Georgia, Pollution Control,
Revenue Bonds, Georgia Power Co., Series 2,
4.65%, 7/01/25................................. 600
100 New York City, New York, City Municipal Water
Finance Authority, Water & Sewer Systems,
Revenue Bonds, Series A, 4.70%, 6/15/25........ 100
200 New York City, New York, General Obligation
Bonds, Series A-8, 5.00%, 8/01/17.............. 200
500 New York City, New York, General Obligation
Bonds, Series B, 4.50%, 10/01/20............... 500
700 New York City, New York, General Obligation
Bonds, Series C, 4.50%, 10/01/23............... 700
500 Sabine River Authority, Texas, Pollution Control,
Revenue Bonds, Texas Utilities Electric Co.,
Series B, 4.70%, 6/01/30....................... 500
--------
TOTAL DAILY VARIABLE RATE INSTRUMENTS (Cost $3,200)......... 3,200
--------
FIXED RATE INSTRUMENTS (90.3%)
825 Albuquerque, New Mexico, General Obligation
Bonds, Series B, 4.70%, 7/01/98................ 835
1,500 Baltimore County, Maryland, Consolidated Public
Improvement, General Obligation Bonds, 6.00%,
7/01/05........................................ 1,619
1,500 Connecticut State, General Obligation Bonds,
Series E, 6.00%, 3/15/12....................... 1,612
1,000 Connecticut State, Special Obligation, Tax
Revenue Bonds, Transportation, 6.50%, 7/01/09,
Prerefunded 7/01/99 at 102..................... 1,074
1,000 De Kalb County, Georgia, Water & Sewer Revenue
Bonds, 7.00%, 10/01/06......................... 1,039
1,000 Delaware Transportation Authority, Transportation
System Revenue Bonds, 6.50%, 7/01/11,
Prerefunded 7/01/01 at 102..................... 1,100
1,000 Fairfax County, Virginia, Water Authority Revenue
Bonds, 6.00%, 4/01/22.......................... 1,030
1,500 Florida State Board of Education, Capital Outlay,
Public Education, General Obligation Bonds,
6.40%, 6/01/19................................. 1,596
1,000 Georgia State, General Obligation Bonds, Series
A, 5.80%, 3/01/02.............................. 1,063
500 Georgia State, General Obligation Bonds, Series
F, 6.50%, 12/01/06............................. 567
500 Hawaii State, General Obligation Bonds, Series
BS, 6.70%, 9/01/97............................. 511
1,000 Hawaii State, General Obligation Bonds, Series
CJ, 6.20%, 1/01/12............................. 1,055
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
$ 1,500 Intermountain Power Agency, Utah, Power Supply
Revenue Bonds, Series D, 8.375%, 7/01/12....... $ 1,562
1,000 Kentucky State Housing Corp., Revenue Bonds,
Series A, 6.00%, 7/01/10....................... 1,026
1,155 Maryland State Department of Transportation,
Construction Revenue Bonds, Second Issue,
6.80%, 11/01/05, Prerefunded 11/01/99 at 102... 1,257
1,000 Massachusetts State Consolidated Loan, Series A,
7.50%, 3/01/03, Prerefunded 3/01/00 at 102..... 1,111
500 Massachusetts State Consolidated Loan, Series A,
7.625%, 6/01/08, Prerefunded 6/01/08 at 102.... 572
1,625 Michigan State Housing Development Authority,
Revenue Bonds, Series A, 6.75%, 12/01/14....... 1,709
1,590 Minnesota State Infrastructure Development,
General Obligation Bonds, 6.80%, 8/01/03,
Prerefunded 8/01/00 at 100..................... 1,720
1,400 Mississippi State, General Obligation Bonds,
6.00%, 2/01/09................................. 1,520
1,475 Montana State, General Obligation Bonds, Long
Range Building Program, Series C, 6.00%,
8/01/13........................................ 1,544
1,000 New Castle County, Delaware, General Obligation
Bonds, 6.25%, 10/15/01......................... 1,079
1,000 New Jersey State, General Obligation Bonds,
Series E, 5.50%, 7/15/02....................... 1,053
1,000 Ohio State, Housing Finance Agency, Residential
Mortgage Revenue Bonds, Series A-1, 6.20%,
9/01/14........................................ 1,032
1,000 Orlando, Florida, Utilities Commission Water &
Electric, Revenue Bonds, Series D, 6.75%,
10/01/17....................................... 1,164
1,000 Reedy Creek Improvement District, Florida,
Utility, Revenue Bonds, Series 91-1, 6.50%,
10/01/16, Prerefunded 10/01/01 at 101.......... 1,097
1,350 San Antonio, Texas, General Obligation Bonds,
6.50%, 8/01/14................................. 1,506
1,000 Virginia Beach, Virginia, General Obligation
Bonds, 6.00%, 9/01/10.......................... 1,059
500 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds, Series B,
6.60%, 1/01/12................................. 531
1,000 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds, Series B,
6.65%, 1/01/13................................. 1,066
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
136
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FIXED RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 1,000 Washington State, General Obligation Bonds,
Series B, 6.40%, 6/01/17....................... $ 1,107
500 Washington Suburban Sanitary District, General
Obligation Revenue Bonds, 6.50%, 11/01/05,
Prerefunded 11/01/01 at 102.................... 553
--------
TOTAL FIXED RATE INSTRUMENTS (Cost $35,420)................. 36,369
--------
TOTAL TAX--EXEMPT INSTRUMENTS (98.2%) (Cost $38,620)........ 39,569
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.2%) (Cost $38,620)................. 39,569
--------
OTHER ASSETS (1.9%)
Cash....................................... $ 25
Interest Receivable........................ 739
Other...................................... 1 765
-----
LIABILITIES (-0.1%)
Investment Advisory Fees Payable........... (7)
Adminstrative Fees Payable................. (6)
Custodian Fees Payable..................... (1)
Director's Fees and Expenses Payable....... (1)
Other Liabilities.......................... (23) (38)
----- --------
NET ASSETS (100%)........................................ $40,296
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................... $ 39,369
Overdistributed Net Investment Income.............. (16)
Accumulated Net Realized Loss...................... (6)
Unrealized Appreciation on Investments............. 949
--------
NET ASSETS......................................... $ 40,296
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ---------------------------------------------------
NET ASSETS......................................... $ 40,227
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 3,925,419 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $10.25
--------
--------
CLASS B:
- ---------------------------------------------------
NET ASSETS......................................... $69
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 6,738 outstanding $0.001 par value
shares (authorized 500,000,000 shares)........... $10.24
--------
--------
</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.
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 Treasury escrow.
- ------------------------------------------------------------
SUMMARY OF TAX-EXEMPT INSTRUMENTS BY STATE CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
STATE (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Connecticut............................ $ 2,686 6.7%
Delaware............................... 2,179 5.4
Florida................................ 3,857 9.6
Georgia................................ 3,869 9.6
Hawaii................................. 1,566 3.9
Kentucky............................... 1,026 2.5
Maryland............................... 2,876 7.1
Massachusetts.......................... 1,683 4.2
Michigan............................... 1,709 4.2
Minnesota.............................. 1,720 4.3
Mississippi............................ 1,520 3.8
Montana................................ 1,544 3.8
New Jersey............................. 1,053 2.6
New Mexico............................. 835 2.1
New York............................... 1,500 3.7
Ohio................................... 1,032 2.6
Texas.................................. 2,006 5.0
Utah................................... 1,562 3.9
Virginia............................... 3,686 9.1
Washington............................. 1,660 4.1
-------- ---
$ 39,569 98.2%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
137
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Commercial Paper 41.0%
Certificates of Deposit 35.4%
U.S. Government Agency Discount Notes 2.7%
U.S. Government Agency Floating Rate
Notes 13.1%
Other 7.8%
</TABLE>
COMPARATIVE MONTHLY AVERAGE YIELDS
- --------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO 30-DAY YIELDS DONOGHUE'S SEC 30-DAY YIELDS
<S> <C> <C>
Jan. 5.21 5.18
Feb. 5.51 5.35
Mar. 5.58 5.47
Apr. 5.58 5.49
May 5.58 5.47
June 5.52 5.43
July 5.38 5.29
August 5.3 5.22
Sept 5.23 5.18
Oct 5.2 5.18
Nov 5.21 5.17
Dec 4.97 4.85
</TABLE>
- ------------------------------------------------
INVESTMENTS IN SHARES OF THE PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Money Market Portfolio's investment objectives are to maximize current
income and preserve capital while maintaining high levels of liquidity through
investing in 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.
The seven day yield and seven day effective yield (which assumes an
annualization of the current yield with all dividends reinvested) for the
Portfolio as of December 31, 1996 were 4.99% and 5.11%, respectively. As with
all money market portfolios, the seven day yields are not necessarily indicative
of future performance.
The Fed began 1996 by cutting interest rates (from 5.50% to 5.25% on the 31st of
January). After that, short term interest rates moved higher throughout most of
the spring. This came as a big surprise to most money market participants
because when the year began they believed that the economy was very weak. In
January leading economists had predicted that the Fed would be required to ease
interest rates dramatically to stimulate the economy. Instead, the U.S. economy
showed surprising strength, particularly in the housing and job creation
categories. These key components proved that an earlier series of Fed easings,
which had begun in July of 1995, had had the desired effect.
At the beginning of each spring month the non-farm payroll report presented the
money market with a new shock that sent interest rates higher. Jobs were being
created at an alarmingly rapid rate, and most bondholders sold in furious
fashion. We chose to use many of these setbacks as buying opportunities and took
advantage of the higher yields available. We bought longer dated money market
securities for the portfolio to extend its weighted average maturity.
By the middle of the summer the market turned again. Just when it seemed that
investors were beginning to get comfortable with the idea that the strength
promised in the spring's employment reports had been real, new data revealed a
rather severe slowdown. After a robust second quarter GDP fell to
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
138
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO (CONT.)
a rather anemic 2.2% in the third quarter. By the time the data had been sorted
out the market had rallied so much that opportunities to extend at attractive
levels had been virtually exhausted.
In addition to the extending we did earlier in the year, we also increased the
percentage of the Portfolio that is devoted to highly-rated commercial paper.
This came as we decreased our holdings of agency discount notes and treasury
bills. We did this to take advantage of the higher yields available on
commercial paper.
As the year drew to a close and the Fed retired with no action imminent, the
economy showed renewed signs of strength and the markets began to contemplate
the possibility of rate hikes in the early part of calendar '97. This led to a
slight backup in rates at the very end of the year.
We are pleased to report that the Portfolio continues to meet its goal of
providing as high a level of interest income as is consistent with maintaining
liquidity and stability of principal, and that the Portfolio still holds only
high quality securities with over 90% of assets invested in securities rated
A1+/P1.
Abigail Jones Feder
PORTFOLIO MANAGER
Kenneth R. Holley
PORTFOLIO MANAGER
Ellen D. Harvey
PORTFOLIO MANAGER
Christian G. Roth
PORTFOLIO MANAGER
Scott F. Richard
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Money Market Portfolio
139
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (92.2%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (15.8%)
AGENCY DISCOUNT NOTE (2.7%)
$35,000 Federal National Mortgage Association 5.33%,
3/20/97........................................ $ 34,596
-----------
AGENCY FLOATING RATE NOTES (13.1%)
20,000 FCC National Bank 5.51%, 5/05/97................. 20,000
Federal National Mortgage Association
25,000 5.25%, 4/11/97................................. 24,997
65,000 5.41%, 9/02/97................................. 65,000
13,000 5.32%, 7/26/99................................. 12,964
46,000 Student Loan Marketing Association 5.57%,
10/30/97....................................... 46,034
-----------
168,995
-----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS (Cost
$203,591)................................................. 203,591
-----------
COMMERCIAL PAPER (41.0%)
FINANCE (41.0%)
30,000 Abbey National North America 5.32%, 3/11/97...... 29,694
27,000 ABN-AMRO North America Finance, Inc. 5.58%,
3/6/97......................................... 26,732
9,000 ABN-AMRO North America Finance, Inc. 5.275%,
5/15/97........................................ 8,823
25,000 American General Finance 5.31%, 1/28/97.......... 24,901
15,000 Ameritech Capital Funding Corp. 5.28%, 3/14/97... 14,842
30,000 Deutsche Bank 5.47%, 1/23/97..................... 29,900
20,000 Deutsche Bank 5.34%, 2/10/97..................... 19,881
25,000 Ford Motor Credit Corp. 5.33%, 2/05/97........... 24,871
15,000 General Electric Capital Corp. 5.31%, 1/24/97.... 14,949
25,000 General Electric Capital Corp. 5.27%, 4/18/97.... 24,608
25,000 Harvard University 5.35%, 1/21/97................ 24,926
25,000 IBM Credit Corp. 5.31%, 3/03/97.................. 24,775
25,000 J.C. Penney Corp. 5.31%, 2/20/97................. 24,816
20,000 John Deere Capital Corp. 5.37%, 1/13/97.......... 19,964
22,728 MetLife Funding, Inc. 5.36%, 1/21/97............. 22,660
3,000 MetLife Funding, Inc. 5.43%, 1/21/97............. 2,991
25,000 Monsanto Co. 5.43%, 2/19/97...................... 24,815
25,000 Private Export Funding Corp. 5.30%, 2/10/97...... 24,853
28,900 Private Export Funding Corp. 5.31%, 2/18/97...... 28,695
25,000 Raytheon Corp. 5.29%, 1/10/97.................... 24,967
15,000 Societe Generale Bank 5.32%, 2/20/97............. 14,889
8,000 Suntrust Banks, Inc. 5.30%, 1/06/97.............. 7,994
10,000 Suntrust Banks, Inc. 5.37%, 2/10/97.............. 9,940
10,000 Transamerica Financial Corp. 5.29%, 1/22/97...... 9,969
18,000 Transamerica Financial Corp. 5.28%, 3/31/97...... 17,765
17,000 Transamerica Financial Corp. 5.27%, 5/27/97...... 16,637
7,000 Xerox Corp. 5.32%, 2/05/97....................... 6,964
-----------
TOTAL COMMERCIAL PAPER (Cost $526,821).................... 526,821
-----------
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT (35.4%)
$23,000 ABN-AMRO Bank, New York (Yankee) 6.12%,
7/14/97........................................ $ 22,999
25,000 ANZ Inc. 5.38%, 2/12/97.......................... 25,002
35,000 Bank of Austria 5.38%, 1/21/97................... 34,997
40,000 Barclay's Bank (Yankee) 5.38%, 2/05/97........... 40,001
30,000 Bayer Landesbank 5.41%, 5/07/97.................. 30,001
30,000 Canadian Imperial Bank 5.49%, 1/15/97............ 30,000
7,670 Canadian Imperial Bank (Yankee) 5.41%, 1/17/97... 7,670
25,000 Commerzbank (Yankee) 5.39%, 3/04/97.............. 25,000
20,000 Credit Agricole (Yankee) 5.49%, 4/28/97.......... 20,001
40,000 National Westminster Bank plc 5.51%, 1/06/97..... 40,000
30,000 Rabobank 5.50%, 4/18/97.......................... 30,001
50,000 Royal Bank of Canada (Yankee) 6.05%, 6/11/97..... 50,000
32,000 Societe Generale Bank (Yankee) 6.16%, 9/08/97.... 31,996
31,840 Swiss Bank 5.35%, 2/07/97........................ 31,840
35,000 UBS Finance Inc. 5.50%, 1/17/97.................. 35,000
-----------
TOTAL CERTIFICATES OF DEPOSIT (Cost $454,508)............... 454,508
-----------
TOTAL MONEY MARKET INSTRUMENTS (Cost $1,184,920)............ 1,184,920
-----------
SHORT TERM INVESTMENT (7.5%)
REPURCHASE AGREEMENT (7.5%)
96,292 Goldman Sachs & Co. 6.52%, dated 12/31/96, due
1/02/97, to be repurchased at $96,327,
collateralized by U.S. Treasury Notes, 5.50%,
due 12/31/00, valued at $98,338 (Cost
$96,292)....................................... 96,292
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.7%) (Cost $1,281,212).............. 1,281,212
--------
OTHER ASSETS (0.6%)
Interest Receivable........................ $ 7,275
Other...................................... 66 7,341
----------
LIABILITIES (-0.3%)
Dividends Payable.......................... (2,503)
Investment Advisory Fees Payable........... (898)
Adminstrative Fees Payable................. (167)
Directors' Fees and Expenses Payable....... (37)
Custodian Fees Payable..................... (28)
Other Liabilities.......................... (287) (3,920)
---------- --------
NET ASSETS (100%)........................................ $1,284,633
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Money Market Portfolio
140
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $1,285,115
Accumulated Net Realized Loss.......... (482)
----------
NET ASSETS............................. $1,284,633
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 1,285,119,350 outstanding
$0.001 par value shares (authorized
4,000,000,000 shares).................. $1.00
----------
----------
</TABLE>
- ------------------------------------------------------------
Floating Rate -- The interest rate changes on these instruments are based on
changes in a designated base rate. The rates shown are those in effect at
December 31, 1996.
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 at December 31, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Money Market Portfolio
141
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Fixed Rate Instruments 39.6%
U.S. Government & Agency Obligations 4.0%
Variable/Floating Rate Instruments 56.1%
Other 0.3%
</TABLE>
COMPARATIVE MONTHLY AVERAGE YIELDS
- --------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MUNICIPAL MONEY
<S> <C> <C>
Market Portfolio Donoghue's SEC
30-Day Yields 30-Day Yields
Jan. 2.97 3.26
Feb. 3.38 3.19
Mar. 3.42 3.35
Apr. 3.62 3.53
May 3.72 3.81
June 3.48 3.31
July 3.28 3.19
Aug 3.29 3.21
Sept 3.3 3.41
Oct 3.27 3.32
Nov 3.34 3.33
Dec 3.03 3.06
</TABLE>
- ------------------------------------------------
INVESTMENTS IN SHARES OF THE PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Municipal Money Market 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 high
quality municipal money market instruments which earn interest exempt from
Federal income tax in the opinion of bond counsel for the issuer. 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
alternative minimum tax. Interest on tax-exempt municipal securities may be
subject to state and local 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.
The seven day yield and seven day effective yield (assumes an annualization of
the current yield with all dividends reinvested) for the Municipal Money Market
Portfolio as of December 31, 1996 were 3.38% and 3.43%, respectively. The seven
day taxable equivalent yield and the seven day taxable equivalent effective
yield for Municipal Money Market Portfolio at December 31, 1996, assuming
Federal income tax rate of 39.6% (maximum rate) were 5.60% and 5.68%,
respectively. The seven day yields are not necessarily indicative of future
performance.
Throughout 1996, taxable investors spent considerable energy focused on the
relative strength of the U.S. economy and how the Federal Reserve might respond
either by raising or lowering short term interest rates. Despite this theme that
dominated the taxable sectors, it had little or no impact on the short term
tax-exempt sector. Instead, as is so often typical in the tax-exempt sector,
changes in the market and the shape of the yield curve were driven primarily by
supply and demand. Except for the latter half of the second quarter, the yield
curve remained very flat or inverted for the majority of 1996 which was in
contrast to the taxable market's positively sloped curve. As the Federal tax
deadline approached in mid April, the
- ------------------------------------------------
INVESTMENTS IN SHARES OF THE PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
142
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
market sold off as bond funds were forced to sell short securities to meet
redemptions. This increase in supply caused the curve to shift to a positive
slope which persisted for the balance of the second quarter only to revert back
to a flat shape as the third quarter unfolded.
The Portfolio experienced tremendous growth during 1996 with the asset size
increasing 61%. The Portfolio finished 1996 with assets of $721 million. Much of
the asset growth occurred during April, which was fortuitous as April
represented a buying opportunity.
Overall the asset allocation throughout the year remained consistent with
commercial paper ranging from 30-40%, tax-exempt notes ranged from 3-5%, and
daily and weekly variable rate puttable issues fluctuated between 50% and 60% of
the Portfolio. Because of the relatively flat shape of the curve, the Portfolio
maintained a relatively short weighted average maturity throughout the year
ranging from 15 to 40 days. December ended with a weighted average maturity of
22 days.
Gerald P. Barth
PORTFOLIO MANAGER
Abigail Jones Feder
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
143
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (95.7%)
FIXED RATE INSTRUMENTS (39.6%)
NOTES (6.8%)
$ 1,000 City of San Antonio, Texas, Revenue Bonds, 7.90%,
5/01/14, Prerefunded 5/01/97 at 101.5.......... $ 1,028
3,000 Colorado State, Series A, 4.50%, 6/27/97,
TRANS.......................................... 3,008
1,500 Delaware State, General Obligation Bonds, Series
A, 4.25%, 3/01/97.............................. 1,501
2,445 Hawaii State, General Obligation Bonds, Series
BK, 6.60%, 4/01/99, Prerefunded 4/01/97 at
101.5.......................................... 2,498
6,225 Idaho State, 4.50%, 6/30/97, TANS................ 6,243
2,000 Indianapolis, Indiana, Local Public Improvements
Board, Series A, 4.25%, 1/09/97................ 2,000
1,500 Los Angeles, California, Unified School District,
4.50%, 6/30/97, TRANS.......................... 1,505
2,500 Maine State, General Obligation Bonds, 4.50%,
6/27/97, TANS.................................. 2,507
4,130 Massachusetts State, General Obligation Bonds,
Series A, 4.25%, 6/10/97....................... 4,138
9,100 New York State, General Obligation Bonds, 3.55%,
2/06/97, BANS.................................. 9,100
1,000 South Carolina State, General Obligation Bonds,
Series A, 5.00%, 7/01/97....................... 1,005
9,000 Texas State, 4.75%, 8/29/97, TRANS............... 9,046
3,575 Wisconsin State, Series B, 7.25%, 5/01/08,
Prerefunded 5/01/97 at 101..................... 3,650
2,000 York County, South Carolina, Pollution Control
Revenue Bonds, Saluda River, Series E2, 3.65%,
2/15/97........................................ 2,000
----------
49,229
----------
COMMERCIAL PAPER (32.8%)
10,000 Baltimore County, Maryland, 3.50%, 2/12/97....... 10,000
3,000 Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light, Series
90C, 3.55%, 2/26/97............................ 3,000
5,025 Burke County, Georgia, Development Authority,
Oglethorpe, Series 92A, 3.55%, 2/06/97......... 5,025
6,000 Burlington, Kansas, Pollution Control Revenue
Bonds, Kansas City Power & Light Project,
Series B, 3.55%, 2/18/97....................... 6,000
4,530 City of Dallas, Texas, Series A, 3.70%, 2/25/97.. 4,530
6,000 City of Honolulu, Hawaii, 3.45%, 1/14/97......... 6,000
2,500 City of Lincoln, Nebraska, Series 95, 3.50%,
2/10/97........................................ 2,500
City of Mount Vernon, Indiana, General Electric,
Series 89A,
4,000 3.55%, 1/29/97................................. 4,000
4,000 3.50%, 2/26/97................................. 4,000
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 2,500 Commonwealth of Virginia, 3.50%, 2/19/97......... $ 2,500
1,200 Converse County, Wyoming, Series 88, 3.50%,
2/10/97........................................ 1,200
Gainesville, Florida, Series C,
1,128 3.45%, 1/30/97................................. 1,128
2,525 3.45%, 2/21/97................................. 2,525
Houston, Texas,
6,000 3.65%, 1/21/97, Series A....................... 6,000
10,100 3.50%, 1/31/97, Series A....................... 10,100
4,000 3.15%, 2/06/97, Series B....................... 4,000
2,000 Illinois Development Finance Authority, Series
93A, 3.70%, 1/07/97............................ 2,000
2,100 Illinois Health & Educational Facilities, Series
89A, 3.60%, 2/24/97............................ 2,100
4,000 Independence, Missouri, Water Utility Revenue,
Series 86, 3.60%, 1/13/97...................... 4,000
Jacksonville, Florida, Electric Authority,
7,700 3.70%, 1/06/97................................. 7,700
3,100 3.45%, 1/14/97................................. 3,100
Jasper County, Indiana,
3,600 3.55%, 2/07/97, Series 88B..................... 3,600
2,000 3.55%, 2/07/97, Series 88C..................... 2,000
1,100 Lehigh County, Pennsylvania, Series A, 3.65%,
1/15/97........................................ 1,100
5,750 Louisiana State, General Obligation Bonds, 3.65%,
1/22/97........................................ 5,750
6,600 Massachusetts Health & Education Facilities
Authority, Harvard University, Series L, 3.55%,
2/27/97........................................ 6,600
3,000 Massachusetts State Water Resource Authority,
3.65%, 1/08/97................................. 3,000
3,000 Montgomery County, Maryland, Series 95, 3.50%,
2/07/97........................................ 3,000
3,000 Montgomery County, Pennsylvania, 3.60%,
2/13/97........................................ 3,000
6,380 Montgomery County, Alabama, Industrial
Development Board, General Electric Series,
3.65%, 1/08/97................................. 6,380
5,000 Municipal Assistance Corp. for the City of New
York, New York, Series F, 3.45%, 1/16/97....... 5,000
3,000 Municipal Electric Authority of Georgia, 3.60%,
3/10/97........................................ 3,000
7,300 Nashville & Davidson County, Tennessee, 3.55%,
1/30/97........................................ 7,300
1,700 New York City, New York, Water Finance Authority,
3.45%, 1/17/97................................. 1,700
4,025 North Carolina Eastern Municipal Power, 3.55%,
2/18/97........................................ 4,025
300 Northeastern Pennsylvania Hospital Authority,
Series B, 3.60%, 1/29/97....................... 300
2,990 Omaha, Nebraska, Public Power District, 3.60%,
1/28/97........................................ 2,990
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
144
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FIXED RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 1,000 Peninsula Ports Authority, Virginia, Series 92,
3.45%, 1/14/97................................. $ 1,000
3,000 Petersburg, Indiana, Indiana Power & Light,
Series 91, 3.60%, 1/28/97...................... 3,000
Platte River Authority, Colorado,
2,200 3.60%, 2/11/97................................. 2,200
5,500 3.45%, 2/12/97................................. 5,500
Rochester, Minnesota, Health Facilities, Mayo
Clinic,
1,000 3.60%, 2/11/97, Series B....................... 1,000
1,500 3.60%, 2/11/97, Series C....................... 1,500
1,065 3.60%, 2/11/97, Series E....................... 1,065
1,500 3.65%, 1/22/97, Series F....................... 1,500
2,800 Salt Lake City, Utah, Series 90, 3.65%, 1/06/97.. 2,800
6,000 Salt River, Arizona, 3.60%, 1/23/97.............. 6,000
Salt River, Arizona, Agricultural and Power,
District Revenue Bonds,
6,600 3.50%, 1/27/97................................. 6,600
7,006 3.45%, 1/30/97................................. 7,006
San Antonio, Texas, Water Systems Revenue Bonds,
4,500 3.70%, 1/07/97................................. 4,500
1,900 3.55%, 2/07/97................................. 1,900
Sunshine State, Florida, Government Finance
Authority,
9,850 3.50%, 2/10/97, Series 86...................... 9,850
4,470 3.60%, 2/13/97................................. 4,470
2,000 3.45%, 2/21/97................................. 2,000
3,750 3.60%, 2/24/97................................. 3,750
5,000 Sweetwater County, Wyoming, Series 88A, 3.50%,
2/10/97........................................ 5,000
2,000 Texas Municipal Power Agency, 3.60%, 2/26/97..... 2,000
Trimble County, Kentucky, Louisville Gas &
Electric Series,
5,000 3.50%, 1/29/97................................. 5,000
1,000 3.60%, 1/29/97................................. 1,000
5,500 University of Minnesota, Series A, 3.60%,
2/14/97........................................ 5,500
2,500 Vanderbilt University, Tennessee, Series 89A,
3.60%, 2/25/97................................. 2,500
----------
236,794
----------
TOTAL FIXED RATE INSTRUMENTS.............................. 286,023
----------
VARIABLE/FLOATING RATE INSTRUMENTS (56.1%)
DAILY VARIABLE RATE BONDS (32.1%)
1,500 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Shell Oil Project, 5.00%,
9/01/23........................................ 1,500
2,400 Birmingham, Alabama, Medical Clinic Board Revenue
Bonds, University of Alabama Hospital Services
Fund, Series 91, 5.10%, 12/01/26............... 2,400
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
Burke County, Georgia, Development Authority,
$ 5,500 4.95%, 7/01/24................................. $ 5,500
4,300 5.00%, 9/01/26................................. 4,300
5,200 California Pollution Control Financing Authority,
Southern California Edison, Series 86A, 4.70%,
2/28/08........................................ 5,200
1,000 Chattanooga-Hamilton County, Tennessee, Hospital
Authority Revenue Bonds, Erlanger Medical
Center, 5.10%, 10/01/17........................ 1,000
Chicago, Illinois, O'Hare International Airport
Special Facilities Revenue Bonds, American
Airlines, Inc., Project,
4,200 5.00%, 12/01/17, Series A...................... 4,200
4,200 5.00%, 12/01/17, Series B...................... 4,200
700 5.00%, 12/01/17, Series C...................... 700
4,200 5.00%, 12/01/17, Series D...................... 4,200
2,800 Delaware County, Pennsylvania, Industrial
Development Authority, Series 95, 5.00%,
12/01/09....................................... 2,800
1,700 Delta County, Michigan, Environmental Improvement
Revenue Bonds, Mead Corp., 5.00%, 12/01/23..... 1,700
4,200 East Baton Rouge Parish, Louisiana, Pollution
Control Revenue Bonds, Exxon Project, 4.15%,
3/01/22........................................ 4,200
4,500 East Baton Rouge Parish, Louisianna, Pollution
Control Revenue Bonds, Exxon Corp. Project,
5.00%, 11/01/19................................ 4,500
6,400 Emery County, Utah, Pollution Control Revenue
Bonds, Pacificorp., 4.95%, 11/01/24............ 6,400
2,100 Geisinger Authority, Pennsylvania Health System,
Series B, 4.25%, 7/01/22....................... 2,100
1,400 Gulf Coast Waste Disposal Authority, Texas,
Pollution Control Revenue Bonds, Exxon Project,
4.90%, 6/01/20................................. 1,400
5,000 Hapeville, Georgia, Industrial Development
Authority, Series 85, 5.00%, 11/01/15.......... 5,000
6,600 Harris County, Texas, Health Facilities
Development Corp., Methodist Hospital, Series
94, 5.00%, 12/01/25............................ 6,600
Harris County, Texas, Industrial Development,
Pollution Control Revenue Bonds, Exxon Project,
2,600 5.00%, 3/01/24, Series 84A..................... 2,600
2,200 5.00%, 3/01/24, Series 84B..................... 2,200
5,700 Hurley, New Mexico, Pollution Control Revenue
Bonds, Series 85, 4.95%, 12/01/15.............. 5,700
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
145
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 7,000 Jackson County, Mississippi, Port Facility,
Chevron Project, Series 93, 4.90%, 6/01/23..... $ 7,000
900 Kansas City, Kansas, Industrial Development
Authority, Revenue Bonds, PQ Corp., 5.05%,
8/01/15........................................ 900
2,000 Lake Charles, Louisiana, Harbor & Terminal
District Port Facilities, Series 84, 4.95%,
11/01/11....................................... 2,000
Lincoln County, Wyoming, Pollution Control
Revenue Bonds, Exxon Project
2,400 5.00%, 11/01/14, Series 84A.................... 2,400
4,400 4.90%, 8/01/15, Series 84A..................... 4,400
2,500 5.00%, 11/01/14, Series 84B.................... 2,500
2,500 5.00%, 11/01/14, Series 84C.................... 2,500
2,500 5.00%, 11/01/14, Series 84D.................... 2,500
2,920 Louisiana Public Facilities Authority, Industrial
Development, Kenner Hotel, Series 85, 5.00%,
12/01/15....................................... 2,920
Maricopa County, Arizona, Pollution Control
Revenue Bonds, Arizona Public Service Co.,
4,500 4.95%, 5/01/29, Series B....................... 4,500
4,600 5.00%, 5/01/29, Series C....................... 4,600
3,500 4.95%, 5/01/29, Series E....................... 3,500
3,600 5.00%, 5/01/29, Series F....................... 3,600
1,000 Marshall County, West Virginia, Pollution Control
Revenue Bonds, Mountaineer Carbon Co., 5.00%,
12/01/20....................................... 1,000
Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington
University,
2,000 4.95%, 9/01/30, Series A....................... 2,000
3,500 4.95%, 9/01/30, Series B....................... 3,500
1,700 Monroe County, Georgia, Pollution Control Revenue
Bonds, Gulf Power Co., Series 2, 4.65%,
9/01/24........................................ 1,700
3,900 New York City, New York, Cultural Resources,
Revenue Bonds, Series B, 4.80%, 12/01/15....... 3,900
New York City, New York, General Obligation
Bonds,
2,500 5.00%, 8/15/03, Series B, Subseries B2......... 2,500
2,000 5.00%, 8/15/04, Series B, Subseries B3......... 2,000
5,000 5.00%, 8/15/23, Series B, Subseries B4......... 5,000
1,500 5.00%, 8/15/18, Series B, Subseries B7......... 1,500
400 5.00%, 8/01/98, Series C, Subseries C4......... 400
1,800 5.00%, 8/01/22, Subseries A4................... 1,800
1,100 5.00%, 8/01/23, Subseries A4................... 1,100
1,500 5.00%, 8/01/15, Subseries A5................... 1,500
1,400 4.50%, 8/15/21, Subseries B4................... 1,400
1,500 4.50%, 8/15/23, Subseries B4................... 1,500
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 7,450 New York City, New York, Water Finance Authority,
Water and Sewer System Revenue Bonds, Series C,
5.00%, 6/15/23................................. $ 7,450
2,000 New York State, Dormitory Authority Revenue
Bonds, Cornell University, Series B, 4.80%,
7/01/25........................................ 2,000
2,500 New York State, Thruway Authority Revenue Bonds,
4.90%, 1/01/24................................. 2,500
1,000 Nueces River Authority, Texas, Pollution Control
Revenue Bonds, Series 85, 5.05%, 12/01/99...... 1,000
Ohio State Air Quality Development Authority
Revenue Bonds, Cincinnati Gas and Electric,
1,300 4.70%, 12/01/15, Series 85A.................... 1,300
2,000 4.70%, 12/01/15, Series 85B.................... 2,000
4,100 4.90%, 9/01/30, Series 95B..................... 4,100
2,800 Parrish, Alabama, Industrial Development Board,
Pollution Control Revenue Bonds, Alabama Power
Co. Project, 5.00%, 6/01/15.................... 2,800
2,400 Peninsula Ports Authority, Virginia, Coal Revenue
Bonds, 4.95%, 7/01/16.......................... 2,400
Pennsylvania Higher Education Authority Revenue
Bonds, Carnegie Mellon University,
5,000 4.25%, 11/01/25, Series 95A.................... 5,000
1,700 5.00%, 11/01/27, Series 95B.................... 1,700
1,500 5.00%, 11/01/29, Series 95C.................... 1,500
2,600 5.00%, 11/01/30, Series 95D.................... 2,600
5,000 Philadelphia, Pennsylvania, Childrens Hospital,
Series 92B, 5.00%, 3/01/27..................... 5,000
4,100 Philadelphia, Pennsylvania, Hospitals & Higher
Educational Facilities Authority Revenue Bonds,
Childrens Hospital Project, Series 96A, 5.00%,
3/01/27........................................ 4,100
Platte County, Wyoming, Pollution Control Revenue
Bonds,
3,800 5.05%, 7/01/14, Series A....................... 3,800
1,000 5.05%, 7/01/14, Series B....................... 1,000
2,000 Port Authority of New York & New Jersey, Revenue
Bonds, 4.85%, 6/01/20.......................... 2,000
Port of Saint Helens, Oregon, Pollution Control
Revenue Bonds, Portland General Electric Co.
2,000 5.25%, 4/01/10, Series A....................... 2,000
1,600 4.95%, 6/01/10, Series B....................... 1,600
2,300 Raleigh-Durham, North Carolina, Airport
Authority, Series A, 4.95%, 11/01/15........... 2,300
1,400 Saint Charles Parish, Louisiana, Pollution
Control Revenue Bonds, Shell Oil Project,
Series 92B, 4.90%, 10/01/22.................... 1,400
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
146
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 3,000 Saint Lucie County, Florida, Pollution Control
Revenue Bonds, Florida Power & Light Co.,
4.00%, 1/01/26................................. $ 3,000
5,000 Salt Lake County, Utah, Pollution Control Revenue
Bonds, British Petroleum Co., Series 94, 4.95%,
2/01/08........................................ 5,000
4,900 Southwest, Texas, Higher Education Authority
Revenue Bonds, Southern Methodist University,
Series 85, 4.95%, 7/01/15...................... 4,900
1,200 Sublette County, Wyoming, Pollution Control
Revenue Bonds, Exxon Project, 4.90%,
11/01/14....................................... 1,200
1,300 Texas State, Water Development Board Revenue
Bonds, Series A, 5.10%, 3/01/15................ 1,300
1,400 Valdez, Alaska, Marine Terminal Authority, Exxon
Project, Series 85, 4.90%, 10/01/25............ 1,400
3,000 West Side Calhoun County, Texas, Pollution
Control Revenue Bonds, 5.00%, 12/01/15......... 3,000
----------
231,870
----------
MONTHLY VARIABLE RATE BONDS (0.4%)
2,500 California State, Series B, 4.47%, 6/30/97,
RANS........................................... 2,500
----------
WEEKLY VARIABLE RATE BONDS (23.6%)
1,000 Albuquerque, New Mexico, Revenue Bonds, Series
91A, 4.10%, 7/01/22............................ 1,000
2,700 Allegheny County, Pennsylvania, Hospital
Development Authority, Series 95B, 4.05%,
9/01/20........................................ 2,700
2,300 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Borden, Inc. Project, 4.15%,
12/01/09....................................... 2,300
Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light,
1,000 4.10%, 8/01/20, Series A....................... 1,000
1,000 4.10%, 8/01/09, Series B....................... 1,000
9,200 Burke County, Georgia, Development Authority,
Oglethorpe, Series 93A, 4.00%, 1/01/16......... 9,200
400 California Health Facilities Authority, Series A,
4.25%, 1/01/16................................. 400
2,500 California State, Series C3, 4.05%, 6/30/97,
RANS........................................... 2,500
2,700 California Statewide Communities, Revenue Bonds,
Series A1, 3.90%, 5/15/25...................... 2,700
5,700 Charlotte, North Carolina, Airport, Series 93A,
4.00%, 7/01/16................................. 5,700
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 1,000 City of Baltimore, Maryland, Pollution Control
Revenue Bonds, General Motors Corp., 4.10%,
2/01/00........................................ $ 1,000
2,500 City of Columbia, Missouri, Special Revenue
Bonds, Series 88A, 4.10%, 6/01/08.............. 2,500
1,500 City of Columbia, Missouri, Water & Electric
Revenue Bonds, Series 85B, 4.10%, 12/01/15..... 1,500
City of Forsyth, Montana, Pollution Control
Revenue Bonds,
300 4.15%, 6/01/13, Series B....................... 300
700 4.15%, 6/01/13, Series D....................... 700
2,600 City of Midlothian, Texas, Industrial Development
Corp., Pollution Control Revenue Bonds,
Box-Crow Cement Co., 4.50%, 12/01/09........... 2,600
1,000 City of Minnetonka, Minnesota, Multifamily,
Cliffs Ridgedale, 4.20%, 9/15/25............... 1,000
1,600 City of San Antonio, Texas, Higher Education
Authority, Trinity University, 4.10%,
4/01/04........................................ 1,600
Clark County, Nevada, Airport Revenue Bonds,
16,700 4.00%, 7/01/12, Series 93A..................... 16,700
2,600 4.00%, 7/01/25, Series 95-A1................... 2,600
4,000 Clark County, Nevada, Industrial Development
Revenue Bond, Nevada Power Co., Series C,
4.15%, 10/01/30................................ 4,000
3,900 Clarksville, Tennessee, Public Building
Authority, Revenue Bonds, 4.00%, 12/01/00...... 3,900
130 Clear Creek County, Colorado, Revenue Bonds,
Colorado Finance Pool Program, Series 88,
4.05%, 6/01/98................................. 130
600 Colorado Student Obligation Bond Authority,
Student Loan Revenue Bonds, Series 91-C1,
4.00%, 8/01/00................................. 600
5,500 Connecticut State, Special Tax Obligation Revenue
Bonds, Series 1, 4.00%, 12/01/10............... 5,500
1,800 Dade County, Florida, Health Facilities Authority
Revenue Bonds, Miami Childrens Hospital
Project, 4.00%, 9/01/25........................ 1,800
16,700 Dade County, Florida, Water & Sewer Revenue
Bonds, Series 94, 4.00%, 10/05/22.............. 16,700
3,000 Foothill/Eastern California Toll Road Revenue
Bonds, Series 95C, 3.90%, 1/02/35.............. 3,000
2,000 Franklin County, Ohio, Series 95, 4.10%,
6/01/16........................................ 2,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
147
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 2,500 Glynn, Georgia, Brunswick Memorial Hospital,
Series 96, 4.00%, 8/01/16...................... $ 2,500
Harris County, Texas, Toll Road Revenue Bonds,
5,000 4.00%, 8/01/20, Series 94G..................... 5,000
5,000 4.00%, 8/01/20, Series 94H..................... 5,000
2,200 Huntsville, Alabama, Healthcare Facilities
Authority, Series B, 4.00%, 6/01/24............ 2,200
300 Illinois Development Finance Authority, A.E.
Staley Manufacturing, Series 85, 2.80%,
12/01/05....................................... 300
5,000 Illinois Development Finance Authority, Series
93A, 4.10%, 3/01/09............................ 5,000
3,000 Illinois State Toll Highway Authority, Series B,
4.00%, 1/01/10................................. 3,000
4,000 Jefferson Parish, Louisiana, Hospital Service
District No. 001 Revenue Bonds, West Jefferson
Medical Center, 4.10%, 1/01/26................. 4,000
900 Lehigh County, Pennsylvania, Allegheny Electric
Cooperative, 4.60%, 12/01/15................... 900
1,200 Louisiana Public Facilities Authority, Hospital
Revenue Bonds, Series 85, 4.10%, 12/01/00...... 1,200
1,000 Massachusetts Health & Education Facilities
Authority, Series G-1, 3.80%, 1/01/19.......... 1,000
2,600 Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington University
Project, 4.10%, 9/01/09........................ 2,600
3,000 New York State Local Government Assistance Corp.,
Series D, 4.00%, 4/01/25....................... 3,000
3,900 Nueces County, Texas, Health Facilities, Driscoll
Childrens' Foundation, 4.15%, 7/01/15.......... 3,900
1,500 Person County, North Carolina, Carolina Power &
Light, 4.25%, 11/01/19......................... 1,500
Pinellas County, Florida, Health Facilities,
Bayfront Medical Center,
235 3.80%, 6/01/98................................. 235
1,000 3.80%, 6/01/09................................. 1,000
350 Polk County, Iowa, Hospital Equipment &
Improvement Authority, 4.10%, 12/01/05......... 350
800 Port Development Corporation Marine Terminal,
Texas, Series 89, 4.00%, 1/15/14............... 800
1,500 Port of Corpus Christi, Texas, Marine Terminal,
R.J. Reynolds Metals Series, 4.60%, 9/01/14.... 1,500
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 600 Putnam County, Florida, Development Authority,
Seminole Electric, Series 84-H1, 4.15%,
3/15/14........................................ $ 600
1,000 Rapides Parish, Louisiana, Industrial Development
Revenue Bonds, Central Louisiana Electric Co.,
4.05%, 7/01/18................................. 1,000
700 Sheboygan, Wisconsin, Wisconsin Power & Light
Co., 4.60%, 8/01/14............................ 700
Tennessee State, General Obligation Bonds, BANS
6,000 3.95%, 7/02/01, Series 96A..................... 6,000
4,500 3.95%, 7/02/01, Series C....................... 4,500
4,430 Texas State, General Obligation Bonds, Veterans
Housing Assistance-Fund I, 4.00%, 12/01/16..... 4,430
1,100 University of North Carolina, Chapel Hill Fund,
Inc., Certificates of Participation, 4.05%,
10/01/09....................................... 1,100
5,000 Washington State, General Obligation Bonds,
Series VR 96B, 4.00%, 6/01/20.................. 5,000
Washington State, Public Power Supply Revenue
Bonds
2,000 4.15%, 7/01/17, Series 93-1A3.................. 2,000
3,300 4.10%, 7/01/17, Series 1A-2.................... 3,300
----------
170,245
----------
TOTAL VARIABLE/FLOATING RATE INSTRUMENTS.................. 404,615
----------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $690,638)................ 690,638
----------
TAXABLE INSTRUMENTS (4.0%)
U.S. GOVERNMENT & AGENCY OBLIGATIONS (4.0%)
28,625 Federal Home Loan Bank Discount Notes 5.55%,
1/02/97 (Cost $28,621)......................... 28,621
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.7%) (Cost $719,259)................ 719,259
--------
OTHER ASSETS (0.5%)
Cash......................................... $ 3
Interest Receivable.......................... 3,747
Other........................................ 42 3,792
----------
LIABILITIES (-0.2%)
Dividends Payable............................ (818)
Investment Advisory Fees Payable............. (507)
Adminstrative Fees Payable................... (96)
Directors' Fees and Expenses Payable......... (23)
Custodian Fees Payable....................... (18)
Other Liabilities............................ (179) (1,641 )
---------- --------
NET ASSETS (100%)........................................ $721,410
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
148
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 721,441
Accumulated Net Realized Loss.......... (31)
----------
NET ASSETS............................. $ 721,410
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 721,415,763 outstanding
$0.001 par value shares (authorized
4,000,000,000 shares).................. $1.00
----------
----------
</TABLE>
- ------------------------------------------------------------
BANS -- Bond Anticipation Notes
RANS -- Revenue Anticipation Notes
TANS -- Tax Anticipation Notes
TRANS -- Tax & Revenue Anticipation Notes
Variable/Floating Rate Instruments: The interest rate changes on these
instruments are based upon a designated base rate. These instruments are payable
on demand.
Prerefunded Bonds. Outstanding bonds have been refeunded 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 Treasury escrow.
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 thirty days or less.
Interest rates disclosed for U.S. Government & Agency Obligations represent
effective yields at December 31, 1996.
At December 31, 1996, approximately 13% of the net assets were invested in Texas
municipal securities. Economic changes affecting the state and certain of its
public bodies and municipalities may effect the ability of issuers to pay the
required principal and interest payments of the municipal securities.
- ------------------------------------------------------------
SUMMARY OF TAX-EXEMPT INSTRUMENTS BY STATE CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
AMORTIZED
COST PERCENT OF
STATE (000) NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Alabama................................ $ 13,780 1.9%
Alaska................................. 1,400 0.2
Arizona................................ 35,806 5.0
California............................. 17,805 2.5
Colorado............................... 11,438 1.6
Connecticut............................ 5,500 0.8
Delaware............................... 1,501 0.2
Florida................................ 57,858 8.0
Georgia................................ 33,225 4.6
Hawaii................................. 8,498 1.2
Idaho.................................. 6,243 0.9
Illinois............................... 25,700 3.6
Indiana................................ 18,600 2.6
Iowa................................... 350 0.1
Kansas................................. 6,900 1.0
Kentucky............................... 6,000 0.8
Louisiana.............................. 30,770 4.3
Maine.................................. 2,507 0.3
Maryland............................... 14,000 1.9
Massachusetts.......................... 14,738 2.0
Michigan............................... 1,700 0.2
Minnesota.............................. 11,565 1.6
Mississippi............................ 7,000 1.0
Missouri............................... 16,100 2.2
Montana................................ 1,000 0.1
Nebraska............................... 5,490 0.8
Nevada................................. 23,300 3.2
New Mexico............................. 6,700 0.9
New York............................... 58,350 8.1
North Carolina......................... 14,625 2.0
Ohio................................... 9,400 1.3
Oregon................................. 3,600 0.5
Pennsylvania........................... 37,800 5.2
South Carolina......................... 3,005 0.4
Tennessee.............................. 25,200 3.5
Texas.................................. 90,934 12.6
Utah................................... 14,200 2.0
Virginia............................... 5,900 0.8
Washington............................. 10,300 1.4
West Virginia.......................... 1,000 0.1
Wisconsin.............................. 4,350 0.6
Wyoming................................ 26,500 3.7
---------- ---
$ 690,638 95.7%
---------- ---
---------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
149
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE
COUNTRY ASIAN EMERGING EUROPEAN
ALLOCATION EQUITY MARKETS EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 3,716 $ 7,323 $ 28,748 $ 3,664
Interest 342 970 4,086 465
Less: Foreign Taxes Withheld (413) (724) (2,468) (471)
-------- -------- -------- -------
Total Income 3,645 7,569 30,366 3,658
-------- -------- -------- -------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,169 3,378 15,368 1,035
Less: Fees Waived (501) (848) -- (203)
-------- -------- -------- -------
Investment Advisory Fees -- Net 668 2,530 15,368 832
Administrative Fees 357 663 1,910 218
Sub-Administrative Fees 5 -- 175 --
Custodian Fees 246 836 3,430 112
Filing and Registration Fees 45 89 198 66
Insurance 5 9 31 2
Directors' Fees and Expenses 9 19 76 5
Professional Fees 45 61 114 37
Shareholder Reports 58 37 112 15
Foreign Tax Expense -- 172 320 --
Distribution Fees on Class B Shares 1 27 28 4
Other Expenses 11 19 109 7
-------- -------- -------- -------
Total Expenses 1,450 4,462 21,871 1,298
-------- -------- -------- -------
NET INVESTMENT INCOME 2,195 3,107 8,495 2,360
-------- -------- -------- -------
NET REALIZED GAIN (LOSS):
Investments Sold 8,704 27,882 21,315 1,678
Foreign Currency Transactions 17,506 (286) (1,717) 82
-------- -------- -------- -------
Total Net Realized Gain 26,210 27,596 19,598 1,760
-------- -------- -------- -------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments (3,318)* (23,998)** 79,800*** 22,284
Foreign Currency Translations (8,185) -- 554 (7)
-------- -------- -------- -------
Total Net Change in Unrealized
Appreciation (Depreciation) (11,503) (23,998) 80,354 22,277
-------- -------- -------- -------
TOTAL NET REALIZED GAIN AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 14,707 3,598 99,952 24,037
-------- -------- -------- -------
Net Increase in Net Assets Resulting
from Operations $ 16,902 $ 6,705 $ 108,447 $ 26,397
-------- -------- -------- -------
-------- -------- -------- -------
<CAPTION>
GLOBAL
EQUITY
PORTFOLIO
YEAR
ENDED
DECEMBER 31,
1996
(000)
<S> <C>
- ------------------------------------------
INVESTMENT INCOME:
Dividends $ 1,813
Interest 214
Less: Foreign Taxes Withheld (149)
-------
Total Income 1,878
-------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 630
Less: Fees Waived (118)
-------
Investment Advisory Fees -- Net 512
Administrative Fees 134
Sub-Administrative Fees --
Custodian Fees 34
Filing and Registration Fees 37
Insurance 3
Directors' Fees and Expenses 4
Professional Fees 43
Shareholder Reports 13
Foreign Tax Expense --
Distribution Fees on Class B Shares 5
Other Expenses 7
-------
Total Expenses 792
-------
NET INVESTMENT INCOME 1,086
-------
NET REALIZED GAIN (LOSS):
Investments Sold 7,259
Foreign Currency Transactions 54
-------
Total Net Realized Gain 7,313
-------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 7,472
Foreign Currency Translations 356
-------
Total Net Change in Unrealized
Appreciation (Depreciation) 7,828
-------
TOTAL NET REALIZED GAIN AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 15,141
-------
Net Increase in Net Assets Resulting
from Operations $ 16,227
-------
-------
</TABLE>
- ---------------
* Net of foreign tax of $4,000 on unrealized appreciation.
** Net of foreign tax of $115,000 on unrealized appreciation.
*** Net of foreign tax of $219,000 on unrealized appreciation.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
150
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL INTERNATIONAL JAPANESE
GOLD EQUITY MAGNUM SMALL CAP EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
YEAR YEAR MARCH 15, YEAR YEAR
ENDED ENDED 1996* TO ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996 1996
(000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 348 $ 52,178 $ 779 $ 5,719 $ 1,534
Interest 157 6,307 263 324 662
Less: Foreign Taxes Withheld (6) (6,263) (96) (681) (231)
------- --------------- ------ ------- ---------------
Total Income 499 52,222 946 5,362 1,965
------- --------------- ------ ------- ---------------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 164 15,861 382 2,092 1,642
Basic Fees -- Sub Adviser 110 -- -- -- --
Less: Fees Waived -- Adviser (129) (474) (257) (178) (129)
------- --------------- ------ ------- ---------------
Investment Advisory Fees -- Net 145 15,387 125 1,914 1,513
Administrative Fees 48 3,077 79 355 331
Sub-Administrative Fees -- -- -- -- --
Custodian Fees 30 637 80 134 55
Filing and Registration Fees 45 233 71 24 76
Insurance -- 45 -- 6 1
Directors' Fees and Expenses 2 82 2 11 9
Professional Fees 32 120 82 52 39
Shareholder Reports 36 156 38 24 20
Distribution Fees on Class B Shares 2 10 11 -- 10
Other Expenses 6 70 3 12 9
------- --------------- ------ ------- ---------------
Total Expenses 346 19,817 491 2,532 2,063
------- --------------- ------ ------- ---------------
NET INVESTMENT INCOME (LOSS) 153 32,405 455 2,830 (98)
------- --------------- ------ ------- ---------------
NET REALIZED GAIN (LOSS):
Investments Sold 474 104,727 510 7,039 (2,403)
Foreign Currency Transactions 19 18,389 855 (220) 14,264
------- --------------- ------ ------- ---------------
Total Net Realized Gain 493 123,116 1,365 6,819 11,861
------- --------------- ------ ------- ---------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments (4,491) 200,500 2,785 22,028 (23,087)
Foreign Currency Translations (7) (183) 858 1,013 5,882
------- --------------- ------ ------- ---------------
Total Net Change in Unrealized
Appreciation (Depreciation) (4,498) 200,317 3,643 23,041 (17,205)
------- --------------- ------ ------- ---------------
TOTAL NET REALIZED GAIN AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) (4,005) 323,433 5,008 29,860 (5,344)
------- --------------- ------ ------- ---------------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ (3,852) $ 355,838 $ 5,463 $ 32,690 $ (5,442)
------- --------------- ------ ------- ---------------
------- --------------- ------ ------- ---------------
<CAPTION>
LATIN
AMERICAN
PORTFOLIO
YEAR
ENDED
DECEMBER 31,
1996
(000)
<S> <C>
- ---------------------------------------------
INVESTMENT INCOME:
Dividends $ 642
Interest 139
Less: Foreign Taxes Withheld (20)
------
Total Income 761
------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 287
Basic Fees -- Sub Adviser --
Less: Fees Waived -- Adviser (121)
------
Investment Advisory Fees -- Net 166
Administrative Fees 49
Sub-Administrative Fees 10
Custodian Fees 100
Filing and Registration Fees 60
Insurance 1
Directors' Fees and Expenses 2
Professional Fees 46
Shareholder Reports 8
Distribution Fees on Class B Shares 2
Other Expenses 4
------
Total Expenses 448
------
NET INVESTMENT INCOME (LOSS) 313
------
NET REALIZED GAIN (LOSS):
Investments Sold 6,290
Foreign Currency Transactions (33)
------
Total Net Realized Gain 6,257
------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 2,595**
Foreign Currency Translations (3)
------
Total Net Change in Unrealized
Appreciation (Depreciation) 2,592
------
TOTAL NET REALIZED GAIN AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 8,849
------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 9,162
------
------
</TABLE>
- ---------------
* Commencement of Operations.
** Net of foreign taxes of $3,000 on unrealized appreciation.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
151
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGRESSIVE EMERGING EQUITY SMALL CAP
EQUITY GROWTH GROWTH VALUE EQUITY TECHNOLOGY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
YEAR YEAR YEAR YEAR SEPTEMBER 16,
ENDED ENDED ENDED ENDED 1996* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996 1996
(000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 1,012 $ 97 $ 3,090 $ 1,229 $ 1
Interest 114 287 722 72 6
--------------- --------------- --------------- ------ -----
Total Income 1,126 384 3,812 1,301 7
--------------- --------------- --------------- ------ -----
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 400 1,025 1,193 345 13
Less: Fees Waived (120) (47) (150) (126) (13)
--------------- --------------- --------------- ------ -----
Investment Advisory Fees -- Net 280 978 1,043 219 --
Administrative Fees 81 166 314 72 3
Custodian Fees 30 30 75 39 4
Filing and Registration Fees 63 37 71 35 14
Insurance 1 4 4 2 --
Directors' Fees and Expenses 2 6 9 3 --
Professional Fees 26 25 31 22 55
Shareholder Reports 11 24 33 12 27
Distribution Fees on Class B Shares 13 10 10 3 1
Other Expenses 5 8 10 6 --
Expenses Reimbursed by Adviser -- -- -- -- (86)
--------------- --------------- --------------- ------ -----
Total Expenses 512 1,288 1,600 413 18
--------------- --------------- --------------- ------ -----
NET INVESTMENT INCOME (LOSS) 614 (904) 2,212 888 (11)
--------------- --------------- --------------- ------ -----
NET REALIZED GAIN (LOSS):
Investments Sold 15,649 36,369 40,528 6,620 (11)
Securities Sold Short 81 -- -- -- --
--------------- --------------- --------------- ------ -----
Total Net Realized Gain (Loss) 15,730 36,369 40,528 6,620 (11)
--------------- --------------- --------------- ------ -----
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 4 (31,141) 10,734 (902) 296
--------------- --------------- --------------- ------ -----
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 15,734 5,228 51,262 5,718 285
--------------- --------------- --------------- ------ -----
Net Increase in Net Assets Resulting from
Operations $ 16,348 $ 4,324 $ 53,474 $ 6,606 $ 274
--------------- --------------- --------------- ------ -----
--------------- --------------- --------------- ------ -----
<CAPTION>
U.S. REAL VALUE
ESTATE EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996
(000) (000) (000)
<S> <C> <C> <C>
- ---------------------------------------------
INVESTMENT INCOME:
Dividends $ 4,760 $ 4,156 $ 247
Interest 439 205 447
--------------- --------------- -------
Total Income 5,199 4,361 694
--------------- --------------- -------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,018 656 75
Less: Fees Waived (184) (94) (75)
--------------- --------------- -------
Investment Advisory Fees -- Net 834 562 --
Administrative Fees 199 210 32
Custodian Fees 63 41 21
Filing and Registration Fees 91 42 35
Insurance 1 4 1
Directors' Fees and Expenses 5 7 1
Professional Fees 28 26 21
Shareholder Reports 43 25 9
Distribution Fees on Class B Shares 12 4 5
Other Expenses 7 9 5
Expenses Reimbursed by Adviser -- -- (20)
--------------- --------------- -------
Total Expenses 1,283 930 110
--------------- --------------- -------
NET INVESTMENT INCOME (LOSS) 3,916 3,431 584
--------------- --------------- -------
NET REALIZED GAIN (LOSS):
Investments Sold 17,097 15,759 1,846
Securities Sold Short -- -- --
--------------- --------------- -------
Total Net Realized Gain (Loss) 17,097 15,759 1,846
--------------- --------------- -------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 28,458 2,404 (1,083)
--------------- --------------- -------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 45,555 18,163 763
--------------- --------------- -------
Net Increase in Net Assets Resulting from
Operations $ 49,471 $ 21,594 $ 1,347
--------------- --------------- -------
--------------- --------------- -------
</TABLE>
- -----------------
* Commencement of Operations.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
152
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL
EMERGING FIXED FIXED HIGH MUNICIPAL
MARKETS INCOME INCOME YIELD BOND
DEBT PORTFOLIO PORTFOLIO PORFOLIO PORTFOLIO PORTFOLIO
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996 1996
(000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ -- $ -- $ -- $ 226 $ --
Interest 26,992 10,785 6,686 8,962 2,015
Less: Foreign Taxes Withheld -- -- (120) -- --
------- ------- ------- ------- ------
Total Income 26,992 10,785 6,566 9,188 2,015
------- ------- ------- ------- ------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,887 559 437 439 135
Less: Fees Waived -- (236) (227) (57) (105)
------- ------- ------- ------- ------
Investment Advisory Fees -- Net 1,887 323 210 382 30
Administrative Fees 300 260 177 146 66
Custodian Fees 419 32 64 26 7
Filing and Registration Fees 50 38 41 49 32
Insurance 5 5 3 2 1
Interest Expense 2,164 -- -- -- --
Directors' Fees and Expenses 30 8 6 4 3
Professional Fees 57 24 34 29 24
Shareholder Reports 23 18 14 13 7
Distribution Fees on Class B Shares 7 2 2 8 --
Other Expenses 140 14 8 7 5
------- ------- ------- ------- ------
Total Expenses 5,082 724 559 666 175
------- ------- ------- ------- ------
NET INVESTMENT INCOME 21,910 10,061 6,007 8,522 1,840
------- ------- ------- ------- ------
NET REALIZED GAIN (LOSS):
Investments Sold 70,698 1,726 1,953 687 (6)
Foreign Currency Transactions (7,643) 1,321 789 -- --
Securities Sold Short (6,282) -- -- -- --
Written Options 392 -- -- -- --
------- ------- ------- ------- ------
Total Net Realized Gain (Loss) 57,165 3,047 2,742 687 (6)
------- ------- ------- ------- ------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments (1,153) (6,222) (1,162) 3,436 (686)
Foreign Currency Translations 45 (121) (384) -- --
Short Sales 1,417 -- -- -- --
------- ------- ------- ------- ------
Total Net Change in Unrealized
Appreciation (Depreciation) 309 (6,343) (1,546) 3,436 (686)
------- ------- ------- ------- ------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 57,474 (3,296) 1,196 4,123 (692)
------- ------- ------- ------- ------
Net Increase in Net Assets Resulting from
Operations $ 79,384 $ 6,765 $ 7,203 $ 12,645 $ 1,148
------- ------- ------- ------- ------
------- ------- ------- ------- ------
<CAPTION>
MUNICIPAL
MONEY MONEY
MARKET MARKET
PORTFOLIO PORTFOLIO
YEAR YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1996
(000) (000)
<S> <C> <C>
- ---------------------------------------------
INVESTMENT INCOME:
Dividends $ -- $ --
Interest 60,654 22,694
Less: Foreign Taxes Withheld -- --
------- -------
Total Income 60,654 22,694
------- -------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 3,343 1,932
Less: Fees Waived -- --
------- -------
Investment Advisory Fees -- Net 3,343 1,932
Administrative Fees 1,731 1,029
Custodian Fees 134 103
Filing and Registration Fees 296 193
Insurance 27 15
Interest Expense -- --
Directors' Fees and Expenses 52 32
Professional Fees 56 38
Shareholder Reports 104 67
Distribution Fees on Class B Shares -- --
Other Expenses 28 24
------- -------
Total Expenses 5,771 3,433
------- -------
NET INVESTMENT INCOME 54,883 19,261
------- -------
NET REALIZED GAIN (LOSS):
Investments Sold (469) (22)
Foreign Currency Transactions -- --
Securities Sold Short -- --
Written Options -- --
------- -------
Total Net Realized Gain (Loss) (469) (22)
------- -------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments -- --
Foreign Currency Translations -- --
Short Sales -- --
------- -------
Total Net Change in Unrealized
Appreciation (Depreciation) -- --
------- -------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) (469) (22)
------- -------
Net Increase in Net Assets Resulting from
Operations $ 54,414 $ 19,239
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
153
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE
COUNTRY ASIAN
ALLOCATION EQUITY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996
(000) (000) (000)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 2,195 $ 2,074 $ 3,107
Net Realized Gain (Loss) 26,210 (1,123) 27,596
Change in Unrealized Appreciation (Depreciation) (11,503) 15,675 (23,998)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 16,902 16,626 6,705
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (11,942) (3,492) (2,757)
In Excess of Net Investment Income (307) (1,308) (5)
Net Realized Gain (6,994) (12,502) (23,408)
CLASS B+:
Net Investment Income (46) -- (59)
In Excess of Net Investment Income (1) -- --
Net Realized Gain (28) -- (735)
- --------------------------------------------------------------------------------------------------------------------
Total Distributions (19,318) (17,302) (26,964)
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 63,687 88,081 319,487
Distributions Reinvested 15,163 15,283 22,963
Redeemed (63,918) (115,002) (274,658)
CLASS B+:
Subscribed 1,042 -- 19,937
Distributions Reinvested 76 -- 728
Redeemed (471) -- (8,582)
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions 15,579 (11,638) 79,875
- --------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 13,163 (12,314) 59,616
NET ASSETS:
Beginning of Period 170,663 182,977 314,884
- --------------------------------------------------------------------------------------------------------------------
End of Period $ 183,826 $ 170,663 $ 374,500
- --------------------------------------------------------------------------------------------------------------------
Overdistributed net investment income included in end of
period net assets $ (308) $ (7,782) $ (4)
- --------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 5,277 7,883 15,774
Shares Issued on Distributions Reinvested 1,321 1,346 1,221
Shares Redeemed (5,262) (10,268) (13,753)
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding 1,336 (1,039) 3,242
- --------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 87 -- 979
Shares Issued on Distributions Reinvested 7 -- 39
Shares Redeemed (39) -- (431)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 55 -- 587
<CAPTION>
<S> <C>
- ------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
1995
(000)
<S> <C>
- ------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 2,796
Net Realized Gain (Loss) 12,459
Change in Unrealized Appreciation (Depreciation) 7,852
- ------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 23,107
- ------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (4,866)
In Excess of Net Investment Income (3)
Net Realized Gain (40,469)
CLASS B+:
Net Investment Income --
In Excess of Net Investment Income --
Net Realized Gain --
- ------------------------------------------------------------
Total Distributions (45,338)
- ------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 472,587
Distributions Reinvested 41,003
Redeemed (453,381)
CLASS B+:
Subscribed --
Distributions Reinvested --
Redeemed --
- ------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions 60,209
- ------------------------------------------------------------
Total Increase (Decrease) in Net Assets 37,978
NET ASSETS:
Beginning of Period 276,906
- ------------------------------------------------------------
End of Period $ 314,884
- ------------------------------------------------------------
Overdistributed net investment income included in end of
period net assets $ (3)
- ------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 24,613
Shares Issued on Distributions Reinvested 2,138
Shares Redeemed (23,439)
- ------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding 3,312
- ------------------------------------------------------------
CLASS B+:
Shares Subscribed --
Shares Issued on Distributions Reinvested --
Shares Redeemed --
- ------------------------------------------------------------
Net Increase in Class B Shares Outstanding --
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
154
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING EUROPEAN
MARKETS EQUITY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996
(000) (000) (000)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,495 $ 5,513 $ 2,360
Realized Net Gain (Loss) 19,598 (34,234) 1,760
Change in Unrealized Appreciation (Depreciation) 80,354 (97,017) 22,277
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 108,447 (125,738) 26,397
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (7,165) (3,978) (2,463)
In Excess of Net Investment Income (197) -- (220)
Net Realized Gain -- (66,711) (364)
CLASS B+:
Net Investment Income (51) -- (36)
In Excess of Net Investment Income (1) -- (3)
Net Realized Gain -- -- (6)
- --------------------------------------------------------------------------------------------------------------------
Total Distributions (7,414) (70,689) (3,092)
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 550,412 379,789 128,948
Distributions Reinvested 5,513 67,401 2,886
Redeemed (229,242) (303,810) (46,075)
CLASS B+:
Subscribed 18,152 -- 3,819
Distributions Reinvested 43 -- 39
Redeemed (4,283) -- (1,495)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 340,595 143,380 88,122
- --------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 441,628 (53,047) 111,427
NET ASSETS:
Beginning of Period 876,591 929,638 69,583
- --------------------------------------------------------------------------------------------------------------------
End of Period $ 1,318,219 $ 876,591 $ 181,010
- --------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment income
included in end of period net assets $ (198) $ 167 $ (223)
- --------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 37,330 27,709 8,473
Shares Issued on Distributions Reinvested 367 4,586 177
Shares Redeemed (15,483) (22,595) (2,969)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 22,214 9,700 5,681
- --------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 1,254 -- 254
Shares Issued on Distributions Reinvested 3 -- 2
Shares Redeemed (288) -- (97)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 969 -- 159
<CAPTION>
<S> <C>
- ------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
1995
(000)
<S> <C>
- ------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 714
Realized Net Gain (Loss) 643
Change in Unrealized Appreciation (Depreciation) 3,042
- ------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from
Operations 4,399
- ------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (738)
In Excess of Net Investment Income --
Net Realized Gain (3,017)
CLASS B+:
Net Investment Income --
In Excess of Net Investment Income --
Net Realized Gain --
- ------------------------------------------------------------
Total Distributions (3,755)
- ------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 56,209
Distributions Reinvested 3,468
Redeemed (18,372)
CLASS B+:
Subscribed --
Distributions Reinvested --
Redeemed --
- ------------------------------------------------------------
Net Increase in Capital Share Transactions 41,305
- ------------------------------------------------------------
Total Increase (Decrease) in Net Assets 41,949
NET ASSETS:
Beginning of Period 27,634
- ------------------------------------------------------------
End of Period $ 69,583
- ------------------------------------------------------------
Undistributed (overdistributed) net investment income
included in end of period net assets $ 24
- ------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 4,104
Shares Issued on Distributions Reinvested 264
Shares Redeemed (1,350)
- ------------------------------------------------------------
Net Increase in Class A Shares Outstanding 3,018
- ------------------------------------------------------------
CLASS B+:
Shares Subscribed --
Shares Issued on Distributions Reinvested --
Shares Redeemed --
- ------------------------------------------------------------
Net Increase in Class B Shares Outstanding --
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
155
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL
EQUITY GOLD
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 1,086 $ 960 $ 153 $ (57)
Net Realized Gain 7,313 5,807 493 876
Change in Unrealized Appreciation (Depreciation) 7,828 7,195 (4,498) 2,423
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 16,227 13,962 (3,852) 3,242
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (1,075) (1,202) (135) (37)
In Excess of Net Investment Income -- -- (29) --
Net Realized Gain (5,024) (7,032) -- (2,066)
In Excess of Net Realized Gain -- -- (1,681) --
CLASS B+:
Net Investment Income (45) -- (4) --
In Excess of Net Investment Income -- -- (1) --
Net Realized Gain (223) -- -- --
In Excess of Net Realized Gain -- -- (89) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (6,367) (8,234) (1,939) (2,103)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 15,476 30,429 52,836 21,820
Distributions Reinvested 5,960 8,198 1,522 1,913
Redeemed (42,500) (31,615) (28,491) (47,706)
CLASS B+:
Subscribed 3,900 -- 2,457 --
Distributions Reinvested 268 -- 38 --
Redeemed (414) -- (800) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions (17,310) 7,012 27,562 (23,973)
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (7,450) 12,740 21,771 (22,834)
NET ASSETS:
Beginning of Period 91,675 78,935 7,409 30,243
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 84,225 $ 91,675 $ 29,180 $ 7,409
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment
income included in end of period net assets $ 19 $ -- $ (30) $ --
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 974 2,175 4,551 2,403
Shares Issued on Distributions Reinvested 370 583 162 222
Shares Redeemed (2,808) (2,239) (2,591) (5,071)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding (1,464) 519 2,122 (2,446)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 252 -- 216 --
Shares Issued on Distributions Reinvested 17 -- 4 --
Shares Redeemed (27) -- (72) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 242 -- 148 --
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
156
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL
EQUITY MAGNUM
PORTFOLIO PORTFOLIO
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM
MARCH 15,
YEAR ENDED YEAR ENDED 1996* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996
(000) (000) (000)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 32,405 $ 19,813 $ 455
Net Realized Gain 123,116 88,470 1,365
Change in Unrealized Appreciation 200,317 50,978 3,643
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 355,838 159,261 5,463
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (45,368) (5,969) (1,037)
In Excess of Net Investment Income -- -- (169)
Net Realized Gain (101,435) (168,582) (87)
CLASS B+:
Net Investment Income (97) -- (273)
In Excess of Net Investment Income -- -- (44)
Net Realized Gain (239) -- (23)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (147,139) (174,551) (1,633)
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 508,163 276,622 82,326
Distributions Reinvested 131,405 167,795 1,117
Redeemed (181,971) (135,367) (1,247)
CLASS B+:
Subscribed 5,025 -- 22,789
Distributions Reinvested 305 -- 311
Redeemed (339) -- (637)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 462,588 309,050 104,659
- ---------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 671,287 293,760 108,489
NET ASSETS:
Beginning of Period 1,598,530 1,304,770 --
- ---------------------------------------------------------------------------------------------------------------------
End of Period $ 2,269,817 $ 1,598,530 $ 108,489
- ---------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment income
included in end of period net assets $ (273) $ 13,219 $ (213)
- ---------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 31,209 18,165 8,015
Shares Issued on Distributions Reinvested 7,837 11,272 106
Shares Redeemed (10,975) (8,961) (117)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 28,071 20,476 8,004
- ---------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 321 -- 2,211
Shares Issued on Distributions Reinvested 18 -- 29
Shares Redeemed (20) -- (60)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 319 -- 2,180
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
+ The International Equity Portfolio began offering Class B shares on
January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
157
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL JAPANESE
SMALL CAP EQUITY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 2,830 $ 3,256 $ (98) $ 90
Net Realized Gain (Loss) 6,819 7,677 11,861 (2,999)
Change in Unrealized Appreciation (Depreciation) 23,041 (6,811) (17,205) 5,934
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 32,690 4,122 (5,442) 3,025
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (3,001) (2,947) (11,178) --
In Excess of Net Investment Income -- -- (8,826) (2,539)
Net Realized Gain (5,327) (4,763) -- --
CLASS B+:
Net Investment Income -- -- (277) --
In Excess of Net Investment Income -- -- (218) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (8,328) (7,710) (20,499) (2,539)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 40,108 59,699 154,108 132,973
Distributions Reinvested 7,416 6,777 16,337 2,277
Redeemed (35,812) (24,320) (112,210) (66,790)
CLASS B+:
Subscribed -- -- 7,701 --
Distributions Reinvested -- -- 435 --
Redeemed -- -- (4,048) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 11,712 42,156 62,323 68,460
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 36,074 38,568 36,382 68,946
NET ASSETS:
Beginning of Period 198,669 160,101 119,278 50,332
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 234,743 $ 198,669 $ 155,660 $ 119,278
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment
income
included in end of period net assets $ 323 $ 715 $ (9,043) $ (2,710)
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 2,406 3,865 16,432 15,121
Shares Issued on Distributions Reinvested 444 453 2,042 245
Shares Redeemed (2,199) (1,584) (12,218) (7,618)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 651 2,734 6,256 7,748
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed -- -- 812 --
Shares Issued on Distributions Reinvested -- -- 55 --
Shares Redeemed -- -- (435) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding -- -- 432 --
</TABLE>
- --------------------------------------------------------------------------------
+ The Japanese Equity Portfolio began offering Class B shares on January
2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
158
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN AGGRESSIVE
AMERICAN EQUITY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 18, MARCH 8,
YEAR ENDED 1995* TO YEAR ENDED 1995* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 313 $ 82 $ 614 $ 266
Net Realized Gain (Loss) 6,257 (543) 15,730 4,041
Change in Unrealized Appreciation 2,592 208 4 1,860
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 9,162 (253) 16,348 6,167
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (273) (74) (549) (268)
In Excess of Net Investment Income (5) -- -- --
Net Realized Gain (4,475) -- (9,877) (3,617)
Return of Capital -- (49) -- --
CLASS B+:
Net Investment Income (8) -- (62) --
Net Realized Gain (164) -- (1,265) --
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (4,925) (123) (11,753) (3,885)
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 18,267 21,860 40,946 26,611
Distributions Reinvested 4,324 108 9,531 3,556
Redeemed (11,766) (6,216) (14,822) (3,901)
CLASS B+:
Subscribed 1,308 -- 9,581 --
Distributions Reinvested 147 -- 1,315 --
Redeemed (151) -- (2,409) --
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share
Transactions 12,129 15,752 44,142 26,266
- ------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 16,366 15,376 48,737 28,548
NET ASSETS:
Beginning of Period 15,376 -- 28,548 --
- ------------------------------------------------------------------------------------------------------------------
End of Period $ 31,742 $ 15,376 $ 77,285 $ 28,548
- ------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net
investment income included in end
of period net assets $ (5) $ -- $ 32 $ --
- ------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,557 2,375 2,748 2,360
Shares Issued on Distributions
Reinvested 384 12 665 293
Shares Redeemed (953) (690) (1,012) (308)
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares
Outstanding 988 1,697 2,401 2,345
- ------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 118 -- 672 --
Shares Issued on Distributions
Reinvested 13 -- 92 --
Shares Redeemed (13) -- (153) --
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares
Outstanding 118 -- 611 --
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
159
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING EQUITY
GROWTH GROWTH
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (904) $ (1,009) $ 2,212 $ 2,169
Net Realized Gain 36,369 11,225 40,528 32,477
Change in Unrealized Appreciation
(Depreciation) (31,141) 27,942 10,734 15,685
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 4,324 38,158 53,474 50,331
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- -- (2,164) (2,636)
Net Realized Gain (24,810) -- (42,560) (26,092)
CLASS B+:
Net Investment Income -- -- (46) --
Net Realized Gain (1,588) -- (1,031) --
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (26,398) -- (45,801) (28,728)
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 26,575 100,167 223,237 78,470
Distributions Reinvested 24,750 -- 41,770 26,785
Redeemed (87,418) (136,616) (78,208) (66,005)
CLASS B+:
Subscribed 5,462 -- 6,515 --
Distributions Reinvested 1,540 -- 993 --
Redeemed (1,423) -- (1,891) --
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital
Share Transactions (30,514) (36,449) 192,416 39,250
- ------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net
Assets (52,588) 1,709 200,089 60,853
NET ASSETS:
Beginning of Period 119,378 117,669 158,112 97,259
- ------------------------------------------------------------------------------------------------------------------
End of Period $ 66,790 $ 119,378 $ 358,201 $ 158,112
- ------------------------------------------------------------------------------------------------------------------
Undistributed net investment
income/accumulated net investment
loss included in end of period net
assets $ (3) $ -- $ 2 $ --
- ------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,202 5,737 14,718 5,794
Shares Issued on Distributions
Reinvested 1,845 -- 2,776 1,955
Shares Redeemed (3,952) (7,483) (5,067) (4,657)
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A
Shares Outstanding (905) (1,746) 12,427 3,092
- ------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 246 -- 418 --
Shares Issued on Distributions
Reinvested 115 -- 66 --
Shares Redeemed (64) -- (116) --
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares
Outstanding 297 -- 368 --
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
160
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP
VALUE EQUITY TECHNOLOGY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM
SEPTEMBER 16,
YEAR ENDED YEAR ENDED 1996* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996
(000) (000) (000)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 888 $ 1,223 $ (11)
Net Realized Gain (Loss) 6,620 1,546 (11)
Change in Unrealized Appreciation (Depreciation) (902) 5,880 296
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 6,606 8,649 274
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (851) (1,519) --
Net Realized Gain (5,696) (2,511) --
CLASS B+:
Net Investment Income (34) -- --
Net Realized Gain (413) -- --
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (6,994) (4,030) --
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 14,319 18,293 3,375
Distributions Reinvested 5,982 3,611 --
Redeemed (48,028) (14,637) --
CLASS B+:
Subscribed 1,899 -- 1,485
Distributions Reinvested 376 -- --
Redeemed (420) -- (52)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share Transactions (25,872) 7,267 4,808
- ---------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (26,260) 11,886 5,082
NET ASSETS:
Beginning of Period 51,919 40,033 --
- ---------------------------------------------------------------------------------------------------------------------
End of Period $ 25,659 $ 51,919 $ 5,082
- ---------------------------------------------------------------------------------------------------------------------
Undistributed net investment income included in end of
period net assets $ 3 $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,157 1,631 336
Shares Issued on Distributions Reinvested 537 324 --
Shares Redeemed (3,850) (1,304) --
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares Outstanding (2,156) 651 336
- ---------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 153 -- 144
Shares Issued on Distributions Reinvested 34 -- --
Shares Redeemed (32) -- (5)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 155 -- 139
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
+ The Small Cap Value Equity Portfolio began offering Class B shares on
January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
161
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. VALUE
REAL ESTATE EQUITY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM
FEBRUARY 24,
YEAR ENDED 1995* TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 3,916 $ 1,526 $ 3,431 $ 3,434
Net Realized Gain 17,097 3,495 15,759 10,276
Change in Unrealized Appreciation 28,458 3,896 2,404 17,116
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 49,471 8,917 21,594 30,826
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (3,888) (1,405) (3,374) (4,042)
In Excess of Net Investment Income (2) -- -- --
Net Realized Gain (12,504) (2,504) (17,256) (6,330)
CLASS B+:
Net Investment Income (148) -- (58) --
Net Realized Gain (559) -- (357) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (17,101) (3,909) (21,045) (10,372)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 119,585 67,651 38,132 70,393
Distributions Reinvested 14,340 3,148 19,004 9,289
Redeemed (24,190) (6,298) (99,013) (26,177)
CLASS B+:
Subscribed 8,149 -- 2,992 --
Distributions Reinvested 514 -- 401 --
Redeemed (1,175) -- (747) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 117,223 64,501 (39,231) 53,505
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 149,593 69,509 (38,682) 73,959
NET ASSETS:
Beginning of Period 69,509 -- 147,365 73,406
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 219,102 $ 69,509 $ 108,683 $ 147,365
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment
income included in end of period net assets $ (2) $ 121 $ 7 $ 8
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 9,313 6,381 2,649 5,522
Shares Issued on Distributions Reinvested 1,047 279 1,340 731
Shares Redeemed (1,849) (573) (6,919) (2,068)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 8,511 6,087 (2,930) 4,185
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 662 -- 207 --
Shares Issued on Distributions Reinvested 37 -- 28 --
Shares Redeemed (92) -- (51) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 607 -- 184 --
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
162
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
BALANCED MARKETS DEBT
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 584 $ 868 $ 21,910 $ 25,020
Net Realized Gain 1,846 1,158 57,165 9,187
Change in Unrealized Appreciation (Depreciation) (1,083) 2,413 309 15,290
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 1,347 4,439 79,384 49,497
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (477) (1,080) (14,104) (33,418)
In Excess of Net Investment Income (1) -- (74) --
Net Realized Gain (1,690) (1,047) (51,244) (7,508)
CLASS B+:
Net Investment Income (108) -- (381) --
In Excess of Net Investment Income -- -- (2) --
Net Realized Gain (548) -- (1,391)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (2,824) (2,127) (67,196) (40,926)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 1,205 3,530 79,712 147,278
Distributions Reinvested 1,898 1,695 51,784 29,155
Redeemed (18,709) (3,387) (173,915) (148,075)
CLASS B+:
Subscribed 3,269 -- 4,437 --
Distributions Reinvested 607 -- 1,522 --
Redeemed (1,246) -- (1,211) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions (12,976) 1,838 (37,671) 28,358
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (14,453) 4,150 (25,483) 36,929
NET ASSETS:
Beginning of Period 22,642 18,492 181,878 144,949
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 8,189 $ 22,642 $ 156,395 $ 181,878
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment
income included in end of period net assets $ (1) $ 2 $ (76) $ (1,501)
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 121 380 8,356 18,475
Shares Issued on Distributions Reinvested 215 182 6,805 3,468
Shares Redeemed (1,872) (358) (16,141) (17,651)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding (1,536) 204 (980) 4,292
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 327 -- 467 --
Shares Issued on Distributions Reinvested 71 -- 201 --
Shares Redeemed (129) -- (103) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 269 -- 565 --
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
163
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIXED GLOBAL
INCOME FIXED INCOME
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 10,061 $ 12,208 $ 6,007 $ 6,508
Net Realized Gain 3,047 5,921 2,742 15
Change in Unrealized Appreciation (Depreciation) (6,343) 13,125 (1,546) 10,191
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 6,765 31,254 7,203 16,714
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (10,366) (13,570) (5,986) (9,003)
In Excess of Net Investment Income (14) -- -- --
CLASS B+:
Net Investment Income (73) -- (88) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (10,453) (13,570) (6,074) (9,003)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 43,737 67,883 53,391 36,622
Distributions Reinvested 8,559 10,529 5,288 7,887
Redeemed (83,396) (139,900) (49,742) (80,043)
CLASS B+:
Subscribed 2,038 -- 2,353 --
Distributions Reinvested 64 -- 78 --
Redeemed (646) -- (902) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions (29,644) (61,488) 10,466 (35,534)
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (33,332) (43,804) 11,595 (27,823)
NET ASSETS:
Beginning of Period 165,527 209,331 102,852 130,675
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 132,195 $ 165,527 $ 114,447 $ 102,852
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment
income included in end of period net assets $ (14) $ 10 $ 612 $ 309
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 4,156 6,668 4,846 3,346
Shares Issued on Distributions Reinvested 812 1,022 480 737
Shares Redeemed (7,913) (13,696) (4,503) (7,623)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding (2,945) (6,006) 823 (3,540)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 194 -- 213 --
Shares Issued on Distributions Reinvested 6 -- 7 --
Shares Redeemed (62) -- (82) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 138 -- 138 --
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
164
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH MUNICIPAL
YIELD BOND
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM
JANUARY 18,
YEAR ENDED YEAR ENDED YEAR ENDED 1995* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,522 $ 7,477 $ 1,840 $ 1,963
Net Realized Gain (Loss) 687 (3,145) (6) 193
Change in Unrealized Appreciation (Depreciation) 3,436 9,886 (686) 1,635
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 12,645 14,218 1,148 3,791
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (8,340) (8,122) (1,821) (1,963)
In Excess of Net Investment Income (4) -- (16) (15)
Net Realized Gain -- -- -- (193)
CLASS B+:
Net Investment Income (333) -- (4) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (8,677) (8,122) (1,841) (2,171)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 48,672 59,247 18,758 61,800
Distributions Reinvested 6,490 6,088 1,724 2,060
Redeemed (25,529) (106,409) (25,432) (19,611)
CLASS B+:
Subscribed 6,981 -- 171 --
Distributions Reinvested 244 -- 4 --
Redeemed (1,743) -- (105) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 35,115 (41,074) (4,880) 44,249
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 39,083 (34,978) (5,573) 45,869
NET ASSETS:
Beginning of Period 62,245 97,223 45,869 --
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 101,328 $ 62,245 $ 40,296 $ 45,869
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (overdistributed) net investment
income included in end of period net assets $ (4) $ 86 $ (16) $ (15)
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 4,604 5,865 1,830 6,134
Shares Issued on Distributions Reinvested 610 609 169 200
Shares Redeemed (2,400) (10,704) (2,496) (1,912)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 2,814 (4,230) (497) 4,422
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 662 -- 17 --
Shares Issued on Distributions Reinvested 23 -- -- --
Shares Redeemed (165) -- (10) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 520 -- 7 --
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
+ Each Portfolio began offering Class B Shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
165
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY MUNICIPAL
MARKET MONEY MARKET
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 54,883 $ 44,657 $ 19,261 $ 13,579
Net Realized Gain (Loss) (469) 79 (22) (1)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 54,414 44,736 19,239 13,578
- ----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income (54,883) (44,657) (19,261) (13,579)
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 13,167,615 8,093,985 5,869,663 3,169,110
Distributions Reinvested 51,181 41,765 18,242 13,182
Redeemed (12,770,387) (7,989,639) (5,617,992) (3,090,216)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 448,409 146,111 269,913 92,076
- ----------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 447,940 146,190 269,891 92,075
NET ASSETS:
Beginning of Period 836,693 690,503 451,519 359,444
- ----------------------------------------------------------------------------------------------------------------------
End of Period $ 1,284,633 $ 836,693 $ 721,410 $ 451,519
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Shares Subscribed 13,167,615 8,093,987 5,869,663 3,169,110
Shares Issued on Distributions Reinvested 51,181 41,765 18,242 13,182
Shares Redeemed (12,770,387) (7,989,639) (5,617,992) (3,090,216)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 448,409 146,113 269,913 92,076
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
166
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
(000)
<S> <C>
- -----------------------------------------------------------------
CASH FLOWS FROM INVESTING AND OPERATING
ACTIVITIES:
Proceeds from Sales of Investments $ 1,065,592
Purchases of Investments (983,851)
Net Decrease in Short Term Investments 2,236
Net Cash Used for Foreign Currency Transactions (7,654)
Interest Income 14,598
Interest Expense Paid (1,794)
Operating Expenses Paid (3,281)
- -----------------------------------------------------------------
Net Cash Provided by Investing and Operating
Activities 85,846
- -----------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Received from Reverse Repurchase Agreements 22,105
Net Portfolio Share transactions (90,932)
Cash Distributions Paid (net of reinvestments of
$53,306) (13,890)
- -----------------------------------------------------------------
Net Cash Used for Financing Activities (82,717)
- -----------------------------------------------------------------
Net Increase in Cash 3,129
CASH AT BEGINNING OF YEAR (2,755)
- -----------------------------------------------------------------
CASH AT END OF YEAR $ 374
- -----------------------------------------------------------------
- -----------------------------------------------------------------
RECONCILIATION OF NET INVESTMENT INCOME TO
NET CASH PROVIDED BY INVESTING AND OPERATING
ACTIVITIES:
Net Investment Income $ 21,910
Proceeds from Sale of Investments 1,065,592
Purchases of Investments (983,851)
Net Decrease in Short Term Investments 2,236
Net Cash Used for Foreign Currency Transactions (7,654)
Net Decrease in Receivables Pertaining to
Investing and Operating Activities (968)
Net Increase in Payables Pertaining to Investing
and Operating Activities (229)
(Accretion)/Amortization of Premium/Discount (11,190)
- -----------------------------------------------------------------
Net Cash Provided by Investing and Operating
Activities $ 85,846
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
167
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
PERIOD FROM
TWO MONTHS JANUARY 17,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.63 $ 11.65 $ 12.21 $ 9.59 $ 9.37 $ 10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.24 0.17 0.19 0.13 0.02 0.11
Net Realized and Unrealized Gain
(Loss) on Investments 0.88 1.00 (0.25) 2.75 0.20 (0.74)
------ ------ ------ ------ ------ ------
Total from Investment Operations 1.12 1.17 (0.06) 2.88 0.22 (0.63)
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.81) (0.25) (0.14) (0.09) -- --
In Excess of Net Investment Income (0.02) (0.10) -- (0.08) -- --
Net Realized Gain (0.48) (0.84) (0.36) -- -- --
In Excess of Net Realized Gain -- -- -- (0.09) -- --
------ ------ ------ ------ ------ ------
Total Distributions (1.31) (1.19) (0.50) (0.26) -- --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 11.44 $ 11.63 $ 11.65 $ 12.21 $ 9.59 $ 9.37
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 9.71% 10.57% (0.52)% 30.72% 2.35% (6.30)%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $183,193 $170,663 $182,977 $150,854 $50,234 $47,534
Ratio of Expenses to Average Net Assets
(1) 0.80% 0.80% 0.80% 0.80% 0.80%** 0.88%**
Ratio of Net Investment Income to
Average Net Assets (1) 1.22% 1.26% 1.43% 1.29% 1.22%** 2.32%**
Portfolio Turnover Rate 65% 72% 51% 53% 2% 62%
Average Commission Rate# $0.0028 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 $0.03 $0.05 $0.03 $0.05 $0.01 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 1.09% 1.18% 1.00% 1.33% 1.70%** 1.58%**
Net Investment Income to Average
Net Assets 0.94% 0.88% 1.23% 0.76% 0.32%** 1.62%**
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.66
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.06
Net Realized and Unrealized Gain on
Investments 1.00
------
Total from Investment Operations 1.06
------
DISTRIBUTIONS
Net Investment Income (0.78)
In Excess of Net Investment Income (0.02)
Net Realized Gain (0.48)
------
Total Distributions (1.28)
------
NET ASSET VALUE, END OF PERIOD $ 11.44
------
------
TOTAL RETURN 9.22%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 633
Ratio of Expenses to Average Net Assets
(2) 1.05%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.09%**
Portfolio Turnover Rate 65%
Average Commission Rate# $0.0028
- ---------------
(2) 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 1.33%**
Net Investment Income to Average
Net Assets 0.82%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.11% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
168
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 19.48 $ 21.54 $ 26.20 $ 13.11 $ 13.63 $ 9.67
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.17 0.18 0.11 0.10 0.01 0.14
Net Realized and Unrealized Gain
(Loss) on Investments 0.50 1.11 (4.15) 13.38 (0.53) 3.86
------ ------ ------ ------ ------ ------
Total from Investment Operations 0.67 1.29 (4.04) 13.48 (0.52) 4.00
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.15) (0.34) (0.09) (0.01) -- (0.04)
In Excess of Net Investment Income (0.00))+ (0.00)+ -- (0.13) -- --
Net Realized Gain (1.27) (3.01) (0.53) (0.12) -- --
In Excess of Net Realized Gain -- -- -- (0.13) -- --
------ ------ ------ ------ ------ ------
Total Distributions (1.42) (3.35) (0.62) (0.39) -- (0.04)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 18.73 $ 19.48 $ 21.54 $ 26.20 $ 13.11 $ 13.63
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 3.49% 6.87% (15.81)% 105.71% (3.82)% 41.50%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $363,498 $314,884 $276,906 $287,136 $41,978 $41,017
Ratio of Expenses to Average Net Assets
(1) 1.00% 1.00% 1.00% 1.00% 1.00%** 1.00%
Ratio of Net Investment Income to
Average Net Assets (1) 0.74% 0.97% 0.52% 0.83% 0.61%** 1.53%
Portfolio Turnover Rate 69% 42% 47% 18% 10% 33%
Average Commission Rate# $0.0111 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 $0.05 $0.03 $0.04 $0.05 $0.02 $0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.25% 1.18% 1.20% 1.38% 2.02%** 1.63%
Net Investment Income (Loss) to
Average Net Assets 0.54% 0.79% 0.32% 0.45% (0.41 %** 0.90%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 19.55
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.11
Net Realized and Unrealized Gain on
Investments 0.46
------
Total from Investment Operations 0.57
------
DISTRIBUTIONS
Net Investment Income (0.11)
Net Realized Gain (1.27)
------
Total Distributions (1.38)
------
NET ASSET VALUE, END OF PERIOD $ 18.74
------
------
TOTAL RETURN 2.92%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $11,002
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.58%**
Portfolio Turnover Rate 69%
Average Commission Rate# $0.0111
- -----------------
(2) 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 1.52%**
Net Investment Income (Loss) to
Average Net Assets 0.37%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.52% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
169
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
PERIOD FROM
TWO MONTHS SEPTEMBER
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 25, 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11 $ 10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.09 0.08 (0.04) (0.01) -- --
Net Realized and Unrealized Gain
(Loss) on Investments 1.51 (2.05) (1.69) 8.79 0.11 0.11
------ ------ ------ ------ ------ ------
Total from Investment Operations 1.60 (1.97) (1.73) 8.78 0.11 0.11
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.08) (0.06) -- -- -- --
Net Realized Gain -- (1.13) (0.97) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.08) (1.19) (0.97) -- -- --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 14.66 $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 12.19% (12.77)% (9.63)% 85.91% 1.09% 1.10%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,304,006 $876,591 $929,638 $735,352 $74,219 $28,806
Ratio of Expenses to Average Net Assets
(1) 1.74% 1.72% 1.75% 1.75% 1.75%** 1.75%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) 0.69% 0.60% (0.26)% (0.06)% (0.33 %** (0.53)%**
Portfolio Turnover Rate 55% 54% 32% 52% 2% 0%
Average Commission Rate# $0.0006 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 N/A N/A N/A $0.01 $0.00 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets N/A N/A N/A 1.79% 2.48%** 4.82%**
Net Investment Loss to Average Net
Assets N/A N/A N/A (0.10)% (1.06 %** (3.60)%**
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.25
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.04
Net Realized and Unrealized Gain on
Investments 1.42
------
Total from Investment Operations 1.46
------
DISTRIBUTIONS
Net Investment Income (0.05)
------
Total Distributions (0.05)
------
NET ASSET VALUE, END OF PERIOD $ 14.66
------
------
TOTAL RETURN 11.04%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $14,213
Ratio of Expenses to Average Net Assets 1.99%**
Ratio of Net Investment Income to
Average Net Assets 0.33%**
Portfolio Turnover Rate 55%
Average Commission Rate# $0.0006
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.42% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
170
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
PERIOD FROM
TWO MONTHS SEPTEMBER
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 25, 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11 $ 10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.09 0.08 (0.04) (0.01) -- --
Net Realized and Unrealized Gain
(Loss) on Investments 1.51 (2.05) (1.69) 8.79 0.11 0.11
------ ------ ------ ------ ------ ------
Total from Investment Operations 1.60 (1.97) (1.73) 8.78 0.11 0.11
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.08) (0.06) -- -- -- --
Net Realized Gain -- (1.13) (0.97) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.08) (1.19) (0.97) -- -- --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 14.66 $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 12.19% (12.77)% (9.63)% 85.91% 1.09% 1.10%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,304,006 $876,591 $929,638 $735,352 $74,219 $28,806
Ratio of Expenses to Average Net Assets
(1) 1.74% 1.72% 1.75% 1.75% 1.75%** 1.75%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) 0.69% 0.60% (0.26)% (0.06)% (0.33 %** (0.53)%**
Portfolio Turnover Rate 55% 54% 32% 52% 2% 0%
Average Commission Rate# $0.0006 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 N/A N/A N/A $0.01 $0.00 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets N/A N/A N/A 1.79% 2.48%** 4.82%**
Net Investment Loss to Average Net
Assets N/A N/A N/A (0.10)% (1.06 %** (3.60)%**
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.25
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.04
Net Realized and Unrealized Gain on
Investments 1.42
------
Total from Investment Operations 1.46
------
DISTRIBUTIONS
Net Investment Income (0.05)
------
Total Distributions (0.05)
------
NET ASSET VALUE, END OF PERIOD $ 14.66
------
------
TOTAL RETURN 11.04%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $14,213
Ratio of Expenses to Average Net Assets 1.99%**
Ratio of Net Investment Income to
Average Net Assets 0.33%**
Portfolio Turnover Rate 55%
Average Commission Rate# $0.0006
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.42% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
170
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
PERIOD FROM
APRIL 2,
YEAR ENDED YEAR ENDED YEAR ENDED 1993* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.92 $ 13.94 $ 12.91 $ 10.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.24 0.14 0.08 0.08
Net Realized and Unrealized Gain on
Investments 2.85 1.37 1.29 2.83
------ ------ ------ ------
Total from Investment Operations 3.09 1.51 1.37 2.91
------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.25) (0.15) (0.09) --
In Excess of Net Investment Income (0.02) -- -- --
Net Realized Gain (0.04) (1.38) (0.25) --
------ ------ ------ ------
Total Distributions (0.31) (1.53) (0.34) --
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 16.70 $ 13.92 $ 13.94 $ 12.91
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN 22.29% 11.85% 10.88% 29.10%
------ ------ ------ ------
------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $178,356 $69,583 $27,634 $12,681
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) 1.83% 1.37% 0.87% 1.23%**
Portfolio Turnover Rate 24% 13% 79% 15%
Average Commission Rate# $0.0212 N/A N/A N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.02 $0.03 $0.06 $0.09
Ratios before expense limitation:
Expenses to Average Net Assets 1.16% 1.25% 1.62% 2.43%**
Net Investment Income (Loss) to
Average Net Assets 1.67% 1.12% 0.25% (0.21)%**
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.05
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.18
Net Realized and Unrealized Gain on
Investments 2.73
------
Total from Investment Operations 2.91
------
DISTRIBUTIONS
Net Investment Income (0.23)
In Excess of Net Investment Income (0.02)
Net Realized Gain (0.04)
------
Total Distributions (0.29)
------
NET ASSET VALUE, END OF PERIOD $ 16.67
------
------
TOTAL RETURN 20.76%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 2,654
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.67%**
Portfolio Turnover Rate 24%
Average Commission Rate# $0.0212
- ---------------
(2) 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 1.40%**
Net Investment Income (Loss) to
Average Net Assets 1.52%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.23% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
171
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
PERIOD FROM
TWO MONTHS JULY 15,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.31 $ 13.40 $ 13.87 $ 9.75 $ 9.35 $ 10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.23 0.18 0.08 0.08 0.01 0.02
Net Realized and Unrealized Gain
(Loss) on Investments 3.02 2.26 0.79 4.18 0.39 (0.67)
------ ------ ------ ------ ------ ------
Total from Investment Operations 3.25 2.44 0.87 4.26 0.40 (0.65)
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.23) (0.22) (0.12) (0.02) -- --
In Excess of Net Investment Income -- -- -- (0.03) -- --
Net Realized Gain (1.09) (1.31) (1.22) (0.09) -- --
------ ------ ------ ------ ------ ------
Total Distributions (1.32) (1.53) (1.34) (0.14) -- --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 16.24 $ 14.31 $ 13.40 $ 13.87 $ 9.75 $ 9.35
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 22.83% 18.66% 6.95% 44.24% 4.28% (6.50)%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $80,297 $91,675 $78,935 $19,918 $11,739 $11,257
Ratio of Expenses to Average Net Assets
(1) 1.00% 1.00% 1.00% 1.00% 1.00%** 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 1.38% 1.17% 0.87% 0.84% 0.69%** 1.00%**
Portfolio Turnover Rate 26% 28% 12% 42% 5% 10%
Average Commission Rate# $0.0299 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 $0.03 $0.02 $0.02 $0.01 $0.02 $0.08
Ratios before expense limitation:
Expenses to Average Net Assets 1.15% 1.13% 1.24% 1.66% 2.49%** 5.22%**
Net Investment Income (Loss) to
Average Net Assets 1.23% 1.04% 0.63% 0.18% (0.80 %** (3.22)%**
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.36
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.13
Net Realized and Unrealized Gain on
Investments 3.02
------
Total from Investment Operations 3.15
------
DISTRIBUTIONS
Net Investment Income (0.21)
Net Realized Gain (1.09)
------
Total Distributions (1.30)
------
NET ASSET VALUE, END OF PERIOD $ 16.21
------
------
TOTAL RETURN 22.04%
------
------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 3,928
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.29%**
Portfolio Turnover Rate 26%
Average Commission Rate# $0.0299
- -----------------
(2) 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 1.39%**
Net Investment Income to Average
Net Assets 1.15%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.25% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
172
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------
PERIOD FROM
FEBRUARY 1,
YEAR ENDED YEAR ENDED 1994* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.55 $ 9.13 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.05 (0.07) 0.03
Net Realized and Unrealized Gain
(Loss) on Investments++ 1.41 1.22 (0.88)
------ ------ ------
Total from Investment Operations 1.46 1.15 (0.85)
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.05) (0.01) (0.02)
In Excess of Net Investment Income (0.01) -- --
Net Realized Gain -- (1.72) --
In Excess of Net Realized Gain (0.65) -- --
------ ------ ------
Total Distributions (0.71) (1.73) (0.02)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.30 $ 8.55 $ 9.13
------ ------ ------
------ ------ ------
TOTAL RETURN 16.94% 13.21% (8.49)%
------ ------ ------
------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $27,810 $7,409 $30,243
Ratio of Expenses to Average Net Assets
(1) 1.25% 1.25% 1.25%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) 0.57% (0.31)% 0.41%**
Portfolio Turnover Rate 94% 47% 56%
Average Commission Rate# $0.0246 N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.04 $0.11 $0.04
Ratios before expense limitation:
Expenses to Average Net Assets 1.73% 1.76% 1.72%**
Net Investment Loss to Average Net
Assets 0.10% (0.82)% (0.06)%**
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.81
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.03
Net Realized and Unrealized Gain on
Investments++ 1.14
------
Total from Investment Operations 1.17
------
DISTRIBUTIONS
Net Investment Income (0.04)
In Excess of Net Investment Income (0.01)
In Excess of Net Realized Gain (0.65)
------
Total Distributions (0.70)
------
NET ASSET VALUE, END OF PERIOD $ 9.28
------
------
TOTAL RETURN 13.21%
------
------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,370
Ratio of Expenses to Average Net Assets
(2) 1.50%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.30%**
Portfolio Turnover Rate 94%
Average Commission Rate# $0.0246
- -----------------
(2) 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 1.94%**
Net Investment Loss to Average Net
Assets (0.13)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.47% of the trade amount.
++ The amounts shown for the year ended December 31, 1996 for a share
outstanding throughout the year does not accord with aggregate net
losses on investments for the year because of the timing of sales and
repurchases of the portfolio shares in relation to fluctuating market
value of the investments in the Portfolio.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
173
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.15 $ 15.34 $ 14.09 $ 9.98 $ 9.83 $ 10.52
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.25 0.16 0.16 0.15 0.01 0.12
Net Realized and Unrealized Gain
(Loss) on Investments 2.71 1.55 1.54 4.36 0.14 (0.59)
------ ------ ------ ------ ------ ------
Total from Investment Operations 2.96 1.71 1.70 4.51 0.15 (0.47)
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.36) (0.06) (0.18) (0.01) -- (0.17)
In Excess of Net Investment Income -- -- -- (0.13) -- --
Net Realized Gain (0.80) (1.84) (0.27) (0.26) -- (0.05)
------ ------ ------ ------ ------ ------
Total Distributions (1.16) (1.90) (0.45) (0.40) -- (0.22)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 16.95 $ 15.15 $ 15.34 $ 14.09 $ 9.98 $ 9.83
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 19.64% 11.77% 12.39% 46.50% 1.53% (4.56)%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $2,264,424 $1,598,530 $1,304,770 $947,045 $510,727 $486,836
Ratio of Expenses to Average Net Assets
(1) 1.00% 1.00% 1.00% 1.00% 1.00%** 1.00%
Ratio of Net Investment Income to
Average Net Assets (1) 1.64% 1.38% 1.12% 1.25% 0.68%** 1.46%
Portfolio Turnover Rate 18% 27% 16% 23% 5% 12%
Average Commission Rate# $0.0238 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 $0.00 $0.003 $0.004 $0.01 $0.00 $0.00
Ratios before expense limitation:
Expenses to Average Net Assets 1.02% 1.03% 1.03% 1.06% 1.14%** 1.02%
Net Investment Income to Average
Net Assets 1.61% 1.35% 1.09% 1.19% 0.54%** 1.44%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.24
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.23
Net Realized and Unrealized Gain on
Investments 2.59
------
Total from Investment Operations 2.82
------
DISTRIBUTIONS
Net Investment Income (0.33)
Net Realized Gain (0.80)
------
Total Distributions (1.13)
------
NET ASSET VALUE, END OF PERIOD $ 16.93
------
------
TOTAL RETURN 18.58%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 5,393
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.68%**
Portfolio Turnover Rate 18%
Average Commission Rate# $0.0238
- -----------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.00
Ratios before expense limitation:
Expenses to Average Net Assets 1.27%**
Net Investment Income to Average
Net Assets 1.66%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.26% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
174
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------
PERIOD FROM
MARCH 15,
1996* TO
DECEMBER 31,
1996
<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 0.76
-------
Total from Investment Operations 0.82
-------
DISTRIBUTIONS
Net Investment Income (0.13)
In Excess of Net Investment Income (0.02)
Net Realized Gain (0.01)
-------
Total Distributions (0.16)
-------
NET ASSET VALUE, END OF PERIOD $ 10.66
-------
-------
TOTAL RETURN 8.25%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $85,316
Ratio of Expenses to Average Net Assets
(1) 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 0.99%**
Portfolio Turnover Rate 18%
Average Commission Rate# $0.0211
- ---------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 1.54%**
Net Investment Income to Average
Net Assets 0.44%**
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------
PERIOD FROM
MARCH 15, 1996*
TO
DECEMBER 31, 1996
<S> <C>
- ----------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.01
Net Realized and Unrealized Gain on
Investments 0.78
-------
Total from Investment Operations 0.79
-------
DISTRIBUTIONS
Net Investment Income (0.13)
In Excess of Net Investment Income (0.02)
Net Realized Gain (0.01)
-------
Total Distributions (0.16)
-------
NET ASSET VALUE, END OF PERIOD $ 10.63
-------
-------
TOTAL RETURN 7.90%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $23,173
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.60%**
Portfolio Turnover Rate 18%
Average Commission Rate# $ 0.0211
- ---------------
(2) 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 1.69%**
Net Investment Income to Average
Net Assets 0.15%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
# For the period ended December 31, 1996, the average commission rate
paid in trades on which commissions were charged was 0.25% of the
trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
175
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 15,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993++ 1992
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.94 $ 15.15 $ 14.64 $ 10.09 $ 10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.21 0.24 0.14 0.09 0.01
Net Realized and Unrealized Gain on
Investments (2) 2.29 0.15 0.62 4.48 0.08
------ ------ ------ ------ ------
Total from Investment Operations 2.50 0.39 0.76 4.57 0.09
------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.22) (0.23) (0.03) 0.00 --
In Excess of Net Investment Income -- -- -- (0.02) --
Net Realized Gain (0.39) (0.37) (0.22) -- --
------ ------ ------ ------ ------
Total Distributions (0.61) (0.60) (0.25) (0.02) --
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 16.83 $ 14.94 $ 15.15 $ 14.64 $ 10.09
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN 16.82% 2.60% 5.25% 45.34% 0.90%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $234,743 $198,669 $160,101 $52,834 $3,824
Ratio of Expenses to Average Net Assets
(1) 1.15% 1.15% 1.15% 1.15% 1.15%**
Ratio of Net Investment Income to
Average Net Assets (1) 1.29% 1.72% 1.18% 0.66% 1.37%**
Portfolio Turnover Rate 35% 24% 8% 14% 0%
Average Commission Rate# $0.0159 N/A N/A N/A N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.01 $0.02 $0.10 $0.16
Ratios before expense limitation:
Expenses to Average Net Assets 1.23% 1.24% 1.29% 1.86% 21.67%**
Net Investment Income (Loss) to
Average Net Assets 1.20% 1.63% 1.04% (0.05)% (19.15)%**
(2) Reflects a 1% transaction fee on purchases and
redemptions of capital shares.
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
++ Per share amounts for the year ended December 31, 1993 are based on
average outstanding shares.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.30% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
176
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------
PERIOD FROM
APRIL 25,
YEAR ENDED YEAR ENDED 1994* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996++ 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.27 $ 9.83 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) -- 0.04 (0.01)
Net Realized and Unrealized Loss on
Investments+ (0.13) (0.40) (0.16)
------ ------ ------
Total from Investment Operations (0.13) (0.36) (0.17)
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.66) -- --
In Excess of Net Investment Income (0.52) (0.20) --
------ ------ ------
Total Distributions (1.18) (0.20) --
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 7.96 $ 9.27 $ 9.83
------ ------ ------
------ ------ ------
TOTAL RETURN (1.40)% (3.64)% (1.70)%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $152,229 $119,278 $50,332
Ratio of Expenses to Average Net Assets
(1) 1.00% 1.00% 1.00%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) (0.04)% 0.15% (0.10)%**
Portfolio Turnover Rate 38% 52% 1%
Average Commission Rate# $0.0561 N/A N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income (loss) $0.01 $0.06 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.07% 1.20% 1.27%**
Net Investment Income (Loss) to
Average Net Assets (0.11)% (0.05)% (0.37)%**
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996++
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.25
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (2) (0.02)
Net Realized and Unrealized Loss on
Investments (0.14)
------
Total from Investment Operations (0.16)
------
DISTRIBUTIONS
Net Investment Income (0.64)
In Excess of Net Investment Income (0.51)
------
Total Distributions (1.15)
------
NET ASSET VALUE, END OF PERIOD $ 7.94
------
------
TOTAL RETURN (1.67)%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $3,431
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Loss to Average
Net Assets (2) (0.26)%**
Portfolio Turnover Rate 38%
Average Commission Rate# $0.0561
- ---------------
(2) 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 1.31%**
Net Investment Loss to Average Net
Assets (0.32)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ The amount shown for the year ended December 31, 1995 for a share
outstanding throughout the year does not agree with the amount of
aggregate net gains on investments for the year because of the timing
of sales and repurchases of the Portfolio shares in relation to
fluctuating market value of the investments in the Portfolio.
++ Per share amounts for the year ended December 31, 1996 are based on
average outstanding shares.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.43% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
177
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------
PERIOD FROM
JANUARY 18,
YEAR ENDED 1995* TO
DECEMBER 31, DECEMBER 31,
1996 1995
<S> <C> <C>
- -------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.06 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.14 0.05
Net Realized and Unrealized Gain
(Loss) on Investments 4.27 (0.92)
------ ------
Total from Investment Operations 4.41 (0.87)
------ ------
DISTRIBUTIONS
Net Investment Income (0.13) (0.04)
Net Realized Gain (2.02) --
Return of Capital -- (0.03)
------ ------
Total Distributions (2.15) (0.07)
------ ------
NET ASSET VALUE, END OF PERIOD $ 11.32 $ 9.06
------ ------
------ ------
TOTAL RETURN 48.77% (8.68)%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $30,409 $15,376
Ratio of Expenses to Average Net Assets
(1) 1.70% 1.70%**
Ratio of Net Investment Income to
Average Net Assets (1) 1.21% 0.62%**
Portfolio Turnover Rate 192% 137%
Average Commission Rate# $0.0004 N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.05 $0.09
Ratios before expense limitation:
Expenses to Average Net Assets 2.18% 3.13%**
Net Investment Income to Average
Net Assets 0.75% (0.48)%**
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.44
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.09
Net Realized and Unrealized Gain on
Investments 3.90
------
Total from Investment Operations 3.99
------
DISTRIBUTIONS
Net Investment Income (0.10)
Net Realized Gain (2.02)
------
Total Distributions (2.12)
------
NET ASSET VALUE, END OF PERIOD $ 11.31
------
------
TOTAL RETURN 42.44%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,333
Ratio of Expenses to Average Net Assets
(2) 1.95%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.89%**
Portfolio Turnover Rate 192%
Average Commission Rate# $0.0004
- ---------------
(2) 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 2.43%**
Net Investment Income to Average
Net Assets 0.42%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period. For the year ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.30% of the trade amount.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
178
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------
PERIOD FROM
YEAR ENDED MARCH 8, 1995*
DECEMBER 31, TO DECEMBER 31,
1996 1995
<S> <C> <C>
- -------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.17 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.18 0.15
Net Realized and Unrealized Gain on
Investments 4.73 3.95
------ ------
Total from Investment Operations 4.91 4.10
------ ------
DISTRIBUTIONS
Net Investment Income (0.17) (0.15)
Net Realized Gain (2.48) (1.78)
------ ------
Total Distributions (2.65) (1.93)
------ ------
NET ASSET VALUE, END OF PERIOD $ 14.43 $ 12.17
------ ------
------ ------
TOTAL RETURN 40.90% 41.25%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $68,480 $28,548
Ratio of Expenses to Average Net Assets
(1) 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 1.26% 1.64%**
Portfolio Turnover Rate 380% 309%
Average Commission Rate # $0.0484 N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.03 $0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.24% 1.59%**
Net Investment Income to Average
Net Assets 1.02% 1.05%**
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.25
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.13
Net Realized and Unrealized Gain on
Investments 4.67
------
Total from Investment Operations 4.80
------
DISTRIBUTIONS
Net Investment Income (0.15)
Net Realized Gain (2.48)
------
Total Distributions (2.63)
------
NET ASSET VALUE, END OF PERIOD $ 14.42
------
------
TOTAL RETURN 39.72%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 8,805
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.95%**
Portfolio Turnover Rate 380%
Average Commission Rate $0.0484
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 1.47%**
Net Investment Income to Average
Net Assets 0.73%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized.
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
179
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 21.49 $ 16.12 $ 16.22 $ 16.22 $ 14.97 $ 16.18
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (1) (0.19) (0.18) (0.09) (0.11) (0.01) (0.09)
Net Realized and Unrealized Gain
(Loss) on Investments 0.89 5.55 (0.01) 0.11 1.26 (1.12)
------ ------ ------ ------ ------ ------
Total from Investment Operations 0.70 5.37 (0.10) 0.00 1.25 (1.21)
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Realized Gain (8.69) -- -- -- -- --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 13.50 $ 21.49 $ 16.12 $ 16.22 $ 16.22 $ 14.97
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 3.72% 33.31% (0.62)% 0.00% 8.35% (7.48)%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $62,793 $119,378 $117,669 $103,621 $94,161 $80,156
Ratio of Expenses to Average Net Assets
(1) 1.25% 1.25% 1.25% 1.25% 1.25%** 1.25%
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) (0.88)% (0.76)% (0.61)% (0.77)% (0.68)%** (0.66)%
Portfolio Turnover Rate % 33 % 25 % 24 % 25 % 1 % 17
Average Commission Rate# $0.0507 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 loss $0.01 $0.003 $0.002 $0.01 $0.00 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.30% 1.26% 1.26% 1.31% 1.36%** 1.29%
Net Investment Loss to Average Net
Assets (0.92)% (0.77)% (0.62)% (0.83)% (0.79)%** (0.71)%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- ------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 21.47
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (2) (0.15)
Net Realized and Unrealized Gain on
Investments 0.82
------
Total From Operations 0.67
------
DISTRIBUTIONS
Net Realized Gain (8.69)
------
NET ASSET VALUE, END OF PERIOD $ 13.45
------
------
TOTAL RETURN 3.58%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 3,997
Ratio of Expenses to Average Net Assets
(2) 1.50%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) (1.09)%**
Portfolio Turnover Rate 33%
Average Commission Rate $0.0507
- ---------------
(2) 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 1.54%**
Net Investment Income to Average
Net Assets (1.14)%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized.
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
180
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.14 $ 12.02 $ 12.14 $ 11.88 $ 11.44 $ 10.66
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.17 0.22 0.17 0.22 0.03 0.16
Net Realized and Unrealized Gain on
Investments 4.07 4.93 0.21 0.28 0.41 0.82
------ ------ ------ ------ ------ ------
Total from Investment Operations 4.24 5.15 0.38 0.50 0.44 0.98
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.17) (0.28) (0.13) (0.23) -- (0.20)
In Excess of Net Investment Income -- -- -- (0.01) -- --
Net Realized Gain (3.27) (2.75) (0.37) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (3.44) (3.03) (0.50) (0.24) -- (0.20)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 14.94 $ 14.14 $ 12.02 $ 12.14 $ 11.88 $ 11.44
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 30.97% 45.02% 3.26% 4.33% 3.85% 9.26%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $352,703 $158,112 $97,259 $73,789 $45,985 $36,558
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) 1.12% 1.57% 1.44% 1.59% 1.93%** 1.73%
Portfolio Turnover Rate 186% 186% 146% 172% 1% 38%
Average Commission Rate# $0.0535 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 $0.01 $0.01 $0.01 $0.02 $0.01 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 0.88% 0.88% 0.89% 0.93% 1.11%** 1.01%
Net Investment Income to Average
Net Assets 1.04% 1.49% 1.35% 1.46% 1.62%** 1.52%
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
APRIL 2,
1991* TO
OCTOBER 31,
1991
<S> <C>
- ---------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.05
Net Realized and Unrealized Gain on
Investments 0.61
------
Total from Investment Operations 0.66
------
DISTRIBUTIONS
Net Investment Income --
In Excess of Net Investment Income --
Net Realized Gain --
------
Total Distributions --
------
NET ASSET VALUE, END OF PERIOD $ 10.66
------
------
TOTAL RETURN 6.60%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $18,139
Ratio of Expenses to Average Net Assets
(1) 0.80%**
Ratio of Net Investment Income to
Average Net Assets (1) 2.34%**
Portfolio Turnover Rate 3%
Average Commission Rate# N/A
- -----------------
(1) Effect of voluntary expense limitat
Per share benefit to net
investment income $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 1.37%**
Net Investment Income to Average
Net Assets 1.77%**
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.22
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.13
Net Realized and Unrealized Gain on
Investments 3.99
------
Total from Investment Operations 4.12
------
DISTRIBUTIONS
Net Investment Income (0.15)
Net Realized Gain (3.27)
------
Total Distributions (3.42)
------
NET ASSET VALUE, END OF PERIOD $ 14.92
------
------
TOTAL RETURN 29.92%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $5,498
Ratio of Expenses to Average Net Assets
(2) 1.05%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.91%**
Portfolio Turnover Rate 186%
Average Commission Rate $0.0535
- -----------------
(2) 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 1.12%**
Net Investment Income to Average
Net Assets 0.84%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
181
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------
PERIOD FROM
DECEMBER 17,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.91 $ 10.80 $ 11.10 $ 10.14 $ 10.00
------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.32 0.30 0.28 0.24 0.01
Net Realized and Unrealized Gain
(Loss) on Investments 2.36 1.82 (0.01) 0.90 0.13
------------ ------------ ------------ ------------ ------------
Total from Investment Operations 2.68 2.12 0.27 1.14 0.14
------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.32) (0.38) (0.27) (0.18) --
Net Realized Gain (3.38) (0.63) (0.30) -- --
------------ ------------ ------------ ------------ ------------
Total Distributions (3.70) (1.01) (0.57) (0.18) --
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD $ 10.89 $ 11.91 $ 10.80 $ 11.10 $ 10.14
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
TOTAL RETURN 22.99% 20.63% 2.53% 11.33% 1.40%
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $23,970 $51,919 $40,033 $26,775 $5,974
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) 2.20% 2.60% 2.67% 2.56% 1.64%**
Portfolio Turnover Rate 32% 36% 22% 29% 0%
Average Commission Rate# $0.0402 N/A N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.04 $0.02 $0.03 $0.06 $0.13
Ratios before expense limitation:
Expenses to Average Net Assets 1.32% 1.21% 1.26% 1.68% 23.14%**
Net Investment Income (Loss) to
Average Net Assets 1.89% 2.39% 2.41% 1.88% (20.50)%**
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.95
------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.23
Net Realized and Unrealized Gain on
Investments 2.38
------------
Total from Investment Operations 2.61
------------
DISTRIBUTIONS
Net Investment Income (0.30)
Net Realized Gain (3.38)
------------
Total Distributions (3.68)
------------
NET ASSET VALUE, END OF PERIOD $ 10.88
------------
------------
TOTAL RETURN 22.33%
------------
------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,689
Ratio of Expenses to Average Net Assets
(2) 1.24%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.93%**
Portfolio Turnover Rate 32%
Average Commission Rate $0.0402
- -----------------
(2) 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 1.69%**
Net Investment Income to Average
Net Assets 1.50%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
182
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE TECHNOLOGY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------
PERIOD FROM
SEPTEMBER
16,
1996* TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) (0.02)
Net Realized and Unrealized Gain on
Investments 0.73
------
Total from Investment Operations 0.71
------
NET ASSET VALUE, END OF PERIOD $ 10.71
------
------
TOTAL RETURN 7.10%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $3,595
Ratio of Expenses to Average Net Assets
(1) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (1) (0.70)%**
Portfolio Turnover Rate 77%
Average Commission Rate $0.0374
- ---------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.22
Ratios before expense limitation:
Expenses to Average Net Assets 8.51%**
Net Investment Income to Average
Net Assets (7.96)%**
- -----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
SEPTEMBER
16,
1996* TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) (0.02)
Net Realized and Unrealized Gain on
Investments 0.73
------
Total from Investment Operations 0.71
------
NET ASSET VALUE, END OF PERIOD $ 10.71
------
------
TOTAL RETURN 7.10%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,487
Ratio of Expenses to Average Net Assets
(2) 1.50%**
Ratio of Net Investment Income to
Average Net Assets (2) (1.00)%**
Portfolio Turnover Rate 77%
Average Commission Rate $0.0374
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.19
Ratios before expense limitation:
Expenses to Average Net Assets 9.14%**
Net Investment Income to Average
Net Assets (8.65)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
183
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------
PERIOD FROM
FEBRUARY 24,
YEAR ENDED 1995* TO
DECEMBER 31, DECEMBER 31,
1996 1995
<S> <C> <C>
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.42 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.37 0.26
Net Realized and Unrealized Gain on
Investments 4.02 1.84
------ ------
Total from Investment Operations 4.39 2.10
------ ------
DISTRIBUTIONS
Net Investment Income (0.39) (0.24)
Net Realized Gain (1.01) (0.44)
------ ------
Total Distributions (1.40) (0.68)
------ ------
NET ASSET VALUE, END OF PERIOD $ 14.41 $ 11.42
------ ------
------ ------
TOTAL RETURN 39.56% 21.07%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $210,368 $69,509
Ratio of Expenses to Average Net Assets
(1) 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 3.08% 4.04%**
Portfolio Turnover Rate 171% 158%
Average Commission Rate# $0.0568 N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.14% 1.33%**
Net Investment Income to Average
Net Assets 2.93% 3.71%**
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- ---------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.50
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.35
Net Realized and Unrealized Gain on
Investments 3.92
------
Total from Investment Operations 4.27
------
DISTRIBUTIONS
Net Investment Income (0.37)
Net Realized Gain (1.01)
------
Total Distributions (1.38)
------
NET ASSET VALUE, END OF PERIOD $ 14.39
------
------
TOTAL RETURN 38.23%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 8,734
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 2.91%**
Portfolio Turnover Rate 171%
Average Commission Rate $0.0568
- ---------------
(2) 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 1.37%**
Net Investment Income to Average
Net Assets 2.79%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized.
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commisions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
184
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.94 $ 11.50 $ 12.63 $ 11.31 $ 10.71 $ 10.24
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.41 0.38 0.40 0.37 0.08 0.38
Net Realized and Unrealized Gain
(Loss) on Investments 2.27 3.30 (0.55) 1.31 0.52 0.48
------ ------ ------ ------ ------ ------
Total from Investment Operations 2.68 3.68 (0.15) 1.68 0.60 0.86
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.41) (0.47) (0.40) (0.36) -- (0.39)
Net Realized Gain (2.32) (0.77) (0.58) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (2.73) (1.24) (0.98) (0.36) -- (0.39)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 13.89 $ 13.94 $ 11.50 $ 12.63 $ 11.31 $ 10.71
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 19.73% 33.69% (1.29)% 15.14% 5.60% 8.51%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $106,128 $147,365 $73,406 $54,598 $27,541 $25,013
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) 2.62% 3.01% 3.37% 3.23% 4.41%** 3.72%
Portfolio Turnover Rate 42% 43% 33% 51% 9% 56%
Average Commission Rate# $0.0434 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 $0.01 $0.01 $0.01 $0.03 $0.01 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 0.78% 0.77% 0.80% 0.95% 1.20%** 0.84%
Net Investment Income to Average
Net Assets 2.55% 2.94% 3.27% 2.98% 3.91%** 3.58%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.06
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.29
Net Realized and Unrealized Gain on
Investments 2.25
------
Total from Investment Operations 2.54
------
DISTRIBUTIONS
Net Investment Income (0.39)
Net Realized Gain (2.32)
------
Total Distributions (2.71)
------
NET ASSET VALUE, END OF PERIOD $ 13.89
------
------
TOTAL RETURN 18.57%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 2,555
Ratio of Expenses to Average Net Assets
(2) 0.95%**
Ratio of Net Investment Income to
Average Net Assets (2) 2.33%**
Portfolio Turnover Rate 42%
Average Commission Rate $0.0434
- -----------------
(2) 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 1.03%**
Net Investment Income to Average
Net Assets 2.26%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were paid, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
185
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.98 $ 8.96 $ 11.13 $ 11.31 $ 11.00 $ 10.61
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.52 0.39 0.42 0.44 0.10 0.58
Net Realized and Unrealized Gain
(Loss) on Investments 0.54 1.62 (0.64) 0.79 0.21 0.42
------------ ------------ ------------ ------------ ------------ ------------
Total from Investment Operations 1.06 2.01 (0.22) 1.23 0.31 1.00
------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income (0.48) (0.50) (0.49) (0.41) -- (0.58)
In Excess of Net Investment Income 0.00+ -- -- (0.08) -- --
Net Realized Gain (2.37) (0.49) (1.46) (0.06) -- (0.03)
In Excess of Net Realized Gain -- -- -- (0.86) -- --
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions (2.85) (0.99) (1.95) (1.41) -- (0.61)
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD $ 8.19 $ 9.98 $ 8.96 $ 11.13 $ 11.31 $ 11.00
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN 10.93% 23.63% (2.32)% 12.09% 2.82% 9.57%
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $5,992 $22,642 $18,492 $29,684 $39,984 $40,332
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) 3.93% 4.10% 4.13% 3.88% 5.29%** 5.21%
Portfolio Turnover Rate 22% 26% 44% 136% 4% 40%
Average Commission Rate# $0.0397 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 $0.08 $0.03 $0.03 $0.04 $0.01 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.32% 1.02% 0.95% 1.02% 1.00%** 0.79%
Net Investment Income to Average
Net Assets 3.31% 3.78% 3.88% 3.56% 4.99%** 5.12%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.02
------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.34
Net Realized and Unrealized Gain on
Investments 0.65
------------
Total from Investment Operations 0.99
------------
DISTRIBUTIONS
Net Investment Income (0.46)
Net Realized Gain (2.37)
------------
Total Distributions (2.83)
------------
NET ASSET VALUE, END OF PERIOD $ 8.18
------------
------------
TOTAL RETURN 10.24%
------------
------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 2,197
Ratio of Expenses to Average Net Assets
(2) 0.95%**
Ratio of Net Investment Income to
Average Net Assets (2) 3.73%**
Portfolio Turnover Rate 22%
Average Commission Rate $0.0397
- -----------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.07
Ratios before expense limitation:
Expenses to Average Net Assets 1.68%**
Net Investment Income to Average
Net Assets 3.00%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
186
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------
PERIOD FROM
FEBRUARY 1,
YEAR ENDED YEAR ENDED 1994* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.59 $ 8.59 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.54 1.36 0.50
Net Realized and Unrealized Gain
(Loss) on Investments 2.79 0.91 (1.91)
------ ------ ------
Total from Investment Operations 4.33 2.27 (1.41)
------ ------ ------
DISTRIBUTIONS
Net Investment Income (1.17) (1.86) --
In Excess of Net Investment Income (0.01) -- --
Net Realized Gain (4.20) (0.41) --
------ ------ ------
Total Distributions (5.38) (2.27) --
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 7.54 $ 8.59 $ 8.59
------ ------ ------
------ ------ ------
TOTAL RETURN 50.52% 28.23% (14.10)%
------ ------ ------
------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $152,142 $181,878 $144,949
Ratio of Expenses to Average Net Assets 2.70% 1.75% 1.49%**
Ratio of Expenses to Average Net Assets
(Excluding Dividend and Interest
Expense) 1.42% N/A N/A
Ratio of Net Investment Income to
Average Net Assets 11.66% 14.70% 9.97%**
Portfolio Turnover Rate 560% 406% 273%
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.68
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.01
Net Realized and Unrealized Gain on
Investments 3.20
------
Total from Investment Operations 4.21
------
DISTRIBUTIONS
Net Investment Income (1.15)
In Excess of Net Investment Income (0.01)
Net Realized Gain (4.20)
------
Total Distributions (5.36)
------
NET ASSET VALUE, END OF PERIOD $ 7.53
------
------
TOTAL RETURN 48.52%
------
------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 4,253
Ratio of Expenses to Average Net Assets 2.81%**
Ratio of Expenses to Average Net Assets
(Excluding Dividend and Interest
Expense) 1.65%**
Ratio of Net Investment Income to
Average Net Assets 11.09%**
Portfolio Turnover Rate 560%
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
187
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.81 $9.82 $11.05 $10.93 $10.92 $10.55
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.67 0.72 0.59 0.54 0.10 0.69
Net Realized and Unrealized Gain
(Loss) on Investments (0.20) 1.06 (0.92) 0.41 0.01 0.39
------ ------ ------ ------ ------ ------
Total from Investment Operations 0.47 1.78 (0.33) 0.95 0.11 1.08
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.70) (0.79) (0.53) (0.56) (0.10) (0.69)
In Excess of Net Investment Income (0.00)+ -- -- (0.01) -- --
Net Realized Gain -- -- (0.37) (0.26) -- (0.02)
In Excess of Net Realized Gain -- -- (0.00)+ -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.70) (0.79) (0.90) (0.83) (0.10) (0.71)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.58 $ 10.81 $ 9.82 $ 11.05 $ 10.93 $ 10.92
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 4.61% 18.76% (3.10)% 9.07% 1.02% 10.61%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $130,733 $165,527 $209,331 $240,668 $154,210 $146,546
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) 6.30% 6.85% 5.73% 4.97% 5.56%** 6.59%
Portfolio Turnover Rate 183% 172% 388% 240% 15% 105%
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.02 $0.01 $0.01 $0.02 $0.01 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 0.60% 0.59% 0.58% 0.60% 0.75%** 0.59%
Net Investment Income to Average
Net Assets 6.15% 6.71% 5.60% 4.82% 5.26%** 6.45%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.81
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.64
Net Realized and Unrealized Loss on
Investments (0.19)
------
Total from Investment Operations 0.45
------
DISTRIBUTIONS
Net Investment Income (0.68)
------
NET ASSET VALUE, END OF PERIOD $ 10.58
------
------
TOTAL RETURN 4.35%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,462
Ratio of Expenses to Average Net Assets
(2) 0.60%**
Ratio of Net Investment Income to
Average Net Assets (2) 6.15%**
Portfolio Turnover Rate 183%
- ---------------
(2) 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 0.74%**
Net Investment Income to Average
Net Assets 6.01%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
188
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.22 $ 10.29 $ 11.68 $ 11.26 $ 11.41 $ 10.61
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.61 0.76 0.70 0.69 0.14 0.53
Net Realized and Unrealized Gain
(Loss) on Investments 0.08 1.15 (1.38) 0.90 (0.29) 0.55
------ ------ ------ ------ ------ ------
Total from Investment Operations 0.69 1.91 (0.68) 1.59 (0.15) 1.08
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.61) (0.98) (0.40) (0.79) -- (0.27)
In Excess of Net Investment Income -- -- -- (0.22) -- --
Net Realized Gain -- -- (0.31) (0.16) -- (0.01)
------ ------ ------ ------ ------ ------
Total Distributions (0.61) (0.98) (0.71) (1.17) -- (0.28)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 11.30 $ 11.22 $ 10.29 $ 11.68 $ 11.26 $ 11.41
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 6.44% 19.32% (6.08)% 15.34% (1.31)% 10.29%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $112,888 $102,852 $130,675 $172,468 $92,897 $94,847
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) 5.50% 6.79% 6.34% 5.99% 6.99%** 6.92%
Portfolio Turnover Rate 258% 207% 171% 108% 9% 144%
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.02 $0.02 $0.02 $0.02 $0.01 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 0.72% 0.71% 0.66% 0.70% 0.90%** 0.86%
Net Investment Income to Average
Net Assets 5.29% 6.58% 6.18% 5.79% 6.59%** 6.56%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.23
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.48
Net Realized and Unrealized Gain on
Investments 0.18
------
Total from Investment Operations 0.66
------
DISTRIBUTIONS
Net Investment Income (0.60)
------
Total Distributions (0.60)
------
NET ASSET VALUE, END OF PERIOD $ 11.29
------
------
TOTAL RETURN 6.12%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 1,559
Ratio of Expenses to Average Net Assets
(2) 0.65%**
Ratio of Net Investment Income to
Average Net Assets (2) 5.28%**
Portfolio Turnover Rate 258%
- ---------------
(2) 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 0.86%**
Net Investment Income to Average
Net Assets 5.08%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
189
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
PERIOD FROM
TWO MONTHS SEPTEMBER
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 28, 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.46 $ 9.55 $ 11.16 $ 9.95 $ 9.77 $ 10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 1.03 1.14 0.97 0.90 0.14 0.08
Net Realized and Unrealized Gain
(Loss) on Investments 0.47 0.97 (1.40) 1.21 0.19 (0.31)
------ ------ ------ ------ ------ ------
Total from Investment Operations 1.50 2.11 (0.43) 2.11 0.33 (0.23)
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (1.05) (1.20) (0.97) (0.90) (0.15) --
In Excess of Net Investment Income (0.00)+ -- -- -- -- --
Net Realized Gain -- -- (0.21) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (1.05) (1.20) (1.18) (0.90) (0.15) --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.91 $ 10.46 $ 9.55 $ 11.16 $ 9.95 $ 9.77
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 15.01% 23.35% (4.18)% 22.11% 3.41% (2.30)%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $95,663 $62,245 $97,223 $74,500 $20,194 $16,950
Ratio of Expenses to Average Net Assets
(1) 0.75% 0.75% 0.75% 0.75% 0.75%** 0.75%**
Ratio of Net Investment Income to
Average Net Assets (1) 9.78% 11.09% 9.42% 8.70% 8.96%** 9.89%**
Portfolio Turnover Rate 117% 90% 74% 104% 24% 9%
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.01 $0.001 $0.02 $0.01 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 0.82% 0.83% 0.76% 0.96% 1.62%** 1.23%**
Net Investment Income to Average
Net Assets 9.71% 11.01% 9.41% 8.49% 8.09%** 9.41%**
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -----------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.49
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.98
Net Realized and Unrealized Gain on
Investments 0.45
------
Total from Investment Operations 1.43
------
DISTRIBUTIONS
Net Investment Income (1.02)
------
NET ASSET VALUE, END OF PERIOD $10.90
------
------
TOTAL RETURN 14.37%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 5,665
Ratio of Expenses to Average Net Assets
(2) 1.00%**
Ratio of Net Investment Income to
Average Net Assets (2) 9.49%**
Portfolio Turnover Rate 117%
- ---------------
(2) 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 1.05%**
Net Investment Income to Average
Net Assets 9.44%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
190
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------
PERIOD FROM
JANUARY 18,
YEAR ENDED 1995*
DECEMBER 31, TO DECEMBER 31,
1996 1995
<S> <C> <C>
- -------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.37 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.49 0.44
Net Realized and Unrealized Gain
(Loss) on Investments (0.12) 0.42
------ ------
Total from Investment Operations 0.37 0.86
------ ------
DISTRIBUTIONS
Net Investment Income (0.49) (0.45)
In Excess of Net Investment Income -- (0.00)+
Net Realized Gain -- (0.04)
------ ------
Total Distributions (0.49) (0.49)
------ ------
NET ASSET VALUE, END OF PERIOD $ 10.25 $ 10.37
------ ------
------ ------
TOTAL RETURN 3.67% 8.80%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $40,227 $45,869
Ratio of Expenses to Average Net Assets
(1) 0.45% 0.45%**
Ratio of Net Investment Income to
Average Net Assets (1) 4.77% 4.61%**
Portfolio Turnover Rate 45% 180%
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.03 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 0.73% 0.73%**
Net Investment Income to Average
Net Assets 4.50% 4.33%**
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
<S> <C>
- -------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.37
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.44
Net Realized and Unrealized Loss on
Investments (0.08)
------
Total from Investment Operations 0.36
------
DISTRIBUTIONS
Net Investment Income (0.49)
------
Total Distributions (0.49)
------
NET ASSET VALUE, END OF PERIOD $ 10.24
------
------
TOTAL RETURN 3.55%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $69
Ratio of Expenses to Average Net Assets
(2) 0.70%**
Ratio of Net Investment Income to
Average Net Assets (2) 4.56%**
Portfolio Turnover Rate 45%
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 0.98%**
Net Investment Income to Average
Net Assets 4.28%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
191
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED TWO MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<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) 0.049 0.054 0.040 0.027 0.005 0.039
------------ ------------ ------------ ------------ ------- -----------
DISTRIBUTIONS
Net Investment Income (0.049) (0.054) (0.040) (0.027) (0.005) (0.039)
In Excess of Net Investment Income -- -- -- 0.000+ -- --
------------ ------------ ------------ ------------ ------- -----------
Total Distributions (0.049) (0.054) (0.040) (0.027) (0.005) (0.039)
------------ ------------ ------------ ------------ ------- -----------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------ ------------ ------------ ------------ ------- -----------
------------ ------------ ------------ ------------ ------- -----------
TOTAL RETURN 5.03% 5.51% 3.84% 2.76% 0.50% 3.77%
------------ ------------ ------------ ------------ ------- -----------
------------ ------------ ------------ ------------ ------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,284,633 $836,693 $690,503 $657,163 $599,172 $612,968
Ratio of Expenses to Average Net Assets
(1) 0.52% 0.51% 0.49% 0.53% 0.55%** 0.52%
Ratio of Net Investment Income to
Average Net Assets (1) 4.92% 5.37% 3.77% 2.71% 3.11%** 3.74%
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income N/A N/A N/A $0.000+ $0.000+ N/A
Ratios before expense limitation:
Expenses to Average Net Assets N/A N/A N/A 0.54% 0.59%** N/A
Net Investment Income to Average
Net Assets N/A N/A N/A 2.70% 3.07%** N/A
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
+ Amount is less than $0.001 per share.
- --------------------------------------------------------------------------------
THE MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
<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) 0.030 0.034 0.020 0.019 0.004 0.026
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.030) (0.034) (0.020) (0.019) (0.004) (0.026)
In Excess of Net Investment Income -- -- -- (0.000)+ -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.030) (0.034) (0.020) (0.019) (0.004) (0.026)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 3.02% 3.44% 2.44% 1.91% 0.37% 2.74%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $721,410 $451,519 $359,444 $266,524 $208,866 $206,691
Ratio of Expenses to Average Net Assets
(1) 0.53% 0.52% 0.51% 0.54% 0.57%** 0.55%
Ratio of Net Investment Income to
Average Net Assets (1) 2.98% 3.38% 2.42% 1.89% 2.31%** 2.66%
- ---------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income N/A N/A N/A $0.000+ $0.000+ N/A
Ratios before expense limitation:
Expenses to Average Net Assets N/A N/A N/A 0.56% 0.67%** N/A
Net Investment Income to Average
Net Assets N/A N/A N/A 1.87% 2.21%** N/A
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
+ Amount is less than $0.001 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
192
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
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. As of December 31, 1996, the Fund was comprised of 26 separate active,
diversified and non-diversified portfolios (individually referred to as a
"Portfolio", collectively as the "Portfolios"). The International Magnum and the
Technology Portfolios commenced operations on March 15, 1996 and September 16,
1996, respectively. On January 2, 1996, each Portfolio (with the exception of
the International Small Cap, Money Market and Municipal Money Market Portfolios)
began offering an additional class of shares - Class B. All the outstanding
shares of the Portfolios prior to January 2, 1996, were redesignated Class A
shares on January 2, 1996. Both classes of shares have identical voting rights
(except shareholders of a Class have exclusive voting rights regarding any
matter relating solely to that Class of shares), dividend, liquidation and other
rights. Please refer to the manager's reports included elsewhere in this report
for a description of each Portfolio's investment objectives.
A. ACCOUNTING POLICIES: 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. Generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual results
may differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. 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 average of 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. Securities owned by the Money Market and Municipal Money Market
Portfolios 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.
A Portfolio may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on income and/or capital gains earned or
repatriated. Taxes are accrued and applied to net investment income, net
realized gains and net unrealized appreciation as income and/or capital gains is
earned.
3. REPURCHASE AGREEMENTS: The Portfolios may enter into repurchase agreements
under which a Portfolio lends excess cash and takes possession of securities
with an agreement that the counterparty will repurchase such securities. In
connection with transactions in repurchase agreements, a bank as custodian for
the Fund takes possession of the underlying securities which are held as
collateral, with a market value at least equal to the amount of the repurchase
transaction, including principal and 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 counterparty to the
agreement, realization and/ or retention of the collateral or proceeds may be
subject to legal proceedings.
4. REVERSE REPURCHASE AGREEMENTS: The Emerging Markets Debt Portfolio may enter
into reverse repurchase agreements with institutions that the Portfolio's
investment adviser has determined are creditworthy. Under a reverse repurchase
agreement, the Portfolio receives cash from the sale of securities and agrees to
repurchase the securities at a mutually agreed upon date and price. Reverse
repurchase agreements involve market risk that the value of the securities
purchased with the proceeds from the sale of securities received by the
Portfolio may decline below the
- --------------------------------------------------------------------------------
193
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
price of the securities the Portfolio is obligated to repurchase. The Portfolio
is also subject to credit risk equal to the amount by which the value of
securities subject to repurchase exceeds the Portfolio's liability under the
reverse repurchase agreement. Securities subject to repurchase under reverse
repurchase agreements are designated as such in the Statements of Net Assets.
At December 31, 1996 the Emerging Markets Debt Portfolio had reverse repurchase
agreements outstanding as follows:
<TABLE>
<CAPTION>
MATURITY IN
30 TO 90
DAYS
------------
<S> <C>
Value of securities subject to repurchase..... $37,616,940
------------
Liability for Reverse Repurchase Agreement.... 34,545,000
Weighted Average Interest Rate................ 5.75%
------------
</TABLE>
For the Emerging Markets Debt Portfolio, the average weekly balance of reverse
repurchase agreements outstanding during the year ended December 31, 1996 was
approximately $19,866,000, at a weighted average interest rate of 5.887%.
5. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in U.S. 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 bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
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 U.S. Federal income
tax regulations, gains and losses from certain foreign currency transactions and
the foreign currency portion of gains and losses realized on sales and
maturities of foreign denominated debt securities 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 exchange
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 U.S. dollar equivalent amounts actually
received or paid. Net unrealized currency gains (losses) from valuing foreign
currency denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on the
Statement of Net Assets. The change in net unrealized currency gains (losses)
for the period is reflected on the Statement of Operations.
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 possibility of lower
levels of governmental supervision and regulation of foreign securities markets
and the possibility of political or economic instability.
Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign investments
in domestic companies may be subject to limitation in other countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies 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. In the absence of
trading of the foreign shares in such markets at December 31, 1996, the
Portfolios value the foreign shares at the closing exchange price of the local
shares. Such securities are reflected as fair valued in the statements of net
assets.
6. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter
into forward foreign currency exchange contracts to attempt to protect
securities and related receivables and payables against changes in future
foreign currency exchange rates. A forward foreign currency exchange contract is
an agreement between two parties to buy or sell
- --------------------------------------------------------------------------------
194
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
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 applicable forward rate and the change in market value is
recorded by the Portfolios as unrealized gain or loss. The Portfolios record
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 U.S. dollar.
7. 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.
8. LOAN AGREEMENTS: Certain 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 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 typically 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.
9. SHORT SALES: The Aggressive Equity, Emerging Markets Debt and Technology
Portfolios may sell securities short. A short sale is a transaction in which the
Portfolio sells securities it may or may 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 obligations deposited as collateral with the broker in
connection with 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.
10. PURCHASED AND WRITTEN OPTIONS: Certain Portfolios may write covered call and
put options on their portfolio securities. Premiums are received and are
- --------------------------------------------------------------------------------
195
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
recorded as liabilities. The liabilities are subsequently adjusted to reflect
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
added to the proceeds or netted against the amount paid on the transaction to
determine the realized gain or loss. By writing a covered 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. By writing a covered put option, a Portfolio, in exchange for
the premium, accepts the risk of a decline in the market value of the underlying
security below the exercise price.
Certain Portfolios may purchase call and put options on their portfolio
securities. Each Portfolio may purchase call options to protect against an
increase in the price of the security it anticipates purchasing. Each Portfolio
may purchase put options on their securities to protect against a decline in the
value of the security or to close out covered written put positions. Risks may
arise from an 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 from the possible lack of a
liquid secondary market for an option. The maximum exposure to loss for any
purchased option is limited to the premium initially paid for the option.
11. SECURITY LENDING: Certain Portfolios may lend investment securities to
certain qualified institutional investors who borrow securities in order to
complete certain transactions. By lending 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 and any interest earned or dividends declared during the term of the
loan would be for the account of the Portfolio. Risks of delay in recovery of
the securities or even loss of rights in the collateral may occur should the
borrower of the securities fail financially. Risks may also arise to the extent
that the value of securities loaned increases above the value of the collateral
received.
Portfolios that lend securities receive cash as collateral in an amount equal to
or exceeding 100% of the current market value of the loaned securities. Any cash
received as collateral is invested in U.S. Government securities or interest
bearing repurchase agreements with approved counterparties. A portion of the
interest received on the repurchase agreements is retained by the Fund and the
remainder is rebated to the borrower of the securities. The net amount of
interest earned and interest rebated is included in the Statement of Operations
as interest income. The value of loaned securities and related collateral
outstanding at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
VALUE OF LOANED VALUE OF
SECURITIES COLLATERAL
PORTFOLIO (000) (000)
- -------------------------------- --------------- -----------
<S> <C> <C>
Active Country Allocation....... $ 32,752 $ 34,886
Asian Equity.................... 22,736 23,576
International Equity............ 621,449 660,048
</TABLE>
Morgan Stanley Trust Company, an affiliate of the investment adviser,
administers the security lending program and has earned fees for its services in
the amount of $282,000 during the year ended December 31, 1996.
12. STRUCTURED SECURITIES: The Emerging Markets Debt Portfolio may invest 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 of
specified instruments and the issuance by that entity of one or more classes of
securities ("Structured Securities") backed by, or representing interests in,
the underlying instruments. Structured Securities generally will expose the
Portfolio to credit risks of the underlying instruments as well as of the issuer
of the structured security. Structured securities are typically sold in private
placement transactions with no active trading market. Investments in Structured
Securities may be more volatile than their underlying instruments, however, any
loss is limited to the amount of the original investment.
13. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the identified cost basis. Dividend income is
recorded on the ex-dividend date (except for certain foreign dividends which may
be recorded as soon as the Fund is informed of such dividends) net of applicable
withholding taxes where recovery of such taxes is not reasonably assured.
Interest income is recognized on the accrual basis except where collection is in
doubt. Discounts and premiums on
- --------------------------------------------------------------------------------
196
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
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. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses are allocated to
each class of shares based upon their relative net assets. Dividends to the
shareholders of the Money Market and the Municipal Money Market Portfolios are
accrued daily and are distributed on or about the 15th of each month.
Distributions for the remaining Portfolios are recorded on the ex-distribution
date.
The U.S. Real Estate Portfolio owns shares of real estate investment trusts
("REITs") which report information on the source of their distributions
annually. A portion of distributions received from REITs during the year is
estimated to be a return of capital and is recorded as a reduction of their
cost.
The amount and character of income and capital gain distributions to be paid by
the Fund are determined in accordance with Federal income tax regulations which
may differ from generally accepted accounting principles. These differences are
primarily due to differing book and tax treatments for the character and timing
of the recognition of gains or losses on securities and forward foreign currency
exchange contracts, the timing of the deductibility of certain foreign taxes and
dividends received from real estate investment trusts.
Permanent book and tax basis differences relating to shareholder distributions
may result in reclassifications among undistributed net investment income
(loss), accumulated net realized gain (loss) and paid in capital.
Permanent book and tax differences, if any, are not included in ending
undistributed (distributions in excess of) net investment income/accumulated net
investment loss for the purpose of calculating net investment income (loss) per
share in the Financial Highlights.
A transaction fee of one percent is charged on subscriptions and redemptions of
capital shares of the International Small Cap Portfolio and are included in paid
in capital. During the year ended December 31, 1996, such transaction fees
totaled approximately $442,000.
B. ADVISER: Morgan Stanley Asset Management Inc. (the "Adviser" or "MSAM"), a
wholly-owned subsidiary of Morgan Stanley Group, Inc., provides the Fund with
investment advisory services under the terms of an Investment Advisory and
Management Agreement (the "Agreement") 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 expenses, as
defined, expressed as a percentage of average daily net assets, exceed the
maximum ratios indicated as follows:
<TABLE>
<CAPTION>
MAXIMUM
EXPENSE RATIO
--------------------------
PORTFOLIO ADVISORY FEE CLASS A CLASS B
- ------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Active Country Allocation...... .65% .80% 1.05%
Asian Equity................... .80 1.00 1.25
Emerging Markets............... 1.25 1.75 2.00
European Equity................ .80 1.00 1.25
Global Equity.................. .80 1.00 1.25
Gold........................... 1.00 1.25 1.50
International Equity........... .80 1.00 1.25
International Magnum........... .80 1.00 1.25
International Small Cap........ .95 1.15 N/A
Japanese Equity................ .80 1.00 1.25
Latin American................. 1.10 1.70 1.95
Aggressive Equity.............. .80 1.00 1.25
Emerging Growth................ 1.00 1.25 1.50
Equity Growth.................. .60 .80 1.05
Small Cap Value Equity......... .85 1.00 1.25
Technology..................... 1.00 1.25 1.50
U.S. Real Estate............... .80 1.00 1.25
Value Equity................... .50 .70 .95
Balanced....................... .50 .70 .95
Emerging Markets Debt.......... 1.00 1.75 2.00
Fixed Income................... .35 .45 .60
Global Fixed Income............ .40 .50 .65
High Yield..................... .50 .75 1.00
Municipal Bond................. .35 .45 .70
Money Markets.................. .30 .55 N/A
Municipal Money Market......... .30 .57 N/A
</TABLE>
Sun Valley Gold Company is the sub-adviser ("Sub-Adviser") of the Gold
Portfolio. The Sub-Adviser is entitled to receive an annual sub-advisory fee in
an amount equal to .40% of the average daily net assets of the Gold 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 Gold Portfolio.
C. ADMINISTRATOR: 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
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197
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
The Chase Manhattan Bank ("Chase"), through its affiliate Chase Global Funds
Services Company, Chase provides certain administrative services to the Fund.
For such services, MSAM pays Chase a portion of the fee MSAM receives from the
Fund. In addition, the Fund incurs local administration fees in connection with
doing business with certain emerging market countries.
D. DISTRIBUTOR: Morgan Stanley & Co., Incorporated (the "Distributor"), a
wholly-owned subsidiary of Morgan Stanley Group, Inc., and an affiliate of MSAM,
serves as the distributor of the Fund and provides Class B shareholders of each
applicable Portfolio with distribution services pursuant to a Distribution Plan
(the "Plan") in accordance with Rule 12b-1 under the Investment Company Act of
1940. Under the Plan, the Distributor is entitled to receive from each
Portfolio, except the International Small Cap, Money Market and Municipal Money
Market Portfolios, a distribution fee, which is accrued daily and paid
quarterly, at an annual rate of 0.25% of the Class B shares' average daily net
assets. The Distributor may voluntarily waive from time to time all or any
portion of its distribution fee. The Distributor has agreed to reduce its fees
to 0.15% of the Class B shares' average daily net assets for the Fixed Income
and Global Fixed Income Portfolios.
E. CUSTODIAN: Morgan Stanley Trust Company ("MSTC"), a wholly-owned subsidiary
of Morgan Stanley Group, Inc., 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 assets held, investment purchases
and sales activity, an account maintenance fee, plus reimbursement for certain
out-of-pocket expenses.
For the year ended December 31, 1996, the following Portfolios incurred custody
fees and had amounts payable to MSTC at December 31, 1996:
<TABLE>
<CAPTION>
MSTC CUSTODY
CUSTODY FEES FEES PAYABLE TO
INCURRED MSTC
(000) (000)
--------------- -----------------
<S> <C> <C>
Active Country Allocation.... $ 227 $ 48
Asian Equity................. 781 182
Emerging Markets............. 3,204 774
European Equity.............. 101 26
Global Equity................ 26 7
Gold......................... 14 1
International Equity......... 622 186
International Magnum......... 73 21
International Small Cap...... 126 31
Japanese Equity.............. 41 11
Latin American............... 90 29
Emerging Markets Debt........ 180 46
Global Fixed Income.......... 42 10
</TABLE>
In addition, for the year ended December 31, 1996, the following Portfolios have
earned interest income and incurred interest expense on balances with MSTC as
follows:
<TABLE>
<CAPTION>
INTEREST INCOME INTEREST EXPENSE
(000) (000)
------------------- -------------------
<S> <C> <C>
Active Country
Allocation............... $ 2 $ 4
Asian Equity.............. 1 31
Emerging Markets.......... 14 119
European Equity........... 31 2
Global Equity............. 1 --
Gold...................... 1 --
International Magnum...... -- 1
Japanese Equity........... -- 1
Latin American............ 1 2
Emerging Markets Debt..... 38 206
Global Fixed Income....... 18 5
</TABLE>
During the year ended December 31, 1996, the Emerging Markets Portfolio owned
shares of affiliated funds for which the Portfolio earned dividend income of
approximately $308,000.
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198
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
F. PURCHASES AND SALES: During the year ended December 31, 1996, purchases and
sales of investment securities, other than long-term U.S. Government securities
and short-term investments, were:
<TABLE>
<CAPTION>
PURCHASES SALES
PORTFOLIO (000) (000)
- ------------------------------------ --------- ---------
<S> <C> <C>
Active Country Allocation........... $ 114,782 $ 108,396
Asian Equity........................ 350,723 272,753
Emerging Markets.................... 963,673 632,208
European Equity..................... 98,430 27,891
Global Equity....................... 20,007 30,242
Gold................................ 44,293 22,036
International Equity................ 604,004 330,607
International Magnum................ 99,527 9,135
International Small Cap............. 74,502 76,633
Japanese Equity..................... 133,742 69,368
Latin American...................... 55,311 48,119
Aggressive Equity................... 207,881 176,566
Emerging Growth..................... 32,718 89,275
Equity Growth....................... 484,502 358,763
Small Cap Value Equity.............. 12,761 43,840
Technology.......................... 7,117 2,682
U.S. Real Estate.................... 293,417 205,048
Value Equity........................ 53,148 109,284
Balanced............................ 2,036 10,436
Emerging Markets Debt............... 984,460 1,061,231
Fixed Income........................ 83,164 79,513
Global Fixed Income................. 191,665 198,548
High Yield.......................... 120,627 91,562
Municipal Bond...................... 16,876 22,981
</TABLE>
Purchases and sales during the year ended December 31, 1996 of long-term U.S.
Government securities occurred in the Balanced, Fixed Income and Global Fixed
Income Portfolios only and totaled:
<TABLE>
<CAPTION>
PURCHASES SALES
PORTFOLIO (000) (000)
- -------------------------------------- ----------- ---------
<S> <C> <C>
Balanced.............................. $ 1,183 $ 7,503
Fixed Income.......................... 188,643 192,850
Global Fixed Income................... 69,484 58,140
</TABLE>
During the year ended December 31, 1996, the following Portfolios paid brokerage
commissions to Morgan Stanley & Co., Incorporated, an affiliated broker/dealer,
of approximately:
<TABLE>
<CAPTION>
BROKERAGE
COMMISSION
PORTFOLIO (000)
- ----------------------------------------------- ---------------
<S> <C>
Asian Equity................................... $ 354
Emerging Markets............................... 290
European Equity................................ 12
Global Equity.................................. 5
International Equity........................... 47
International Magnum........................... 3
Japanese Equity................................ 105
Latin American................................. 3
U.S. Real Estate............................... 8
</TABLE>
G. OTHER: At December 31, 1996, cost, unrealized appreciation, unrealized
depreciation, and net unrealized appreciation (depreciation) for U.S. Federal
income tax purposes of the investments of each Portfolio were:
<TABLE>
<CAPTION>
NET APPREC.
COST APPREC. DEPREC. (DEPREC.)
PORTFOLIO (000) (000) (000) (000)
- ------------------------ --------- --------- --------- -----------
<S> <C> <C> <C> <C>
Active Country
Allocation............. $ 175,563 $ 20,764 $ (13,603) $ 7,161
Asian Equity............ 350,057 50,328 (32,402) 17,926
Emerging Markets........ 1,301,489 217,574 (192,303) 25,271
European Equity......... 147,712 29,358 (4,274) 25,084
Global Equity........... 67,413 20,657 (4,304) 16,353
Gold.................... 30,461 589 (5,776) (5,187)
International Equity.... 1,635,662 540,805 (66,964) 473,841
International Magnum.... 103,581 7,880 (5,131) 2,749
International Small
Cap.................... 212,243 35,733 (21,190) 14,543
Japanese Equity......... 167,186 2,883 (23,960) (21,077)
Latin American.......... 28,992 3,514 (853) 2,661
Aggressive Equity....... 74,862 3,551 (2,169) 1,382
Emerging Growth......... 45,189 22,710 (913) 21,797
Equity Growth........... 405,039 30,016 (4,483) 25,533
Small Cap Value
Equity................. 20,804 4,547 (524) 4,023
Technology.............. 4,525 420 (132) 288
U.S. Real Estate........ 186,125 33,884 (1,875) 32,009
Value Equity............ 92,700 18,519 (1,924) 16,595
Balanced................ 6,979 865 (68) 797
Emerging Markets Debt... 176,805 7,781 (1,598) 6,183
Fixed Income............ 128,848 2,362 (643) 1,719
Global Fixed Income..... 105,410 2,613 (627) 1,986
High Yield.............. 98,278 4,683 (2,848) 1,835
Municipal Bond.......... 38,620 1,000 (51) 949
Money Market............ 1,281,212 -- -- --
Municipal Money
Market................. 719,259 -- -- --
</TABLE>
At December 31, 1996, the following Portfolios had available capital loss
carryforwards to offset future net capital gains, to the extent provided by
regulations, through the indicated expiration dates:
<TABLE>
<CAPTION>
EXPIRATION DATE
DECEMBER 31,
(000)
------------------------------------------
PORTFOLIO 2001 2002 2003 2004 TOTAL
- -------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Emerging Markets.......... $ $ $ 11,112 $ $ 11,112
Japanese Equity........... -- -- 1,668 -- 1,668
Technology................ -- -- -- 4 4
Fixed Income.............. -- 5,532 -- -- 5,532
Global Fixed Income....... -- 2,720 1,780 -- 4,500
High Yield................ -- -- 3,604 -- 3,604
Municipal Bond............ -- -- -- 6 6
Money Market.............. -- 13 -- 469 482
Municipal Money
Market................... 1 7 1 23 32
</TABLE>
During the year ended December 31, 1996, the Japanese Equity, Latin American,
Fixed Income, Global Fixed Income and High Yield Portfolios utilized capital
loss carryforwards for U.S. Federal income tax purposes of approximately
$998,000, $224,000, $2,759,000, $2,572,000, and $1,435,000 respectively.
To the extent that capital loss carryovers are used to offset any future capital
gains realized during the
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199
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
carryover period as provided by U.S. Federal income tax regulations, no capital
gains tax liability will be incurred by a Portfolio for gains realized and not
distributed. To the extent that capital gains are offset, such gains will not be
distributed to the shareholders.
Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first day of the Portfolio's next
taxable year. For the period from November 1, 1996 to December 31, 1996 certain
Portfolios incurred and elected to defer until January 1, 1997 for U.S. Federal
income tax purposes net capital and net currency losses of approximately:
<TABLE>
<CAPTION>
CAPITAL CURRENCY
LOSSES LOSSES
PORTFOLIO (000) (000)
- ----------------------------------------- ----------- -----------
<S> <C> <C>
Asian Equity............................. $ -- $ 369
Emerging Markets......................... -- 274
European Equity.......................... -- 215
Gold..................................... 1,750 --
Japanese Equity.......................... 3,596 --
Latin American........................... -- 4
Emerging Markets Debt.................... -- 72
High Yield............................... 404 --
</TABLE>
During the year ended December 31, 1996, the following Portfolio wrote covered
call options as follows:
COVERED CALL OPTIONS:
<TABLE>
<CAPTION>
FACE AMOUNT PREMIUM
EMERGING MARKETS DEBT PORTFOLIO (000) (000)
- ------------------------------------ ------------- -----------
<S> <C> <C>
Options outstanding at December 31,
1995............................... $ -- $ --
Options written during the period... 78,897 1,569
Options expired during the period... (32,530) (392)
Options exercised during the
period............................. (46,367) (1,177)
------------- -----------
Options outstanding at December 31,
1996............................... $ -- $ --
------------- -----------
------------- -----------
</TABLE>
At December 31, 1996, the net assets of certain Portfolios were substantially
comprised of foreign denominated securities and currency. Changes in currency
exchange rates will affect the U.S. dollar value of and investment income from
such securities.
Assets and liabilities, including Portfolio securities and foreign currency
holdings were translated at the following exchange rates as of December 31,
1996:
<TABLE>
<S> <C> <C> <C>
Argentine Peso...................... 0.99982 = $1.00
Australian Dollar................... 1.25889 = $1.00
Austrian Schilling.................. 10.82950 = $1.00
Belgian Franc....................... 31.72750 = $1.00
Brazilian Real...................... 1.03910 = $1.00
British Pound....................... 0.58374 = $1.00
Canadian Dollar..................... 1.36965 = $1.00
Colombian Peso...................... 1,006.20000 = $1.00
Czech Korona........................ 27.20400 = $1.00
Danish Krone........................ 5.89075 = $1.00
Deutsche Mark....................... 1.53875 = $1.00
Egyptian Pound...................... 3.39250 = $1.00
Finnish Markka...................... 4.60000 = $1.00
French Franc........................ 5.18700 = $1.00
Greek Drachma....................... 246.71000 = $1.00
Hong Kong Dollar.................... 7.73450 = $1.00
Hungarian Forint.................... 161.70000 = $1.00
Indian Rupee........................ 35.85 = $1.00
Indonesian Rupiah................... 2362.00000 = $1.00
Irish Punt.......................... 0.59028 = $1.00
Israeli Shekel...................... 3.24390 = $1.00
Italian Lira........................ 1617.00000 = $1.00
Japanese Yen........................ 115.81000 = $1.00
Korean Won.......................... 845.00000 = $1.00
Malaysian Ringgit................... 2.52550 = $1.00
Mexican Peso........................ 7.88500 = $1.00
Moroccan Dirham..................... 8.75505 = $1.00
Netherlands Guilder................. 1.72760 = $1.00
New Zealand......................... 1.41453 = $1.00
Norwegian Krona..................... 6.37010 = $1.00
Pakistan Rupee...................... 40.07990 = $1.00
Peruvian Sole....................... 2.61150 = $1.00
Philippine Peso..................... 26.30000 = $1.00
Poland Zlotey....................... 2.86740 = $1.00
Portuguese Escudo................... 155.05000 = $1.00
Singapore Dollar.................... 1.39930 = $1.00
South African Rand.................. 4.67850 = $1.00
Spanish Peseta...................... 129.82500 = $1.00
Swedish Krona....................... 6.81635 = $1.00
Swiss Franc......................... 1.33850 = $1.00
Taiwan Dollar....................... 27.50000 = $1.00
Thai Baht........................... 25.64600 = $1.00
Turkey Lira......................... 108,450.00000 = $1.00
Venezuelan Bolivar.................. 476.25500 = $1.00
</TABLE>
From time to time, certain Portfolios of the Fund have shareholders that hold a
significant portion of a Portfolio's outstanding shares. Investment activities
of these shareholders could have a material impact on those Portfolios.
- --------------------------------------------------------------------------------
200
<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, of changes in net assets and of cash flows (the
Emerging Markets Debt Portfolio only) and the financial highlights present
fairly, in all material respects, the financial position of each of the
portfolios constituting Morgan Stanley Institutional Fund, Inc. (the "Fund") at
December 31, 1996, the results of each of their operations, the changes in each
of their net assets, the Emerging Markets Debt Portfolio's cash flows 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, 1996 by
correspondence with the custodians, brokers and counterparties and the
application of alternative auditing procedures where confirmations from brokers
and counterparties 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 10, 1997
- --------------------------------------------------------------------------------
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201
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED):
- --------------------------------------------------------------------------------
For the year ended December 31, 1996, the percentages of distributions taxable
as ordinary income, as reported on Form 1099-DIV, that qualify for the dividends
received deduction for corporations for the Global Equity, Aggressive Equity,
Equity Growth, Small Cap Value Equity, Value Equity, Balanced and High Yield
Portfolios are 28.6%, 5.2%, 8.1%, 60.5%, 64.7%, 29.3% and 2.6%, respectively.
For the year ended December 31, 1996, the percentage of exempt interest
dividends paid by the Municipal Bond and Municipal Money Market Portfolios are
100% and 94%, respectively.
For the year ended December 31, 1996, the following Portfolios intend to pass
through to shareholders foreign tax credits and have derived gross income from
sources within foreign countries amounting to:
<TABLE>
<CAPTION>
FOREIGN TAX
CREDIT FOREIGN SOURCE
PASS-THROUGH INCOME
FUND (000) (000)
- ----------------------------------------------------------------------- ----------------- --------------
<S> <C> <C>
Active Country Allocation.............................................. $ 413 $ 3,409
Asian Equity........................................................... 896 7,437
Emerging Markets....................................................... 2,630 29,870
European Equity........................................................ 471 3,732
Global Equity.......................................................... 149 1,267
International Equity................................................... 5,573 50,453
International Small Cap................................................ 681 5,509
Japanese Equity........................................................ 231 1,534
Global Fixed Income.................................................... 120 4,835
</TABLE>
For the year ended December 31, 1996, the following Portfolios intend to
distribute long-term capital gains totaling:
<TABLE>
<CAPTION>
LONG-TERM
CAPITAL GAINS
FUND (000)
- --------------------------------------------------------------------------------------- -----------------
<S> <C>
Active Country Allocation.............................................................. $ 5,372
Asian Equity........................................................................... 24,144
European Equity........................................................................ 201
Global Equity.......................................................................... 4,766
Gold................................................................................... 32
International Small Cap................................................................ 4,786
Latin American......................................................................... 2,099
Emerging Growth........................................................................ 26,399
Equity Growth.......................................................................... 6,171
Small Cap Value Equity................................................................. 5,183
U.S. Real Estate....................................................................... 412
Value Equity........................................................................... 13,798
Balanced............................................................................... 1,914
</TABLE>
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202
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
- -----------------------------------------------------------------------------
DIRECTORS
Barton M. Biggs
CHAIRMAN OF THE BOARD
Chairman and Director, Morgan Stanley
Asset Management Inc. and Morgan Stanley Asset
Management Limited; Managing Director,
Morgan Stanley & Co. Incorporated; Director,
Morgan Stanley Group Inc.
Frederick B. Whittemore
VICE-CHAIRMAN OF THE BOARD
Advisory Director, Morgan Stanley & Co.,
Incorporated
Warren J. Olsen
DIRECTOR AND PRESIDENT
Principal, Morgan Stanley Asset Management Inc. and
Morgan Stanley & Co. Incorporated
John D. Barrett II
Chairman and Director, Barrett Associates, Inc.
Gerard E. Jones
Partner, Richards & O'Neil LLP
Andrew McNally IV
Chairman and Chief Executive Officer, Rand McNally
Samuel T. Reeves
Chairman of the Board and CEO, Pinacle L.L.C.
Fergus Reid
Chairman and Chief Executive Officer, LumeLite Corporation
Frederick O. Robertshaw
Of Counsel, Bryan, Cave
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
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
OFFICERS
James W. Grisham
VICE PRESIDENT
Michael F. Klein
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Karl O. Hartmann
ASSISTANT SECRETARY
James R. Rooney
TREASURER
Joanna M. Haigney
ASSISTANT TREASURER
FOR CURRENT PERFORMANCE, CURRENT NET ASSET VALUE, OR FOR ASSISTANCE WITH YOUR
ACCOUNT, PLEASE CONTACT THE FUND AT (800) 548-7786.
- --------------------------------------------------------------------------------
203
