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<TABLE>
<S> <C>
DIRECTORS OFFICERS
Barton M. Biggs James W. Grisham
CHAIRMAN OF THE BOARD VICE PRESIDENT
Chairman and Director, Morgan Stanley Asset Management Inc. and Morgan Harold J. Schaaff, Jr.
Stanley VICE PRESIDENT
Asset Management Limited; Managing Joseph P. Stadler
Director, Morgan Stanley & Co. Incorporated VICE PRESIDENT
Michael F. Klein Valerie Y. Lewis
DIRECTOR AND PRESIDENT SECRETARY
Principal, Morgan Stanley Asset Management Inc. and Morgan Stanley & Karl O. Hartmann
Co. Incorporated ASSISTANT SECRETARY
John D. Barrett II Joanna M. Haigney
Chairman and Director, TREASURER
Barrett Associates, Inc. Rene J. Feuerman
Gerard E. Jones ASSISTANT TREASURER
Partner, Richards & O'Neil LLP
Andrew McNally IV
Chairman and Chief Executive Officer, Rand McNally
Samuel T. Reeves
Chairman of the Board and Chief
Executive Officer,
Pinacle Trading L.L.C.
Fergus Reid
Chairman and Chief Executive Officer, LumeLite Corporation
Frederick O. Robertshaw
Of Counsel, Copple, Chamberlin &
Boehm, P.C.
</TABLE>
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INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
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DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
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CUSTODIANS
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
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LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
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INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
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For current performance, current net asset value, or for assistance with your
account, please contact the Fund at (800) 548-7786. This report is authorized
for distribution only when preceded or accompanied by prospectuses of the Morgan
Stanley Institutional Fund, Inc.
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. Box 2798
Boston, MA 02208-2798
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
SMALL CAP VALUE EQUITY PORTFOLIO
THIRD QUARTER REPORT
SEPTEMBER 30, 1997
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Small Cap Value Equity Portfolio invests in equity securities of small to
medium-sized companies that our research indicates are undervalued relative to
the stock market in general at the time of purchase. 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 should 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
PERFORMANCE COMPARED TO THE RUSSELL 2500 INDEX AND S&P 500 INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
----------- ----------- -----------------
<S> <C> <C> <C>
PORTFOLIO--CLASS A............ 40.03% 56.16% 20.11%
PORTFOLIO--CLASS B............ 39.83 55.80 36.01
RUSSELL 2500--CLASS A......... 27.22 34.30 19.77
RUSSELL 2500--CLASS B......... 27.22 34.30 26.66
S&P 500--CLASS A.............. 29.66 40.46 20.59
S&P 500--CLASS B.............. 29.66 40.46 30.08
</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.
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.
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 nine month and one year periods ended September 30, 1997, the Portfolio
had total returns of 40.03% and 56.16%, respectively, for the Class A shares and
39.83% and 55.80%, respectively, for the Class B shares compared to 27.22% and
34.30%, respectively, for the Russell 2500 Index and 29.66% and 40.46%,
respectively, for the S&P 500 Index. From inception on December 17, 1992 to
September 30, 1997, the average annual total for the Class A shares was 20.11%
compared to 19.77% for the Russell 2500 Index and 20.59% for the S&P 500 Index.
From inception on January 2, 1996 to September 30, 1997, the average annual
total return for the Class B shares was 36.01% compared to 26.66% for the
Russell 2500 Index and 30.08% for the S&P 500 Index.
For the three months ended September 30, 1997, the Portfolio had a total return
of 20.47% for the Class A
2
<PAGE>
shares and 20.37% for the Class B shares as compared to a total return of 14.35%
for the Russell 2500 Index and 7.50% for the S&P 500 Index.
Stock selection was the primary driver of the Portfolio's third quarter
outperformance, with modest support from an overweighting in financial stocks
and an underweighting in utility stocks. Individual companies which were
additive to performance included Nellcor Puritan Bennett (with total return for
the quarter of 56.2%), SCI Systems (55.5%), Herman Miller (48.8%), Noble
Drilling (44.4%) and Air Express International (38.0%).
We continue to look for industries and stocks which benefit from corporate
outsourcing, consolidation and pricing flexibility. Sectors that currently
exhibit one or more of these characteristics are financials, energy and
business services. Conversely, we avoid areas that are plagued by government
regulation and inquiry, commodity pricing or unsustainable growth. Utilities,
basic resources, and selected healthcare and technology stocks currently fall
into the latter category.
Despite a favorable backdrop of low inflation, low interest rates and steady
economic growth, recent comments by Federal Reserve Chairman Greenspan and an
uptick in producer prices suggest that investment caution is warranted.
Gary G. Schlarbaum
PORTFOLIO MANAGER
William Gerlach
PORTFOLIO MANAGER
October 1997
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCKS (99.2%)
AEROSPACE (0.3%)
3,100 Coltec Industries, Inc. $ 67
2,600 Doncasters plc ADR 78
---------
145
---------
BANKING (11.4%)
6,300 City National Corp. 202
3,700 Colonial Bancgroup Inc. 106
5,700 Comerica, Inc. 450
7,400 Community First Bankshares, Inc. 359
8,200 Crestar Financial Corp. 384
5,000 Cullen/Frost Bankers, Inc. 237
8,400 First Alliance Corp. 265
6,000 First of America Bank Corp. 322
1,700 GreenPoint Financial Corp. 108
4,200 Long Island Bancorp, Inc. 197
6,200 Money Store, Inc. 177
16,400 North Fork Bancorp, Inc. 476
4,000 Nothern Trust Corp. 236
800 Prime Bancshares, Inc. 15
7,800 Southtrust Corp. 384
8,401 Summit Bancorp. 373
6,600 Trans Financial, Inc. 210
2,400 UnionBanCal Corp. 208
2,500 Wilmington Trust Corp. 137
---------
4,846
---------
BUILDING (2.1%)
5,800 Champion Enterprises, Inc. 111
3,450 Hughes Supply, Inc. 104
7,800 Southdown, Inc. 426
5,600 USG Corp. 269
---------
910
---------
CAPITAL GOODS (3.1%)
5,900 Aeroquip-Vickers, Inc. 289
3,400 Case Corporation 227
2,000 Credence Systems Corp. 98
1,200 Electro Scientific Industries,
Inc. 73
10,100 Herman Miller, Inc. 540
3,700 Semitool, Inc. 93
---------
1,320
---------
CHEMICALS (1.2%)
2,400 Fuller (H.B.) Co. 130
7,500 Quaker Chemical Corp. 141
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
5,700 USA Waste Services, Inc. $ 227
---------
498
---------
COMMUNICATIONS (3.2%)
25,200 Journal Register Co. 495
5,100 McClatchy Newspapers, Inc. 175
1,700 New York Times Co., Class A 89
10,200 Nextel Communications, Inc., Class
A 295
4,000 Valassis Communications, Inc. 127
400 Washington Post Co., Class B 179
---------
1,360
---------
COMPUTERS (7.2%)
4,700 Altera Corp. 241
1,600 BMC Software, Inc. 104
2,100 Box Hill Systems Corp. 37
4,100 Cadence Design Systems, Inc. 219
4,600 Ceridian Corp. 170
7,900 Computer Products, Inc. 235
6,400 Converse Technology, Inc. 338
6,800 Elbit Systems, Ltd. 93
5,800 Fiserv, Inc. 254
2,800 Gateway 2000, Inc. 88
16,300 HMT Technology Corp. 256
8,400 MicroAge, Inc. 244
5,800 Solectron Corp. 258
3,800 Storage Technology Corp. 182
5,700 Tech Data Corp. 262
6,200 Technology Modeling Associates,
Inc. 95
---------
3,076
---------
CONSUMER-DURABLES (2.7%)
8,200 Arvin Industries, Inc. 322
8,000 Datascope Corp. 176
3,200 Dura Pharmaceuticals, Inc. 140
4,300 Furniture Brands International,
Inc. 81
11,900 VIVUS, Inc. 446
---------
1,165
---------
CONSUMER-RETAIL (7.6%)
3,000 Brylane, Inc. 138
2,500 Crane Co. 103
7,100 CVS Corp. 404
2,200 Fred Meyer, Inc. 117
2,400 Neiman Marcus Group, Inc. 77
12,300 Office Depot, Inc. 248
12,750 Pier 1 Imports, Inc. 229
5,200 Premark International, Inc. 166
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
CONSUMER-RETAIL (CONT.)
10,500 Ross Stores, Inc. $ 358
10,400 ShopKo Stores, Inc. 270
3,000 Stage Stores, Inc. 129
14,000 TJX Cos., Inc. 428
3,200 Tommy Hilfiger Corp. 160
4,300 V.F. Corp. 398
---------
3,225
---------
CONSUMER-SERVICE & GROWTH (2.0%)
7,100 Danka Business Systems plc ADR 316
3,600 EVI, Inc. 230
2,900 Forecenergy, Inc. 113
5,300 Nabors Industries, Inc. 206
---------
865
---------
CONSUMER-STAPLES (3.0%)
6,900 Arbor Drugs, Inc. 161
3,800 Dean Foods Co. 176
2,100 Doubletree Corp. 101
3,200 Interstate Bakeries Corp. 219
1,400 Lancaster Colony Corp. 74
10,300 Richfood Holdings, Inc. 267
4,000 SL Green Realty Corp. REIT 104
5,100 Security Capital Group, Inc.,
Class B 175
---------
1,277
---------
ELECTRIC (1.7%)
5,100 Black Hills Corp. 149
11,700 SCI Systems, Inc. 580
---------
729
---------
ENERGY (7.0%)
4,400 Apache Corp. 189
200 Arch Coal, Inc. 6
3,500 Columbia Gas System, Inc. 245
6,300 Diamond Offshore Drilling, Inc. 348
1,200 El Paso Natural Gas Co. 73
15,700 Falcon Drilling Co., Inc. 554
4,300 New Century Energies, Inc. 179
2,600 Noble Affiliates, Inc. 116
4,700 Noble Drilling Corp. 152
1,800 Pacific Enterprises 61
2,400 Sun Co., Inc. 105
3,000 Transocean Offshore, Inc. 144
5,800 Union Texas Petro Holdings, Inc. 136
4,000 United Meridian Corp. 147
2,400 Vintage Petroleum, Inc. 118
7,700 Weatherford Enterra, Inc. 410
---------
2,983
---------
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
ENTERTAINMENT (2.4%)
3,500 MGM Grand, Inc. $ 152
24,400 Universal Corp. 885
---------
1,037
---------
FINANCIAL-DIVERSIFIED (2.8%)
5,600 Bear Stearns Cos., Inc. 246
4,600 Capital One Financial Corp. 210
5,400 First Financial Corp. 184
5,600 National Commerce Bancorp 153
6,100 S & P Mid-Cap 400 Depositary
Receipts 393
725 Wellsford Real Properties, Inc. 12
---------
1,198
---------
HEALTH CARE (5.2%)
3,900 Biogen, Inc. 127
10,400 FPA Medical Management, Inc. 357
2,500 Health Care & Retirement Corp. 93
1,300 Healthcare Financial Partners,
Inc. 40
2,600 ICN Pharmaceuticals, Inc. 128
4,200 Marquette Medical Systems, Class A 130
3,900 RoTech Medical Corp. 75
15,900 Sullivan Dental Products, Inc. 407
4,500 Universal Health Services, Inc.,
Class B 195
2,100 Watson Pharmaceuticals, Inc. 126
9,200 Wellpoint Health Networks, Inc. 533
---------
2,211
---------
INDUSTRIAL (9.9%)
2,600 AGCO Corp. 82
7,300 BJ Services Co. 542
14,400 CDI Corp. 544
4,900 Culp, Inc. 102
8,300 Franklin Resources, Inc. 773
3,200 Halter Marine Group, Inc. 155
3,300 Hirsch International Corp., Class
A 58
7,000 Intevac, Inc. 99
5,300 Lear Corp. 261
3,400 Lone Star Industries, Inc. 184
4,100 MascoTech, Inc. 84
4,800 NS Group, Inc. 155
6,200 Teradyne, Inc. 334
13,500 Tetra Technologies, Inc. 312
2,900 Trinity Industries, Inc. 140
3,800 Triumph Group, Inc. 127
5,500 Tuboscope Vetco International
Corp. 172
2,000 Varco International, Inc. 97
---------
4,221
---------
INSURANCE (4.4%)
3,000 AMBAC, Inc. 122
4,700 CMAC Investment Corp. 252
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
INSURANCE (CONTINUED)
4,900 Everest Reinsurance Holdings, Inc. $ 201
2,700 Hartford Life, Inc., Class A 104
3,100 Mercury General Corp. 271
17,500 Nationwide Financial Services,
Inc., Class A 488
1,700 Old Republic International Corp. 66
4,400 Torchmark Corp. 173
7,600 Western National Corp. 218
---------
1,895
---------
METALS (2.0%)
9,600 General Cable Corp. 341
2,700 Kaydon Corp. 162
5,300 Precision Castparts Corp. 344
---------
847
---------
PAPER & PACKAGING (1.5%)
10,000 P.H. Glatfelter Co. 222
4,000 Schweitzer-Mauduit International,
Inc. 170
6,600 U.S. Office Products 233
---------
625
---------
RESTAURANTS (0.5%)
8,400 Applebee's International, Inc. 210
---------
SERVICES (3.0%)
17,000 AccuStaff, Inc. 535
14,800 Interim Services, Inc. 416
3,900 Personnel Group of America, Inc. 134
7,200 Russ Berrie & Co., Inc. 211
---------
1,296
---------
TECHNOLOGY (5.9%)
6,100 CTB International Corp. 96
1,600 Coherent, Inc. 89
2,800 Cooper Cameron Corp. 201
25,300 Healthdyne Technologies, Inc. 471
6,400 Inacom Corp. 238
700 Innovex, Inc. 23
2,800 KLA-Tencor Corp. 189
4,600 Quantum Corp. 176
17,600 Symantec Corp. 400
2,200 Tektronix, Inc. 148
2,800 Veritas DGC, Inc. 119
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
4,200 Vishay Intertechnology, Inc. $ 111
2,100 Western Atlas, Inc. 185
1,600 Xilinx, Inc. 81
---------
2,527
---------
TOBACCO (1.4%)
3,600 Consolidated Cigar Holdings, Inc. 147
17,600 DIMON, Inc. 440
---------
587
---------
TRANSPORTATION (6.1%)
23,900 Air Express International Corp. 872
2,000 Airborne Freight Corp. 121
11,000 Arnold Industries, Inc. 257
8,300 CNF Transportation, Inc. 362
5,000 Expeditors International of
Washington, Inc. 209
7,200 Harley-Davidson, Inc. 210
1,400 Hertz Corp., Class A 53
3,000 Lubrizol Corp. 126
3,500 PACCAR, Inc. 196
4,100 Tower Automotive, Inc. 185
---------
2,591
---------
UTILITIES (1.6%)
5,600 IPALCO Enterprises, Inc. 192
6,200 LG&E Energy Corp. 138
2,700 NICOR, Inc. 101
3,000 Oneok, Inc. 98
4,700 Pinnacle West Capital Corp. 158
---------
687
---------
TOTAL COMMON STOCKS (Cost $34,960) 42,331
---------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENT (1.5%)
REPURCHASE AGREEMENT (1.5%)
$648 Chase Securities, Inc. 5.75%,
dated 9/30/97, due 10/01/97, to
be repurchased at $648
collateralized by U.S. Treasury
Notes, 6.625%, due 3/31/02,
valued at $666 (Cost $648) 648
---------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AMOUNT
(000)
---------
<C> <S> <C>
TOTAL INVESTMENTS (100.7%) (Cost $35,608) $ 42,979
---------
OTHER ASSETS AND LIABILITIES (-0.7%)
Other Assets 190
Liabilities (477)
---------
(287)
---------
NET ASSETS (100%) $ 42,692
---------
---------
CLASS A:
- ------------
NET ASSETS $34,648
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 2,364,674 outstanding $0.001 par
value shares (authorized 500,000,000 shares)
$14.65
---------
---------
CLASS B:
- ------------
NET ASSETS $8,044
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE
Applicable to 549,793 outstanding $0.001 par value
shares (authorized 500,000,000 shares)
$14.63
---------
---------
</TABLE>
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ADR -- American Depositary Receipt
REIT -- Real Estate Investment Trust
7
