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MORGAN STANLEY
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
SEMI-ANNUAL REPORT
JUNE 30, 1997
[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.............................. 16
Emerging Markets.......................... 21
European Equity .......................... 29
Global Equity ............................ 34
Gold...................................... 39
International Equity ..................... 42
International Magnum ..................... 49
International Small Cap................... 55
Japanese Equity........................... 60
Latin American............................ 64
U.S. Equity Portfolios:
Aggressive Equity......................... 69
Emerging Growth........................... 74
Equity Growth............................. 79
Small Cap Value Equity.................... 84
Technology................................ 89
U.S. Real Estate.......................... 94
Value Equity.............................. 99
Balanced Portfolio.......................... 103
Fixed Income Portfolios:
Emerging Markets Debt..................... 107
Fixed Income.............................. 112
Global Fixed Income....................... 116
High Yield................................ 120
Municipal Bond............................ 125
Money Market Portfolios:
Money Market.............................. 129
Municipal Money Market.................... 133
Statement of Operations..................... 141
Statement of Changes in Net Assets.......... 145
Financial Highlights ....................... 158
Notes to Financial Statements............... 183
Officers and Directors ..................... 192
</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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[LOGO] Morgan Stanley
Institutional Fund, Inc.
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PRESIDENT'S LETTER
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FELLOW SHAREHOLDERS:
We are pleased to present to you the Fund's semi-annual report for the six
months ended June 30, 1997. Our Fund now offers 27 portfolios, including 11
global and international equity portfolios, eight U.S. equity portfolios, a
balanced portfolio, five fixed-income portfolios and two money market
portfolios.
The performance of each of the portfolios and commentaries from the
portfolio managers discussing the results of each portfolio are contained in
this report. The investment performance of the portfolios relative to their
respective benchmarks is also presented in the performance summary on page two
of this report. For the first half of 1997, approximately 70% of the Fund's
portfolios met or exceeded their benchmarks and eleven of twelve of our global
and international equity and bond portfolios performed at or above their
benchmark returns.
The beginning of the first quarter of 1997 saw continued strength in most
equity markets, as prices were driven higher by, among other factors, a
supportive interest rate environment, favorable market sentiment as well as by
continued impressive mutual fund flows. By March, however, investors began to
focus on the likelihood of a Federal Reserve-induced hike in short-term interest
rates, and many markets sold off considerably. Global fixed-income markets had
more disparate returns over the quarter, with the U.S. and high yielding
European markets retreating while Japan continued to rally.
The second quarter of 1997 provided investors with almost an ideal
investment environment. Markets around the world posted impressive gains, many
reaching new highs, driven by contained inflation, surging liquidity and
improving corporate earnings. The supportive environment and the lack of further
hikes in the Federal Funds rate allowed bond yields to fall almost 70 basis
points in the U.S. during the first half of the year, and international markets
rallied as well. Japan was the notable exception, as stronger than expected
growth resulted in negative bond returns for the second quarter.
On July 31, 1997, the Fund began offering shares of its newest portfolio --
the Equity Plus Portfolio -- which invests primarily in equity securities of
issuers included in the S&P 500. The Portfolio seeks to achieve a total return
that exceeds the S&P 500 with price volatility similar to that of the S&P 500.
Our portfolio managers have provided their insights as to the outlook for
the remainder of 1997 in their commentaries. We hope you find their reports
informative. As always, we sincerely appreciate your support of the Fund.
Sincerely,
[SIGNATURE]
Michael F. Klein
PRESIDENT
August 1997
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1
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
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PERFORMANCE SUMMARY (UNAUDITED)
JUNE 30, 1997
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<TABLE>
<CAPTION>
NET ASSETS NET ASSET VALUE
INCEPTION DATES (000) PER SHARE SIX MONTH TOTAL RETURN
------------------ ------------------- ---------------- ---------------------------
COMPARABLE
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B INDICES
-------- -------- ---------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GLOBAL AND INTERNATIONAL
EQUITY PORTFOLIOS:
Active Country Allocation 1/17/92 1/02/96 $ 142,237 $ 29 $ 12.99 $ 12.97 13.55% 13.37% 11.21%(1)
Asian Equity 7/01/91 1/02/96 318,844 4,884 19.16 19.15 2.30 2.19 0.19(2)
Emerging Markets 9/25/92 1/02/96 1,808,434 14,489 18.44 18.42 25.78 25.65 17.10(3)
European Equity 4/02/93 1/02/96 239,958 4,125 19.18 19.14 14.85 14.82 14.26(4)
Global Equity 7/15/92 1/02/96 96,056 5,063 18.97 18.90 16.81 16.60 15.38(5)
Gold 2/01/94 1/02/96 24,180 1,119 6.60 6.60 -28.86 -28.75 -17.73(6)
International Equity 8/04/89 1/02/96 2,840,689 3,008 19.59 19.54 15.58 15.42 11.21(1)
International Magnum 3/15/96 3/15/96 140,458 30,351 12.37 12.33 16.04 15.99 11.21(1)
International Small Cap 12/15/92 -- 266,527 -- 18.20 -- 8.14 -- 11.21(1)
Japanese Equity 4/25/94 1/02/96 172,141 2,408 9.82 9.77 23.37 23.05 9.07(7)
Latin American 1/18/95 1/02/96 75,766 3,374 16.31 16.28 44.08 43.94 40.50(8)
U.S. EQUITY PORTFOLIOS:
Aggressive Equity 3/08/95 1/02/96 133,897 14,402 16.40 16.39 13.76 13.71 20.61(10)
Emerging Growth 11/01/89 1/02/96 58,596 1,097 13.60 13.53 0.74 0.60 11.70(9)
Equity Growth 4/02/91 1/02/96 500,808 8,449 16.97 16.94 13.74 13.62 20.61(10)
Small Cap Value Equity 12/17/92 1/02/96 27,149 4,067 12.60 12.59 16.23 16.17 11.25(11)
Technology 9/16/96 9/16/96 16,214 1,334 13.65 13.62 27.45 27.17 20.61(10)
U.S. Real Estate 2/24/95 1/02/96 299,436 12,251 15.98 15.93 11.46 11.20 5.73(12)
Value Equity 1/31/90 1/02/96 97,500 1,975 15.66 15.62 13.49 13.13 20.61(10)
BALANCED PORTFOLIO 2/20/90 1/02/96 5,439 1,246 8.75 8.72 8.01 7.70 11.36(13)
FIXED INCOME PORTFOLIOS:
Emerging Markets Debt 2/01/94 1/02/96 162,199 2,933 8.84 8.82 17.24 17.13 10.27(14)
Fixed Income 5/15/91 1/02/96 133,959 2,663 10.64 10.65 3.13 3.16 3.09(15)
Global Fixed Income 5/01/91 1/02/96 85,760 405 11.01 11.00 -1.07 -1.12 -1.09(16)
High Yield 9/28/92 1/02/96 111,679 5,737 11.33 11.31 7.55 7.32 5.88(17)
Municipal Bond 1/18/95 1/02/96 53,554 -- 10.31 -- 2.42 -- 2.63(18)
MONEY MARKET PORTFOLIOS:
Money Market 11/15/88 -- 1,275,275 -- 1.00 -- 2.50 -- --
Municipal Money Market 2/10/89 -- 711,656 -- 1.00 -- 1.52 -- --
</TABLE>
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<TABLE>
<CAPTION>
YIELD INFORMATION AS OF JUNE 30, 1997
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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 8.07% 7.90% Money Market 5.11% 5.24% 5.11% 5.02%(19)
Fixed Income 6.31 6.15 Municipal Money Market 3.67 3.74 3.36 3.28(20)
Global Fixed Income 4.97 4.82
High Yield 8.20 7.95
Municipal Bond 4.45 --
</TABLE>
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+The 7 day current yield and 7 day effective yield assume an annualization of
the current yield at June 30, 1997 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 indiciative of future performance.
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2
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<TABLE>
<CAPTION>
AVERAGE ANNUAL FIVE AVERAGE ANNUAL TOTAL
ONE YEAR TOTAL RETURN YEAR TOTAL RETURN RETURN SINCE INCEPTION
- ------------------------------- --------------------------- -------------------------------------------------------------
COMPARABLE COMPARABLE COMPARABLE COMPARABLE
CLASS A CLASS B INDICES CLASS A INDICES CLASS A INDICES--CLASS A CLASS B INDICES--CLASS B
- ------- ------- ----------- ------------ ------------ ----------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
15.17% 14.86% 12.84%(1) 11.32% 12.83%(1) 10.43% 10.51%(1) 15.39% 11.65%(1)
0.11 -0.14 0.95(2) 14.43 12.73(2) 17.09 15.47(2) 3.44 6.01(2)
17.28 17.07 11.31(3) -- -- 17.01 15.01(3) 24.98 16.71(3)
25.57 25.20 29.99(4) -- -- 21.03 18.83(4) 24.47 23.78(4)
26.51 26.05 22.27(5) -- -- 20.87 15.17(5) 26.64 19.45(5)
- -35.04 -35.04 -22.07(6) -- -- -4.26 -8.13(6) -13.40 -16.41(6)
24.18 23.79 12.84(1) 17.92 12.83(1) 13.23 5.15(1) 23.39 11.65(1)
20.32 20.11 12.84(1) -- -- 19.29 14.07(1) 18.95 14.07(1)
9.22 -- 12.84(1) -- -- 16.49 14.89(1) -- --(1)
12.87 12.26 -8.87(7) -- -- 4.55 -1.81(7) 13.61 -4.83(7)
59.31 59.04 45.84(8) -- -- 31.55 19.16(8) 61.74 41.20(8)
30.71 30.50 34.70(10) -- -- 42.33 32.98(10) 36.35 29.55(10)
-2.42 -2.65 21.69(9) 8.65 20.67(9) 11.25 16.22(9) 2.79 23.02(9)
27.71 27.35 34.70(10) 20.92 19.78(10) 18.01 18.05(10) 29.80 29.55(10)
30.24 30.00 20.09(11) -- -- 16.45 17.44(11) 26.54 20.48(11)
36.50* 36.20* 32.12*(10) -- -- -- -- -- --
40.01 39.54 33.87(12) -- -- 30.94 23.59(12) 33.36 27.09(12)
25.18 24.80 34.70(10) 17.24 19.78(10) 13.97 17.86(10) 21.74 29.55(10)
15.30 14.82 20.86(13) 11.41 13.25(13) 10.82 12.42(13) 12.18 17.62(13)
49.05 48.77 33.04(14) -- -- 21.51 14.37(14) 44.89 32.32(14)
8.89 8.75 8.15(15) 7.25 7.12(15) 8.19 8.15(15) 5.05 4.54(15)
5.09 4.91 4.48(16) 6.38 7.26(16) 7.60 8.83(16) 3.28 2.17(16)
18.40 18.15 14.66(17) -- -- 13.21 11.38(17) 14.71 12.28(17)
6.28 -- 7.03(18) -- -- 6.07 7.73(18) -- --
-- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
</TABLE>
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* Cumulative (unannualized) total return since inception of the Portfolio.
<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 Equity
(13) Indata Balanced-Median
(14) J.P. Morgan Emerging Markets Bond Plus
(15) Lehman Aggregate Bond
(16) J.P. Morgan Traded Global Bond
(17) CS First Boston High Yield
(18) Lehman 7-Year Municipal Bond
(19) IBC Money Fund Comparable Yield
(20) 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
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
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OVERVIEW
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ACTIVE COUNTRY ALLOCATION PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 2.0%
France 8.2%
Germany 9.6%
Hong Kong 3.5%
Italy 3.8%
Japan 32.5%
Korea 1.2%
Netherlands 3.6%
Singapore 4.0%
Spain 3.6%
Sweden 3.4%
Switzerland 4.3%
Thailand 1.4%
United Kingdom 16.2%
Other 2.7%
</TABLE>
PERFORMANCE COMPARED TO MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE
INDEX(1)
- --------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS
A.................... 13.55% 15.17% 11.32% 10.43%
PORTFOLIO -- CLASS
B.................... 13.37 14.86 N/A 15.39
INDEX -- CLASS A..... 11.21 12.84 12.83 10.51
INDEX -- CLASS B..... 11.21 12.84 N/A 11.65
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australasia and the Far East (includes dividends 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 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 six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 13.55% and 15.17%, respectively, for the Class A shares; and
13.37% and 14.86%, respectively, for the Class B shares as compared to total
returns of 11.21% and 12.84%, respectively, for the Morgan Stanley Capital
International (MSCI) EAFE Index (the "Index"). For the five-year period ended
June 30, 1997, the average annual total return for Class A was 11.32% as
compared to 12.83% for the Index. From inception on January 17, 1992 to June 30,
1997, the average annual total return of Class A was 10.43% as compared to
10.51% for the Index. From inception on January 2, 1996 to June 30, 1997, the
average annual total return of Class B was 15.39% as compared to 11.65% for the
Index.
The returns for the second quarter of 1997 for selected indices is shown below:
<TABLE>
<CAPTION>
MSCI INDICES USD LOCAL
- --------------------------------------- ----------- -----------
<S> <C> <C>
EAFE................................... 12.98% 11.68%
Europe................................. 8.94 11.12
Japan.................................. 23.67 14.30
Pacific Ex-Japan....................... 6.64 8.30
Emerging Markets....................... 9.17 10.77
</TABLE>
PERFORMANCE REVIEW:
Driven by liquidity and lower interest rates, global equity markets continued
their inexorable climb during the second quarter. The Portfolio's neutral weight
in Japan served us well as Japan rallied sharply between mid-April and mid-May
from 17,500 to 20,500. Within Europe, underweights to the high flying, very
fully valued Dutch (+13.5%) and Swiss markets (+19.0%) were offset by an
overweight to Spain (+22.3%) and some tactical shifts in France and the U.K.
During the quarter we reduced the U.K. slightly before the election, and
increased Italy 1-2.%
In June, we removed the underweight to Japanese banks as the market rallied and
investors began to differentiate between high and low quality banks.
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ACTIVE COUNTRY ALLOCATION PORTFOLIO
4
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
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OVERVIEW
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ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
Importantly, Japanese real estate has bottomed and the possibility of further
loan securitization and international partnerships is high.
In Asia, our slight underweight in Hong Kong early in the second quarter cost us
a few basis points of return, although we raised our allocation in mid-June. Our
zero weight in Malaysia added significantly to returns as the market fell a
precipitous 11.8% for the second quarter. Singapore, where we were overweight,
disappointed with flat returns. New Zealand, an underperformer in the first
quarter, rallied 13.5% on the back of interest rate reductions, while Australia
trailed at a respectable +8.8%. We have no allocation to New Zealand due to
heavy exposure to NZ Telecom and pulp and paper, and we are benchmark neutral in
Australia. In early July we sold our small positions in Thailand and Korea which
had rallied 35% and 24% respectively, and took the opportunity to exit these
markets while both were cheap. Slow export growth and indications that economic
structural issues will take some time to be worked out diluted our earlier
enthusiasm for these markets.
During the second quarter, currency hedging added to returns. We reduced the yen
hedge to zero at $/Y127, reinstated it at $/Y113 for a time and then reduced it
back to zero at $/Y113 by quarter-end. Unlike the yen, continental European
currencies continued their decline against the dollar throughout the quarter,
falling by about 5%. In June, we removed the deutsche mark and Swiss franc
hedges entirely and reduced currency hedges against the French franc, Dutch
guilder, and Spanish peseta to 25%. European currencies should continue to
weaken, but the deutsche mark and the Swiss franc are subject to periodic EMU
related strength. Other European currencies have weakened substantially and are
beginning to gain support from economic recoveries. We believe the yen is stuck
in a trading range: bound by its trade surplus on one side and low interest
rates and weak economic fundamentals on the other.
INVESTMENT OUTLOOK:
Overall, the markets performed exceptionally in the first half, and we are
increasingly uneasy about valuation levels and the rate of change. With few
exceptions, European markets appear to be experiencing a demand-driven blow-off.
Current valuations leave no room for short-term setbacks -- such as earnings
disappointments or further intransigence on structural pension and tax reform in
Germany, Italy, Spain and France. Since quarter end, we have selectively been
raising cash to between 7% and 10%. Most of the monies have been shaved off of
European weights (the Netherlands, France, and the U.K.), and we have pulled
back on select Asian markets (such as Hong Kong and Singapore) which are highly
correlated to the U.S. We added a few percentage points to Italy, a market which
has underperformed, is undervalued, and should benefit from lower short-term
interest rates. The U.K. underweight is due to the impact of sterling strength
on profits, continued 1997 earnings downgrades and the belief that short rates
need to rise further.
Target portfolio weights are now slightly underweight Europe (53% vs. 57%), Asia
(8% vs. 10%), and Japan (31% vs. 33%), with 8% cash.
JAPAN
While it appears that the Japanese economy has withstood the effects of the
April 1 consumption tax hike, it has done so with the aid of the lagged effect
of a weak yen, loose monetary policy, and increased foreign demand. The June
Tankan survey showed that small and medium sized companies -- which employ 75%
of Japanese workers -- are still depressed. Japanese domestic demand needs to
improve in order for the market to broaden beyond the current focus on a few,
over-owned, high-growth exporters. Signs of personal income growth and improved
investment spending are positive. Continued government fiscal consolidation will
not be helpful, but a less splintered LDP may adopt bolder structural reforms.
EUROPE
In Europe, markets have been focused on economic growth and the likelihood that
neither France nor Germany will achieve the 3% deficit-to-GDP ratio for Economic
and Monetary Union (EMU). The much awaited budget of the new Socialist-led
French government alleviated many fears, as corporate taxes were raised in an
attempt to keep the country on course to join EMU. While German political
squabbling about strict adherence to the 3% level continues, we agree with the
consensus that EMU will go forward, but with a larger number of countries and a
weaker Euro. EMU, though not without its risks, should be very positive for
Europe. Productive capital allowed to flow freely across borders without
currency risk will increase competition for investment and jobs, lower taxes on
capital and improve wage and labor
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Active Country Allocation Portfolio
5
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
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ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
flexibility. We have already seen evidence of corporate consolidation and
government de-regulation in preparation, and we believe the trend will continue.
ASIA
Asian news has been dominated by the devaluation of the Thai baht and its
contagion to the Philippines, Indonesia, Malaysia, Singapore and most recently
Hong Kong. While parallels to Mexico in 1994 are inevitable, we do not think
they are valid. Compared to Latin America, Asian average growth rates are much
faster (4.5% versus 7.0%) and levels of indebtedness much lower (99% versus
203%). Property price levels and current account deficits need to come down, but
deep recessions will not be necessary to maintain stability. Though disruptive,
softening the Asian currency peg to the U.S. Dollar is a long-term policy
positive and an indication of financial market maturity. We have gone to an
underweight in the region because of reduced investor flows, the competitive
squeeze on profits, and the high Asian correlation with the U.S. market in
market pullbacks. However, many Asian markets, like Malaysia and Singapore are
back at 1990 valuation levels. At a later date, underowned, more competitive,
and ignored -- they should be poised to outperform.
Barton M. Biggs
PORTFOLIO MANAGER
Madhav Dhar
PORTFOLIO MANAGER
Francine J. Bovich
PORTFOLIO MANAGER
Ann D. Thivierge
PORTFOLIO MANAGER
July 1997
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ACTIVE COUNTRY ALLOCATION PORTFOLIO
6
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (96.7%)
AUSTRALIA (1.8%)
10,800 Amcor Ltd......................................... $ 72
5,800 Australian Gas Light Co., Ltd..................... 34
15,900 Australian National Industries Ltd................ 19
20,250 Boral Ltd......................................... 64
3,900 Brambles Industries Ltd........................... 77
30,987 Broken Hill Proprietary Co., Ltd.................. 456
8,997 Burns, Philip & Co., Ltd.......................... 17
8,276 Coca Cola Amatil Ltd.............................. 107
17,714 Coles Myer Ltd.................................... 92
(a)9,183 Crown Ltd......................................... 15
18,200 CSR Ltd........................................... 71
31,000 Fosters Brewing Corp.............................. 58
10,100 Gio Australia Holdings Ltd........................ 31
20,082 Goodman Fielder Ltd............................... 30
5,500 ICI Australia Ltd................................. 54
4,100 Leighton Holdings Ltd............................. 20
4,400 Lend Lease Corp., Ltd............................. 93
27,261 MIM Holdings Ltd.................................. 40
22,440 National Australia Bank Ltd....................... 322
4,837 Newcrest Mining Ltd............................... 13
30,846 News Corp., Ltd................................... 148
25,891 Normandy Mining Ltd............................... 29
12,765 North Ltd......................................... 49
14,700 Pacific Dunlop Ltd................................ 44
15,600 Pioneer International Ltd......................... 60
3,700 Plutonic Resources Ltd............................ 12
3,149 Renison Goldfields Consolidated Ltd............... 12
5,300 Rio Tinto, Ltd.................................... 90
9,925 Santos Ltd........................................ 42
3,300 Smith (Howard) Ltd................................ 31
2,000 Sons of Gwalia Ltd................................ 7
10,267 Southcorp Holdings Ltd............................ 38
5,400 TABCORP Holdings Ltd.............................. 29
1,067 Westfield Trust (New)............................. 2
28,000 Westpac Banking Corp.............................. 169
16,166 WMC Ltd........................................... 102
----------
2,549
----------
FRANCE (8.1%)
1,108 Accor S.A......................................... 166
4,039 Alcatel Alsthom................................... 506
9,417 AXA S.A. ......................................... 586
5,723 Banque Nationale de Paris......................... 236
925 BIC Corp. ........................................ 151
713 Bouygues.......................................... 59
(a)889 Canal Plus........................................ 173
1,075 Carrefour S.A. ................................... 781
2,450 Casino Guichard-Perrachon......................... 121
801 Cie Bancaire S.A.................................. 102
2,289 Cie de Saint Gobain............................... 334
84,260 Cie de Suez, S.A.................................. 207
3,611 Cie Financiere de Paribas S.A., Class A........... 250
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
3,133 Cie Generale des Eaux............................. $ 402
7,100 Elf Aquitaine S.A. ............................... 766
825 Eridania Beghin-Say S.A. ......................... 124
300 Essilor International............................. 81
2,133 Groupe Danone..................................... 352
2,021 Havas S.A......................................... 146
2,010 L'air Liquide..................................... 319
1,430 L'air Liquide RFD................................. 227
2,592 Lafarge S.A....................................... 161
3,000 Lagardere S.C.A. ................................. 87
855 Legrand........................................... 151
(a)1,835 L'OREAL........................................... 773
2,400 LVMH Moet Hennessy Louis Vuitton.................. 645
1,739 Lyonnaise des Eaux................................ 175
3,364 Michelin Compagnie Generale des Establissements,
Class B......................................... 202
1,850 Pernod Ricard..................................... 95
605 Pinault-Printemps S.A. ........................... 291
520 Promodes.......................................... 203
1,450 PSA Peugeot Citroen S.A. ......................... 140
9,342 Rhone-Poulenc S.A., Class A....................... 382
130 Sagem............................................. 66
2,976 Sanofi S.A........................................ 292
3,641 Schneider S.A..................................... 194
(a)58 Simco S.A. (New).................................. 5
675 Simco S.A. (RFD).................................. 54
100 Societe Eurafrance S.A............................ 41
2,731 Societe Generale.................................. 305
200 Sodexho S.A....................................... 102
3,296 Thomson CSF....................................... 85
6,654 Total S.A., Class B............................... 673
6,900 Usinor Sacilor.................................... 124
1,800 Valeo S.A......................................... 112
1,740 Worms et Compagnie................................ 103
----------
11,550
----------
GERMANY (9.3%)
1,200 Adidas AG......................................... 134
(a)850 AGIV AG........................................... 19
5,650 Allianz AG........................................ 1,207
100 AMB Aachener & Muenchener Beteiligungs AG......... 91
14,800 BASF AG........................................... 546
18,100 Bayer AG.......................................... 698
6,850 Bayerische Hypotheken Bank AG..................... 207
6,500 Bayerische Vereinsbank AG......................... 266
1,450 Bilfinger & Berger Bau AG......................... 61
(a)200 Brau Und Brunnen AG............................... 16
700 CKAG Colonia Konzern AG........................... 66
2,000 Continential AG................................... 50
13,350 Daimler-Benz AG................................... 1,087
2,450 Degussa AG........................................ 130
12,550 Deutsche Bank AG.................................. 737
55,156 Deutsche Telekom AG............................... 1,356
</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 (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
GERMANY (CONT.)
<TABLE>
<C> <S> <C>
11,300 Dresdner Bank AG.................................. $ 396
1,350 Heidelberger Zement AG............................ 131
2,600 Hochtief AG....................................... 116
300 Karstadt AG....................................... 108
(a)1,250 Kloeckner-Humboldt-Deutz AG....................... 12
250 Linde AG.......................................... 194
9,000 Lufthansa AG...................................... 173
350 MAN AG............................................ 109
950 Mannesmann AG..................................... 425
4,250 Merck KGaA........................................ 185
(a)2,615 Metro AG.......................................... 285
209 Muenchener Rueck AG (Registered).................. 592
450 Preussag AG....................................... 132
8,800 RWE AG............................................ 379
1,600 SAP AG............................................ 321
1,700 Schering AG....................................... 182
14,300 Siemens AG........................................ 857
(a)100 STRABAG AG........................................ 9
900 Thyssen AG........................................ 217
12,900 VEBA AG........................................... 729
650 Viag AG........................................... 297
(a)256 Viag AG (RFD)..................................... 116
750 Volkswagen AG..................................... 569
----------
13,205
----------
HONG KONG (3.5%)
29,500 Bank of East Asia Ltd............................. 123
78,000 Cathay Pacific Airways Ltd........................ 162
48,000 Cheung Kong Holdings Ltd.......................... 474
52,500 China Light & Power Co., Ltd...................... 297
35,985 Chinese Estates Holdings.......................... 34
15,800 Giordano Holdings Ltd............................. 11
29,000 Hang Lung Development Co.......................... 53
40,600 Hang Seng Bank Ltd................................ 579
4,400 Hong Kong Aircraft Engineering Co., Ltd........... 16
79,008 Hong Kong & China Gas Co., Ltd.................... 158
30,082 Hong Kong & Shanghai Hotel Ltd.................... 48
242,668 Hong Kong Telecommunications Ltd.................. 579
91,198 Hopewell Holdings Ltd............................. 58
81,000 Hutchison Whampoa Ltd............................. 700
21,000 Hysan Development Co., Ltd........................ 62
9,000 Johnson Electric Holdings Ltd..................... 27
39,465 New World Development Co., Ltd.................... 235
33,000 Oriental Press Group Ltd.......................... 14
12,800 Peregrine Investment Holdings Ltd................. 26
37,240 Shangri-La Asia Ltd............................... 45
35,398 Shun Tak Holdings Ltd............................. 22
60,000 Sino Land Co...................................... 65
38,000 South China Morning Post Holdings Ltd............. 37
50,000 Sun Hung Kai Properties Ltd....................... 602
33,500 Swire Pacific Ltd., Class A....................... 302
10,000 Television Broadcasts Ltd......................... 45
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
48,000 Wharf Holdings Ltd................................ $ 208
5,652 Wing Lung Bank Ltd................................ 36
----------
5,018
----------
ITALY (3.8%)
26,512 Assicurazioni Generali S.p.A...................... 482
41,700 Banca Commerciale Italiana........................ 86
16,300 Banco Ambrosiano Veneto S.p.A..................... 47
5,844 Benetton Group S.p.A.............................. 93
4,500 Cartiere Burgo.................................... 25
71,000 Credito Italiano.................................. 130
19,000 Edison S.p.A...................................... 95
229,000 ENI S.p.A......................................... 1,297
4,800 Falck Acciaierie & Ferriere Lombarde.............. 18
96,500 Fiat S.p.A........................................ 347
21,800 Fiat S.p.A. Di Risp (NCS)......................... 41
(a)6,500 Impregilo S.p.A................................... 4
25,000 Istituto Bancario San Paolo....................... 182
18,200 Istituto Mobiliare Italiano S.p.A................. 164
121,900 Istituto Nazionale delle Assicurazioni............ 186
(a)4,800 Italcementi....................................... 12
(a)6,850 Italcementi Di Risp............................... 43
19,800 Italgas........................................... 64
13,900 Magneti Marelli S.p.A............................. 24
34,500 Mediaset S.p.A.................................... 147
14,500 Mediobanca S.p.A.................................. 88
(a)85,574 Montedison S.p.A.................................. 57
(a)26,900 Montedison S.p.A. Di Risp (NCS)................... 17
(a)103,250 Olivetti S.p.A.................................... 29
46,920 Parmalat Finanziaria S.p.A........................ 66
48,000 Pirelli S.p.A..................................... 119
8,515 R.A.S. S.p.A...................................... 67
7,000 Rinascente S.p.A.................................. 39
3,900 SAI............................................... 30
4,900 Sasib S.p.A....................................... 17
9,000 Sirti S.p.A....................................... 52
18,000 Snia BPD S.p.A.................................... 16
185,500 Telecom Italia S.p.A.............................. 556
45,500 Telecom Italia S.p.A. Di Risp (NCS)............... 90
188,900 Telecom Italia Mobile S.p.A....................... 611
45,000 Telecom Italia Mobile S.p.A. (RNC)................ 81
----------
5,422
----------
JAPAN (32.5%)
2,390 Advantest Corp.................................... 184
31,000 Ajinomoto Co...................................... 333
(a)18,000 Aoki Corp......................................... 21
2,400 Aoyama Trading Co................................. 77
59,000 Asahi Bank Ltd.................................... 502
18,000 Asahi Breweries Ltd............................... 269
55,000 Asahi Chemical Industry Co., Ltd.................. 329
52,000 Asahi Glass Co., Ltd.............................. 517
18,000 Bridgestone Co.................................... 418
22,000 Canon, Inc........................................ 599
</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 (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
11,000 Casio Computer Co................................. $ 96
29,000 Chiba Bank........................................ 173
18,000 Chugai Pharmaceuticals Co......................... 162
21,000 Dai Nippon Printing Co., Ltd...................... 475
19,000 Daiei, Inc........................................ 122
18,000 Daikin Industries Ltd............................. 163
18,000 Daiwa House Industry.............................. 220
36,000 Daiwa Securities Co., Ltd......................... 284
22,000 Denso Corp........................................ 526
107 East Japan Railway Co............................. 549
12,000 Ebara Corp........................................ 180
7,700 Fanuc............................................. 296
63,000 Fuji Bank......................................... 946
11,000 Fuji Photo Film Ltd............................... 443
47,000 Fujitsu Ltd....................................... 652
14,000 Furukawa Electric Co.............................. 89
25,000 Hankyu Corp....................................... 138
18,000 Hazama Corp....................................... 37
91,000 Hitachi Ltd....................................... 1,017
24,000 Honda Motor Co.................................... 723
57,000 Industrial Bank of Japan.......................... 886
(a)11,000 Ito-Yokado Co., Ltd............................... 638
56,000 Japan Airlines Co................................. 255
46,000 Japan Energy Corp................................. 120
20,000 Joyo Bank......................................... 110
9,000 Jusco Co., Ltd.................................... 304
36,000 Kajima Corp....................................... 211
24,200 Kansai Electric Power Co.......................... 467
33,000 Kao Corp.......................................... 458
29,000 Kawasaki Steel Corp............................... 94
44,000 Kinki Nippon Railway.............................. 269
36,000 Kirin Brewery Co., Ltd............................ 374
36,000 Komatsu Ltd....................................... 292
55,000 Kubota Corp....................................... 269
36,000 Kumagai Gumi Co................................... 60
5,400 Kyocera Corp...................................... 429
18,000 Kyowa Hakko Kogyo................................. 135
55,000 Marubeni Corp..................................... 250
4,000 Marui Co., Ltd.................................... 74
55,000 Matsushita Electric Industries Ltd................ 1,109
55,000 Mitsubishi Chemical Corp.......................... 180
50,000 Mitsubishi Corp................................... 624
64,000 Mitsubishi Electric Corp.......................... 358
39,000 Mitsubishi Estate Co., Ltd........................ 565
99,000 Mitsubishi Heavy Industries Ltd................... 760
37,000 Mitsubishi Materials Corp......................... 148
33,000 Mitsubishi Trust & Banking Co..................... 521
55,000 Mitsui & Co....................................... 528
36,000 Mitsui Engineering & Shipbuilding................. 79
29,000 Mitsui Fudosan Co................................. 400
27,000 Mitsui Trust & Banking Co., Ltd................... 204
20,000 Mitsukoshi Ltd.................................... 142
6,000 Murata Manufacturing Co., Ltd..................... 239
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
12,000 Mycal Corp........................................ $ 173
31,000 NEC Corp.......................................... 433
18,000 NGK Insulators.................................... 198
14,000 Nippon Express Co., Ltd........................... 112
18,000 Nippon Fire & Marine Insurance Co................. 97
18,000 Nippon Light Metal Co............................. 65
18,000 Nippon Meat Packers, Inc.......................... 232
52,000 Nippon Oil Co..................................... 285
201,000 Nippon Steel Co................................... 642
272 Nippon Telegraph & Telephone Corp................. 2,612
55,000 Nippon Yusen Kabushiki Kaisha..................... 214
69,000 Nissan Motor Co................................... 535
106,000 NKK Corp.......................................... 228
47,000 Nomura Securities Co., Ltd........................ 648
21,000 Odakyu Electric Railway Corp...................... 125
36,000 Oji Paper Co., Ltd. (New)......................... 223
80,000 Osaka Gas Co...................................... 230
18,000 Penta-Ocean Construction.......................... 58
6,000 Pioneer Electric Corp............................. 146
2,000 Rohm Co........................................... 206
71,000 Sakura Bank....................................... 544
14,000 Sankyo Co., Ltd................................... 470
55,000 Sanyo Electric Co., Ltd........................... 247
4,000 Secom Co., Ltd.................................... 294
3,600 Sega Enterprises.................................. 119
18,000 Sekisui House Co., Ltd............................ 182
36,000 Sharp Corp........................................ 496
5,000 Shimano, Inc...................................... 105
26,000 Shimizu Corp...................................... 156
8,000 Shin-Etsu Chemical Co............................. 212
8,000 Shiseido Co., Ltd................................. 132
25,000 Shizuoka Bank..................................... 286
(a)36,000 Showa Denko....................................... 94
8,400 Sony Corp......................................... 732
72,000 Sumitomo Bank..................................... 1,181
73,000 Sumitomo Chemical Co.............................. 331
36,000 Sumitomo Corp..................................... 342
24,000 Sumitomo Electric................................. 402
7,000 Sumitomo Forestry Co., Ltd........................ 77
17,000 Sumitomo Metal & Mining Co........................ 120
65,000 Sumitomo Metal Industries......................... 185
18,000 Sumitomo Osaka Cement Co., Ltd.................... 57
36,000 Taisei Corp., Ltd................................. 167
11,000 Taisho Pharmaceutical Co.......................... 297
22,000 Takeda Chemical................................... 618
36,000 Teijin Ltd........................................ 170
106,000 The Bank of Tokyo-Mitsubushi...................... 2,128
25,000 Tobu Railway Co................................... 115
13,000 Tohoku Electric Power............................. 231
55,000 Tokai Bank........................................ 566
55,000 Tokio Marine & Fire Insurance Co.................. 720
33,700 Tokyo Electric Power Co........................... 709
2,000 Tokyo Electron Ltd................................ 96
73,000 Tokyo Gas Co...................................... 203
</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 (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
31,000 Tokyu Corp........................................ $ 192
25,000 Toppan Printing Co., Ltd.......................... 393
55,000 Toray Industries, Inc............................. 392
18,000 Toto Ltd.......................................... 222
36,000 Toyoba Co......................................... 95
79,000 Toyota Motor Corp................................. 2,331
36,000 Ube Industries Ltd................................ 105
36,000 Yamaichi Securities Co............................ 107
33,000 Yasuda Trust & Banking Co......................... 126
----------
46,301
----------
KOREA (1.2%)
3,710 Cho Hung Bank Co., Ltd. (Foreign)................. 25
3,320 Commercial Bank of Korea.......................... 18
2,570 Daewoo Corp....................................... 21
8,050 Daewoo Heavy Industries........................... 66
1,110 Daewoo Securities Co.............................. 20
820 Dong-Ah Construction Industrial Co................ 16
3,780 Hanil Bank........................................ 21
(a)1,134 Hyundai Engineering & Construction Co.
(Foreign)....................................... 29
(d)910 Hyundai Motor Co.,Ltd............................. 30
(d)11,390 Korea Electric Power.............................. 340
3,410 Korea First Bank.................................. 14
33,700 Korea Fund, Inc. (The)............................ 497
(d)84 Korea Mobile Telecommunications Corp. (Foreign)... 63
1,760 L.G. Chemical Ltd................................. 24
(d)2,130 Pohang Iron & Steel Co., Ltd...................... 218
1,330 Samsung Corp...................................... 18
(d)560 Samsung Display Devices Co........................ 31
(d)1,620 Samsung Electronics............................... 181
220 Tong Yang Cement Co............................... 4
1,677 Yukong Ltd........................................ 41
----------
1,677
----------
NETHERLANDS (3.6%)
21,304 ABN Amro Holdings N.V............................. 397
1,250 Akzo Nobel N.V.................................... 171
11,700 Elsevier N.V...................................... 196
1,400 Getronics N.V..................................... 45
850 Heineken N.V...................................... 145
12,908 ING Groep N.V..................................... 596
1,556 KLM Royal Dutch Airlines N.V...................... 48
2,729 Koninklijke Ahold N.V............................. 230
1,800 Koninklijke KNP BT N.V............................ 41
7,567 Koninklijke PTT Nederland N.V..................... 297
450 Nedlloyd Groep N.V................................ 13
300 Oce N.V........................................... 39
5,700 Philips Electronics N.V........................... 409
34,800 Royal Dutch Petroleum Co.......................... 1,812
639 Stork N.V......................................... 26
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
2,600 Unilever N.V...................................... $ 548
1,085 Wolters Kluwer N.V................................ 132
----------
5,145
----------
SINGAPORE (4.0%)
(d)24,000 Amcol Holdings Ltd................................ --
58,000 City Developments Ltd............................. 568
(a)7,000 Creative Technology Ltd........................... 120
17,000 Cycle & Carriage Ltd.............................. 176
68,000 DBS Land Ltd...................................... 215
35,000 Development Bank of Singapore Ltd. (Foreign)...... 441
21,000 First Capital Corp., Ltd.......................... 55
21,800 Fraser & Neave Ltd................................ 155
41,000 Hai Sun Hup Group Ltd............................. 29
34,000 Hotel Properties Ltd.............................. 58
15,000 Inchcape Bhd...................................... 54
9,000 Jurong Shipyard Ltd............................... 39
59,750 Keppel Corp., Ltd................................. 265
8,000 Metro Holdings Ltd................................ 26
25,000 Natsteel Ltd...................................... 64
63,000 Neptune Orient Lines Ltd. (Foreign)............... 56
51,560 Oversea-Chinese Banking Corp. (Foreign)........... 534
11,000 Overseas Union Enterprise Ltd..................... 51
24,000 Parkway Holdings Ltd.............................. 107
4,000 Robinson & Co. Ltd................................ 21
11,600 Shangri-La Hotel Ltd.............................. 35
65,000 Singapore Airlines Ltd. (Foreign)................. 582
14,800 Singapore Press Holdings (Foreign)................ 298
53,000 Singapore Technologies Industrial Corp............ 136
448,000 Singapore Telecommunications Ltd.................. 827
25,000 Straits Trading Co., Ltd.......................... 55
104,000 United Industrial Corp., Ltd...................... 79
59,000 United Overseas Bank Ltd. (Foreign)............... 607
(a)40,000 United Overseas Land Ltd.......................... 54
----------
5,707
----------
SPAIN (3.6%)
435 Acerinox S.A...................................... 82
59 Aguas de Barcelona................................ 2
1,430 Aguas de Barcelona (New).......................... 59
4,200 Argentaria S.A.................................... 235
6,769 Autopistas Concesionaria Espanola S.A............. 92
7,500 Banco Bilbao Vizcaya S.A. (Registered)............ 610
5,500 Banco Central Hispano Americano S.A............... 201
16,000 Banco Santander S.A............................... 493
500 Corporacion Financiera Alba....................... 64
945 Corporacion Mapfre................................ 50
1,900 Dragados y Construccion S.A....................... 40
1,650 Ebro Agricolas S.A................................ 32
750 ENCE S.A.......................................... 13
8,600 Endesa S.A........................................ 723
(a)5,700 Ercros S.A........................................ 6
550 Fomento Construction y Contractas S.A............. 70
</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 (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SPAIN (CONT.)
<TABLE>
<C> <S> <C>
1,250 Gas Natural SDG S.A............................... $ 273
31,200 Iberdrola S.A..................................... 394
700 Metro Vacesa...................................... 25
200 Portland Valderrivas S.A.......................... 16
10,100 Repsol S.A........................................ 427
1,200 Tabacalera S.A., Class A.......................... 64
31,500 Telefonica de Espana S.A.......................... 911
9,800 Union Electrica Fenosa S.A........................ 89
1,750 Uralita S.A....................................... 20
1,467 Vallehermoso S.A.................................. 40
750 Viscofan Envolturas Celulosicas S.A............... 18
284 Zardoya Otis S.A.................................. 37
----------
5,086
----------
SWEDEN (3.4%)
24,400 ABB AB, Class A................................... 342
4,500 AGA AB, Class A................................... 61
3,700 AGA AB, Class B................................... 49
49,633 Astra AB, Class A................................. 924
4,650 Atlas Copco AB, Class A........................... 121
2,600 Electrolux AB, Series B........................... 188
30,300 Ericsson LM, Class B.............................. 1,193
1,300 Esselte AB, Class A............................... 31
6,500 Hennes & Mauritz AB, Class B...................... 233
3,000 Securitas AB, Class B............................. 84
3,900 Skandia Forsakrings AB............................ 144
17,600 Skandinaviska Enskilda Banken, Class A ........... 190
4,400 Skanska AB, Class B............................... 195
2,700 S.K.F. AB, Class B................................ 70
11,050 Stora Kopparbergs Bergslags Aktiebolag, Class A... 179
6,800 Svenska Cellulosa AB, Class B..................... 145
7,100 Svenska Handelsbanken, Class A.................... 227
16,900 Swedish Match AB.................................. 57
4,600 Trelleborg AB, Class B............................ 75
13,650 Volvo AB, Class B................................. 365
----------
4,873
----------
SWITZERLAND (4.3%)
145 ABB AG............................................ 220
275 Adecco S.A........................................ 105
85 Alusuisse-Lonza Holdings Ltd. (Registered) ....... 88
2,850 CS Holding AG (Registered)........................ 366
15 Georg Fischer AG (Bearer)......................... 21
100 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 94
595 Nestle S.A. (Registered).......................... 785
975 Novartis AG (Registered).......................... 1,559
25 Roche Holding AG (Bearer)......................... 343
105 Roche Holding AG (Registered)..................... 950
25 SGS Surveillance.................................. 53
80 SMH AG (Bearer)................................... 46
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
60 Sulzer AG (Registered)............................ $ 51
(a)1,150 Swiss Bank Corp. (Registered)..................... 308
215 Swiss Reinsurance (Registered).................... 304
(a)50 SwissAir (Registered)............................. 56
320 Union Bank of Switzerland (Bearer)................ 366
350 Union Bank of Switzerland (Registered)............ 80
(a)95 Valora Holding AG................................. 20
720 Zuerich Versicherung (Registered)................. 286
----------
6,101
----------
THAILAND (1.4%)
14,600 Advanced Information Service PCL (Foreign)........ 104
2,100 Banpu PCL (Foreign)............................... 31
(d)22,100 Bangchak Petroleum PCL (Foreign).................. 9
28,100 Bangkok Bank PCL (Foreign)........................ 193
(d)86,209 Bangkok Metropolitan Bank PCL (Foreign)........... 18
28,775 Bank of Ayudhya PCL (Foreign)..................... 45
(a,d)2,000 Castle Peak Holdings PCL (Foreign)................ 10
(d)8,000 CMIC Finance & Securities PCL (Foreign)........... 2
2,400 CP Feedmill PCL (Foreign)......................... 6
28,400 Dhana Siam Finance & Securities PCL (Foreign)..... 15
18,600 General Finance & Securities PCL (Foreign)........ 12
21,800 Industrial Finance Corp. of Thailand (Foreign).... 28
(a,d)2,200 International Broadcasting Corp., Ltd.
(Foreign)....................................... 1
(d)2,500 International Engineering PCL (Foreign)........... 2
(d)15,500 Italian Thai Development PCL (Foreign)............ 35
14,100 Jasmine International PCL (Foreign)............... 12
86,700 Krung Thai Bank PCL (Foreign)..................... 90
16,800 Land & House Co., Ltd. (Foreign).................. 35
23,651 National Finance & Securities PCL (Foreign)....... 15
(d)25,900 National Petrochemical PCL (Foreign).............. 26
(a,d)10,600 NTS Steel Groups PCL (Foreign).................... 1
(a,d)13,500 One Holding PCL (Foreign)......................... --
(a,d)8,700 Padaeng Industry PCL (Foreign).................... 2
24,900 Phatra Thanakit PCL (Foreign)..................... 31
(a,d)6,100 Phoenix Pulp & Paper PCL (Foreign)................ 5
30,300 PTT Exploration & Production PCL (Foreign)........ 440
23,500 Quality House PCL (Foreign)....................... 9
1,100 Saha-Union PCL.................................... 1
(a,d)31,900 Sahaviriya Steel Industry PCL (Foreign)........... 6
(d)14,700 Shinawatra Computer Co. PCL (Foreign)............. 102
(d)14,800 Shinawatra Satellite PCL (Foreign)................ 18
(d)7,100 Siam Cement PCL (Foreign)......................... 123
34,700 Siam City Bank PCL (Foreign)...................... 20
7,400 Siam City Cement PCL (Foreign).................... 30
13,700 Siam Commercial Bank PCL (Foreign)................ 56
(a)138,800 TelecomAsia Corp. PCL (Foreign)................... 161
</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 (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
THAILAND (CONT.)
<TABLE>
<C> <S> <C>
28,300 Thai Airways International PCL (Foreign).......... $ 34
22,500 Thai Farmers Bank PCL (Foreign)................... 96
18,100 Thai Military Bank PCL (Foreign).................. 20
3,200 Thai Plastic & Chemical PCL....................... 10
(a,d)39,900 Thai Telephone & Telecommunications Co.
(Foreign)....................................... 17
5,700 Tipco Asphalt PCL................................. 30
(d)13,600 TPI Polene PCL.................................... 7
(d)24,700 United Communication Industry PCL (Foreign)....... 102
(d)10,800 Wattachak Co., Ltd. (Foreign)..................... 2
----------
2,012
----------
UNITED KINGDOM (16.2%)
30,000 Abbey National plc................................ 410
15,000 Arjo Wiggins Appleton plc......................... 44
10,700 Associated British Foods plc...................... 92
36,417 Barclays plc...................................... 723
23,600 Bass plc.......................................... 288
66,435 BAT Industries plc................................ 595
94,300 BG plc............................................ 345
14,954 BICC plc.......................................... 44
27,810 Blue Circle Industries plc........................ 199
14,970 BOC Group plc..................................... 260
23,600 Boots Co. plc..................................... 277
15,000 BPB Industries plc................................ 81
10,675 British Aerospace plc............................. 238
25,725 British Airways plc............................... 293
122,109 British Petroleum Co. plc......................... 1,519
34,300 British Sky Broadcasting plc...................... 250
42,900 British Steel plc................................. 107
124,300 British Telecommunications plc.................... 923
90,005 BTR plc........................................... 308
6,426 Burmah Castrol plc................................ 109
53,572 Cable & Wireless plc.............................. 491
23,580 Cadbury Schweppes plc............................. 210
17,140 Caradon plc....................................... 57
(a)94,300 Centrica plc...................................... 115
19,243 Coats Viyella plc................................. 40
14,996 Commercial Union plc.............................. 158
10,700 Courtaulds plc.................................... 60
2,116 De La Rue Co. plc................................. 13
10,694 EMI Group plc..................................... 192
62,100 General Electric plc.............................. 371
12,815 GKN plc........................................... 220
68,600 Glaxo Wellcome plc................................ 1,419
14,972 Granada Group plc................................. 197
47,194 Grand Metropolitan plc............................ 454
25,700 Great Universal Stores plc........................ 261
17,163 Guardian Royal Exchange plc....................... 78
47,100 Guinness plc...................................... 461
12,840 Hanson plc........................................ 64
27,900 Harrisons & Crosfield plc......................... 51
47,188 HSBC Holdings plc................................. 1,398
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
19,300 Imperial Chemical Industries plc.................. $ 268
25,719 Ladbroke Group plc................................ 101
17,100 Land Securities plc............................... 242
17,100 Lasmo plc......................................... 75
25,700 Legal & General Group plc......................... 174
117,900 Lloyds TSB Group plc.............................. 1,211
17,096 Lonrho plc........................................ 36
75,000 Marks and Spencer plc............................. 622
12,900 MEPC plc.......................................... 106
30,000 National Power plc................................ 261
17,155 Peninsular & Oriental Steam Navigation Co. plc.... 171
32,120 Pilkington plc.................................... 74
42,862 Prudential Corp. plc.............................. 419
19,300 Rank Group plc.................................... 122
12,816 Redland plc....................................... 73
30,000 Reed International plc............................ 290
36,400 Reuters Holdings plc.............................. 384
12,900 Rexam plc......................................... 54
6,400 RMC Group plc..................................... 104
30,028 Royal & Sun Alliance Insurance Group plc ......... 222
10,670 Royal Bank of Scotland Group plc.................. 100
25,748 RTZ Corp. plc..................................... 449
19,327 Safeway plc....................................... 112
34,323 Sainsbury (J) plc................................. 208
4,300 Schroders plc..................................... 118
21,430 Scottish Power plc................................ 139
42,900 Sears plc......................................... 49
12,846 Sedgwick Group plc................................ 26
10,700 Slough Estates plc................................ 53
53,598 Smithkline Beecham plc............................ 987
10,738 Southern Electric plc............................. 79
30,007 Tarmac plc........................................ 62
17,116 Taylor Woodrow plc................................ 50
40,720 Tesco plc......................................... 251
14,952 Thames Water plc.................................. 172
10,750 Thorn plc......................................... 30
10,717 TI Group plc...................................... 93
15,000 Unilever plc...................................... 429
14,986 United Utilities plc.............................. 164
70,756 Vodafone Group plc................................ 345
19,300 Zeneca Group plc.................................. 638
----------
22,978
----------
TOTAL COMMON STOCKS (Cost $124,060)........................... 137,624
----------
PREFERRED STOCKS (0.4%)
AUSTRALIA (0.1%)
23,778 News Corp., Ltd................................... 94
----------
GERMANY (0.3%)
5,850 RWE AG............................................ 204
1,100 SAP AG............................................ 227
----------
431
----------
</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 (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
ITALY (0.0%)
33,000 Fiat S.p.A........................................ $ 61
----------
TOTAL PREFERRED STOCKS (Cost $515)............................ 586
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------
RIGHTS (0.0%)
FRANCE (0.0%)
(a)675 Simco S.A., expiring 7/02/97...................... --
----------
ITALY (0.0%)
(a)7,000 Rinascente S.p.A., expiring 7/23/97............... 1
----------
SPAIN (0.0%)
(a)700 Metro Vacesa, expiring 7/26/97.................... --
----------
SWITZERLAND (0.0%)
(a)60 Sulzer AG, expiring 7/17/97....................... --
----------
THAILAND (0.0%)
(a,d)13,600 TPI Polene PCL, expiring 7/11/97.................. 2
----------
TOTAL RIGHTS (Cost $0)........................................ 3
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANTS (0.0%)
FRANCE (0.0%)
(a)620 Casino Guichard-Perrachon, expiring 12/31/99...... 9
(a)4,333 Cie Generale des Eaux, expiring 5/02/01........... 3
----------
12
----------
HONG KONG (0.0%)
(a)8,582 Hong Kong & Shanghai Hotel, Ltd., expiring
10/12/98........................................ 2
(a)2,300 Hysan Development Co., Ltd., expiring 4/30/98..... 1
(a)11,500 Oriental Press Group Ltd., expiring 10/02/98...... 1
(a)1,750 Peregrine Investment Holdings Ltd., expiring
5/15/98......................................... 1
(a)12,800 Stelux Holdings International Ltd., expiring
2/28/98......................................... 1
----------
6
----------
ITALY (0.0%)
(a)2,950 R.A.S. S.p.A., expiring 12/31/97.................. 6
(a)1,550 R.A.S. S.p.A. Saving Shares, expiring 12/31/97.... 3
(a)1,050 Rinascente S.p.A., expiring 12/31/99.............. --
----------
9
----------
SINGAPORE (0.0%)
(a)11,750 Straits Steamship, expiring 12/20/00.............. 11
----------
SWITZERLAND (0.0%)
(a)112 Roche Holding A.G., expiring 5/05/98.............. 9
----------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
<C> <S> <C>
- --------------------------------------------------------------------------
THAILAND (0.0%)
(a)6,349 National Finance & Securities PCL, expiring
11/15/99........................................ $ 1
(a)1,980 One Holding PCL, expiring 10/14/01................ --
----------
1
----------
TOTAL WARRANTS (Cost $10)..................................... 48
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
UNITS
<C> <S> <C>
- ----------
UNITS (0.1%)
AUSTRALIA (0.1%)
20,221 General Property Trust............................ 40
(a)20,348 Westfield Trust................................... 42
----------
TOTAL UNITS (Cost $73)........................................ 82
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
CONVERTIBLE DEBENTURE (0.1%)
FRANCE (0.1%)
FRF 60 Sanofi S.A. 4.00%, 1/01/00 (Cost $38)............. 65
----------
FIXED INCOME SECURITY (0.0%)
FRANCE (0.0%)
62 Casino Guichard-Perrachon, Series XW, 4.50%,
7/12/01 (Cost $27).............................. 31
----------
TOTAL FOREIGN SECURITIES (97.3)% (Cost $124,723).............. 138,439
----------
SHORT-TERM INVESTMENT (2.8%)
REPURCHASE AGREEMENT (2.8%)
$ 4,025 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $4,026,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $4,093 (Cost $4,025)..... 4,025
----------
FOREIGN CURRENCY (0.5%)
AUD 17 Australian Dollar................................. 12
ATS 23 Austrian Schilling................................ 2
BEF 15 Belgian Franc..................................... --
GBP 20 British Pound..................................... 34
DEM 66 German Mark....................................... 38
HKD 323 Hong Kong Dollar.................................. 42
IDR 114,982 Indonesian Rupiah................................. 47
ITL 86,882 Italian Lira...................................... 51
JPY 32,984 Japanese Yen...................................... 288
MYR 22 Malaysian Ringgit................................. 9
SGD 28 Singapore Dollar.................................. 20
KRW 4,961 South Korean Won.................................. 5
ESP 4,250 Spanish Peseta.................................... 29
SEK 30 Swedish Krona..................................... 4
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
13
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FOREIGN CURRENCY (CONT.)
<TABLE>
<C> <S> <C>
CHF 7 Swiss Franc....................................... $ 5
THB 3,751 Thai Baht......................................... 145
----------
TOTAL FOREIGN CURRENCY (Cost $732)............................ 731
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.6%) (Cost $129,480)............... 143,195
--------
OTHER ASSETS (40.4%)
Cash....................................... $ 140
Securities at Value, Held as Collateral for
Securities Lending....................... 41,808
Receivable for Investments Sold............ 14,216
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 745
Dividends Receivable....................... 484
Foreign Withholding Tax Reclaim
Receivable............................... 84
Security Lending Income Receivable......... 15
Interest Receivable........................ 1
Other...................................... 11 57,504
----------
LIABILITIES (-41.0%)
Collateral on Securities Loaned, at Value.. (41,808)
Payable for Portfolio Shares Redeemed...... (12,561)
Payable for Investments Purchased.......... (3,691)
Investment Advisory Fees Payable........... (211)
Custodian Fees Payable..................... (44)
Administrative Fees Payable................ (29)
Security Lending Expense Payable........... (21)
Directors' Fees & Expenses Payable......... (7)
Payable for Foreign Taxes.................. (4)
Other Liabilities.......................... (57) (58,433)
---------- --------
NET ASSETS (100%)........................................ $142,266
--------
--------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
- -------------------------------------------------------
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.............................. $106,772
Undistributed Net Investment Income.......... 1,479
Accumulated Net Realized Gain................ 19,640
Unrealized Appreciation on Investments and
Foreign Currency Translations (Net of
accrual for foreign tax of $4 on unrealized
appreciation on investments)............... 14,375
--------
NET ASSETS................................... $142,266
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $142,237
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 10,951,513 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $12.99
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $29
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,243 outstanding $0.001 par value
shares (authorized 500,000,000 shares).......... $12.97
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
14
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, the
portfolio is obligated to deliver or is to receive 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>
- ------------- -------- ---------- ------------- -------- ------------
AUD 316 $ 239 7/01/97 U.S.$ 237 $ 237 $ (2)
JPY 450,259 3,930 7/01/97 U.S.$ 3,928 3,928 (2)
SEK 3,339 432 7/01/97 U.S.$ 434 434 2
U.S.$ 9 9 7/01/97 ESP 1,393 9 --
U.S.$ 9 9 7/01/97 ESP 1,393 9 --
GBP 1,242 2,067 7/01/97 U.S.$ 2,071 2,071 4
ITL 838,490 493 7/01/97 U.S.$ 498 498 5
SGD 749 524 7/01/97 U.S.$ 524 524 --
DEM 2,126 1,220 7/03/97 U.S.$ 1,228 1,228 8
CHF 784 537 7/03/97 U.S.$ 544 544 7
HKD 3,329 430 7/03/97 U.S.$ 430 430 --
THB 3,621 140 7/03/97 U.S.$ 140 140 --
U.S.$ 4,555 4,555 7/30/97 DEM 7,848 4,511 (44)
DEM 7,848 4,511 7/30/97 U.S.$ 4,675 4,675 164
NLG 5,685 2,909 8/18/97 U.S.$ 2,995 2,995 86
CHF 7,616 5,248 8/18/97 U.S.$ 5,360 5,360 112
U.S.$ 798 798 8/18/97 NLG 1,544 790 (8)
U.S.$ 725 725 8/18/97 NLG 1,401 717 (8)
THB 16,304 618 8/18/97 U.S.$ 610 610 (8)
U.S.$ 2,000 2,000 8/18/97 CHF 2,782 1,917 (83)
U.S.$ 913 913 8/18/97 CHF 1,305 900 (13)
U.S.$ 2,470 2,470 8/18/97 CHF 3,530 2,432 (38)
U.S.$ 733 733 8/18/97 THB 19,790 750 17
THB 3,487 132 8/18/97 U.S.$ 130 130 (2)
U.S.$ 40 40 8/19/97 THB 1,078 41 1
THB 17,767 673 8/19/97 U.S.$ 660 660 (13)
JPY 1,852,593 16,305 8/25/97 U.S.$ 16,600 16,600 295
U.S.$ 4,582 4,582 8/25/97 JPY 520,584 4,582 --
U.S.$ 11,731 11,731 8/25/97 JPY 1,332,009 11,723 (8)
U.S.$ 1,218 1,218 8/29/97 DEM 2,094 1,207 (11)
U.S.$ 3,309 3,309 8/29/97 DEM 5,679 3,272 (37)
DEM 7,773 4,479 8/29/97 U.S.$ 4,541 4,541 62
U.S.$ 4,879 4,879 9/15/97 FRF 28,257 4,835 (44)
U.S.$ 255 255 9/15/97 FRF 1,474 252 (3)
FRF 46,187 7,903 9/15/97 U.S.$ 8,150 8,150 247
THB 38,817 1,455 9/16/97 U.S.$ 1,498 1,498 43
ESP 201,382 1,369 9/26/97 U.S.$ 1,385 1,385 16
-------- -------- ------
$ 93,840 $ 94,585 $ 745
--------
-------- -------- ------
-------- ------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at Fair Value -- See note A-1 to financial
statements
FRF -- French Franc
NCS -- Non Convertible Shares
NLG -- Netherlands Guilder
PCL -- Public Company Limited
RFD -- Ranked for Dividend
RNC -- Non Convertible Savings Share
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------------
Capital Equipment...................... $ 17,879 12.6%
Consumer Goods......................... 27,923 19.6
Energy................................. 13,082 9.2
Finance................................ 34,267 24.1
Gold Mines............................. 68 --
Materials.............................. 19,617 13.8
Multi-Industry......................... 3,898 2.7
Services............................... 21,705 15.3
--------- ---
$ 138,439 97.3%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
15
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
China 1.2%
Hong Kong 36.0%
Indonesia 6.9%
Korea 8.0%
Malaysia 15.8%
Philippines 4.1%
Singapore 11.6%
Taiwan 12.3%
Thailand 3.4%
Other 0.7%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) COMBINED FAR EAST FREE EX-JAPAN INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEAR INCEPTION
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A...... 2.30% 0.11% 14.43% 17.09%
PORTFOLIO -- CLASS B...... 2.19 -0.14 N/A 3.44
INDEX -- CLASS A.......... 0.19 0.95 12.73 15.47
INDEX -- CLASS B.......... 0.19 0.95 N/A 6.01
</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 (included 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.
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 six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 2.30% and 0.11%, respectively, for the Class A shares; and
2.19% and -0.14%, respectively, for the Class B shares as compared to total
returns of 0.19% and 0.95%, respectively, for the Morgan Stanley Capital
International (MSCI) Combined Far East Free ex-Japan Index (the "Index"). For
the five-year period ended June 30, 1997, the average annual total return for
Class A was 14.43% as compared to 12.73% for the Index. From inception on July
1, 1991 to June 30, 1997, the average annual total return of Class A was 17.09%
as compared to 15.47% for the Index. From inception on January 2, 1996 to June
30, 1997, the average annual total return of Class B was 3.44% as compared to
6.01% for the Index.
Continuing the pattern set in 1996, the individual Asian markets showed a great
divergence in performance in the first half of 1997. The rise in the Asian
markets was led by the greater China markets where Taiwan (+26.6%), China
(+10.3%) and Hong Kong (+8.1%) staged sharp increases ahead of Hong Kong's
handover to China on July 1, 1997. Rounding out the Northeast Asian markets,
Korea also showed a sharp rise, gaining 9.7%. In contrast, the Southeast Asian
markets of Thailand (-37.3%), The Philippines (-12.2%) and Malaysia (-12.2%)
registered sharp falls.
As of June 30, 1997, the Portfolio was overweighted compared to the Index in
Hong Kong (35.8% vs. 33.3%), Korea (8.0% vs. 5.9%), Singapore (11.4% vs. 11.1%)
and China (1.2% vs. 0.8%). It was underweight everywhere else, most notably in
Malaysia (15.7% vs. 18.4%).
Following the first quarter where the Hong Kong market fell -9.5%, the Portfolio
increased its exposure to that market from 30% to 36%. The
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
16
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
Portfolio's increased weight in Hong Kong stood it in good stead as the market
staged a sharp rebound. Euphoria over China concept plays and in particular red
chips led the way. Sentiment and liquidity further contributed, as asset
injection stories propelled the red chips ever higher while traditional blue
chip stocks languished. The rally culminated in an all-time high of 15,197 on
the Hang Seng Index on June 27, 1997, the last trading day before the handover.
With the handover complete, red chip fever has subsided and talk of increasing
the supply of residential units in Hong Kong has caused the property sector to
weaken. The Portfolio will be looking to take its Hong Kong weighting down while
shifting towards better value blue chips such as the major property developers
if they weaken further.
The Portfolio also sharply increased its weight in Taiwan over the half-year
from 4.3% to 12.3%. Following on a strong 1996 performance of 38.9%, the Taiwan
market continued to surge, up 26.6% for the first half. This sharp rise was
powered primarily by the electronics sector which surged more than 60% on strong
earnings growth in the second quarter alone. The Portfolio intends to maintain
its weighting in this market as domestic liquidity continues to be high. The
position will be trimmed, however, if the central bank anticipates a further
pick up in domestic growth and moves to tighten liquidity.
The Portfolio also increased its weight in Korea since the beginning of the year
from 4.5% to 8.0% and will continue to look for good values in that market. The
Korean economy appears to have bottomed as positive export growth generated its
first monthly trade surplus in 30 months. Equally encouraging, there are also
signs that the Korean corporate culture is finally changing. The zealousness
with which many Korean companies pursued market share gains and top line growth
is finally beginning to shift towards interest in the bottom line which should
bode well for equity investors.
By contrast, the Portfolio sharply cut its weighting in Malaysia over the second
quarter, from 22.6% to 15.7%, following a flat first quarter. Bank Negara's
curbs on property lending and stock market margin loans in April finally forced
the economy to confront its problems with the impending oversupply in the
property market and an infrastructure spending binge. The subsequent severity of
the market fallout indicated an overstretched market. Although the long-term
fundamentals for Malaysia remain good, short-term prospects are not promising,
especially in the aftermath of the fallout from the depegging of the Thai baht.
The Portfolio is looking to maintain its underweight in Malaysia barring
unforeseen positive developments.
The Portfolio's weighting in Thailand has also been taken down, from 8.4% to
3.2%, due to a combination of Portfolio sales and a collapsing market. This
market has continued to be a disaster, falling -37.3% this year following a
- -38.0% decline last year. Most recently, confidence plummeted as the government
resorted to capital controls and increased interest rates to fend off the
currency speculators. The gloom was further compounded by news of a slowing
economy as the mounting financial crisis resulted in the suspension of 16
finance companies. The depegging of the Thai baht at the beginning of July is
the first step towards addressing the Thai financial crisis. Recovery, however,
will be a slow and painful process, and the first sharp rally since the baht
broke is proving hard to sustain. The Portfolio will selectively continue to
seek to acquire good companies at low prices but it is still too early to bet on
the Thai market.
The Thai financial crisis and the final depegging of the Thai baht have brought
into focus the common ills of the fast growing Southeast Asian nations. Thailand
is further along the economic cycle but the pain it is going through has
heightened investors' wariness about the region in general and is likely to
prove a dampener on the markets in the near term. The collapse in the Thai
market and the correction in Malaysia, Singapore and the Philippines have
brought market valuations back to attractive levels but short-term sentiment
remains poor.
In summary, the Portfolio will continue to selectively seek to move out of more
extended markets like Hong Kong into the more distressed situations in Southeast
Asia.
Ean Wah Chin
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Asian Equity Portfolio
17
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------------
COMMON STOCKS (99.2%)
CHINA (1.2%)
1,968,000 Guangshen Railway Co., Ltd., Class H.............. $ 864
3,299,000 Qingling Motors Co., Class H...................... 1,703
137,000 Shenzhen Fangda Co., Ltd., Class B................ 199
(a)4,901,000 Zhejiang Expressway Co. Ltd., Class H............. 1,189
----------
3,955
----------
HONG KONG (36.0%)
2,136,000 Cheung Kong Holdings Ltd.......................... 21,092
408,000 China Merchants Holdings International Co.,
Ltd............................................. 1,269
2,918,000 China Resources Enterprise Ltd.................... 14,313
337,000 Dao Heng Bank Group Ltd........................... 1,844
409,300 Hang Seng Bank Ltd................................ 5,838
1,436,000 Henderson Land Development Co., Ltd............... 12,743
617,220 HSBC Holdings plc................................. 18,563
1,752,000 Hutchison Whampoa Ltd............................. 15,152
1,069,000 New World Development Co., Ltd.................... 6,375
1,006,000 Ng Fung Hong Ltd.................................. 1,506
1,786,000 Shanghai Industrial Holdings Ltd.................. 11,112
569,100 Sun Hung Kai Properties Ltd....................... 6,850
----------
116,657
----------
INDONESIA (6.9%)
1,190,000 Astra International (Foreign)..................... 4,893
(d)3,246,683 Bank International Indonesia (Foreign)............ 2,803
(d)3,900,000 Bank Negara Indonesia (Foreign)................... 2,486
(d)733,000 Bimantara Citra (Foreign)......................... 1,281
(d)377,000 Gudang Garam (Foreign)............................ 1,581
(d)403,200 Hanjaya Mandala Sampoerna
(Foreign)....................................... 1,538
(d)884,400 Indofood Sukses Makmur (Foreign).................. 2,036
(d)1,174,000 Matahari Putra Prima (Foreign).................... 2,365
(a,d)1,349,000 Mayora Indah (Foreign)............................ 763
(a,d)454,000 Putra Surya Multidana (Foreign)................... 723
(d)1,057,000 Telekomunikasi Indonesia (Foreign)................ 1,728
----------
22,197
----------
KOREA (8.0%)
51,180 Hansol Paper Co................................... 1,297
(d)107,250 Housing & Commercial Bank, Korea (New)............ 2,002
67,568 Kookmin Bank GDR.................................. 1,427
(a,d)94,367 Kookmin Bank GDR (New)............................ 1,741
106,660 Korea Electric Power Corp......................... 3,183
23,490 LG Information & Communication Ltd. RFD (New)..... 2,910
(d)35,030 Pohang Iron & Steel Co., Ltd. ADR................. 3,588
(a,e)7,960 Samsung Electronics GDR (New)..................... 472
(d)66,698 Samsung Electronics GDS........................... 7,466
(d)133,761 Shinhan Bank Co., Ltd............................. 1,939
----------
26,025
----------
MALAYSIA (15.8%)
309,000 Arab Malaysian Corp., Bhd......................... 1,151
3,063,000 Berjaya Group Bhd................................. 3,762
236,000 Berjaya Sports Toto Bhd........................... 1,113
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------------
1,118,000 Commerce Asset Holdings Bhd....................... $ 2,946
220,000 Dialog Group Bhd.................................. 3,181
362,000 Edaran Otomobil Nasional Bhd...................... 3,083
636,700 Genting Bhd....................................... 3,052
813,000 IJM Corp. Bhd..................................... 1,707
513,000 Jaya Tiasa Holdings Bhd........................... 2,581
(a)848,000 Leader Universal Holdings Bhd..................... 1,525
58,000 Lityan Holdings Bhd............................... 707
388,500 Malayan Banking Bhd............................... 4,079
96,316 Malaysian International Shipping Bhd (Foreign).... 250
267,000 Malaysian Pacific Industries Bhd.................. 1,164
309,000 Malaysian Resources Corp. Bhd..................... 851
687,000 Multi-Purpose Holdings Bhd........................ 964
544,000 Rashid Hussain Bhd................................ 3,448
1,339,000 Resorts World Bhd................................. 4,032
2,456,000 Sime Darby Bhd.................................... 8,174
467,000 United Engineers Ltd.............................. 3,367
----------
51,137
----------
PHILIPPINES (4.1%)
4,782,171 Ayala Land, Inc., Class B......................... 4,397
(a)15,461,000 Digital Telecommunications Philippines, Inc....... 1,495
(a)4,764,200 DMCI Holdings, Inc................................ 1,571
(a)2,536,000 Fil-Estate Land, Inc.............................. 740
2,823,100 JG Summit Holding, Class B........................ 578
501,234 Manila Electric Co., Class B...................... 2,471
6,486,000 SM Prime Holdings, Inc., Class B.................. 1,918
----------
13,170
----------
SINGAPORE (11.5%)
225,500 Development Bank of Singapore Ltd. (Foreign)...... 2,839
634,000 Electronic Resources Ltd.......................... 998
265,000 Jurong Shipyard Ltd............................... 1,149
2,543,000 Natsteel Ltd...................................... 6,474
296,378 Oversea-Chinese Banking Corp. (Foreign)........... 3,068
(a)841,000 Pacific Century Regional Development.............. 1,171
598,000 Parkway Holdings Ltd.............................. 2,677
337,400 Singapore Press Holdings (Foreign)................ 6,797
(a)2,146,000 Summit Holdings Ltd............................... 1,621
(a)948,000 Super Coffeemix Manufacturing Ltd................. 789
266,200 United Overseas Bank Ltd. (Foreign)............... 2,737
(a)1,207,200 Want Want Holdings................................ 4,008
953,000 Wing Tai Holdings Ltd............................. 2,746
----------
37,074
----------
TAIWAN (12.3%)
(a)1,200,000 Acer, Inc......................................... 4,317
(a)500,000 Asustek Computer, Inc............................. 6,619
278,150 Cathay Life Insurance Co., Ltd.................... 1,591
(a)930,000 China Development Corp............................ 4,800
791,400 China Steel Corp.................................. 837
(a)1,716,000 Compal Electronics................................ 6,790
2,310,000 Far East Textiles Ltd............................. 3,631
1,455,150 Formosa Plastics Corp............................. 3,507
830,000 Great Wall Enterprises Co......................... 657
</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 (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
TAIWAN (CONT.)
<TABLE>
<C> <S> <C>
(a)1,606,740 Kuoyang Construction.............................. $ 3,872
998,200 Siliconware Precision Industries Co............... 3,375
----------
39,996
----------
THAILAND (3.4%)
433,100 Bangkok Bank PCL (Foreign)........................ 2,976
185,000 Big C Supercenter PCL (Foreign)................... 59
(a)287,700 Eastern Water Resources Development and Management
PCL............................................. 333
5,800 I.C.C. International PCL.......................... 19
(d)58,000 I.C.C. International PCL (Foreign)................ 181
25,000 Matichon PCL (Foreign)............................ 58
162,700 Nation Multimedia Group PCL....................... 346
(d)24,000 Nation Multimedia Group PCL (Foreign)............. 51
(d)911,700 National Petrochemical PCL (Foreign).............. 933
291,000 Quality House PCL (Foreign)....................... 99
(d)87,000 Robinson Department Store PCL (Foreign)........... 31
514,800 Siam Commercial Bank PCL (Foreign)................ 2,106
(a)40,000 Sino Thai Engineering & Construction PCL.......... 111
(a,d)21,000 Sino Thai Engineering & Construction PCL
(Foreign)....................................... 58
577,270 Thai Farmers Bank PCL (Foreign)................... 2,451
59,500 Thai Rung Union Car PCL........................... 215
(d)38,000 Thai Rung Union Car PCL (Foreign)................. 137
(d)33,000 Thai Storage Battery PCL (Foreign)................ 33
166,500 Thai Theparos Food Product PCL (Foreign).......... 257
(d)144,700 United Communications Industry PCL (Foreign)...... 598
----------
11,052
----------
TOTAL COMMON STOCKS (Cost $290,823)................................. 321,263
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------------
RIGHTS (0.1%)
MALAYSIA (0.0%)
(a)203,600 Commerce Asset Holdings Bhd, expiring 7/23/97..... 7
----------
SINGAPORE (0.1%)
(a)317,000 Electronic Resources Ltd., expiring 7/07/97....... 211
----------
TOTAL RIGHTS (Cost $0).............................................. 218
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------------
WARRANTS (0.0%)
MALAYSIA (0.0%)
(a)127,250 Commerce Asset Holdings Bhd, expiring 3/16/02..... 20
(a)77,714 Rashid Hussain Bhd, expiring 12/31/02............. --
----------
TOTAL WARRANTS (Cost $0)............................................ 20
----------
TOTAL FOREIGN SECURITIES (99.3%) (Cost $290,823).................... 321,501
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------
SHORT-TERM INVESTMENT (2.0%)
REPURCHASE AGREEMENT (2.0%)
$ 6,370 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $6,371,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $6,481 (Cost $6,370).... $ 6,370
---------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<C> <S> <C>
- -------------
FOREIGN CURRENCY (0.5%)
HKD 3 Hong Kong Dollar................................. --
IDR 1,053,258 Indonesian Rupiah................................ 433
MYR 677 Malaysian Ringgit................................ 268
PHP 11,103 Philippines Peso................................. 421
SGD 19 Singapore Dollar................................. 13
KRW 403,384 South Korean Won................................. 454
TWD 1,820 Taiwan Dollar.................................... 66
---------
TOTAL FOREIGN CURRENCY (Cost $1,656).............................. 1,655
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (101.8%) (Cost $298,849)............... 329,526
--------
OTHER ASSETS (12.7%)
Securities at Value, Held as Collateral for
Securities Lending....................... $ 37,586
Receivable for Investments Sold............ 3,177
Dividends Receivable....................... 193
Receivable for Portfolio Shares Sold....... 124
Security Lending Income Receivable......... 37
Foreign Withholding Tax Reclaim
Receivable............................... 26
Interest Receivable........................ 1
Other...................................... 19 41,163
----------
LIABILITIES (-14.5%)
Collateral on Securities Loaned, at
Value.................................... (37,586)
Payable for Investments Purchased.......... (6,541)
Payable for Portfolio Shares Redeemed...... (1,108)
Bank Overdraft............................. (706)
Investment Advisory Fees Payable........... (474)
Payable for Closed Foreign Currency
Exchange Contracts....................... (112)
Custodian Fees Payable..................... (106)
Deferred Foreign Taxes Payable............. (94)
Net Unrealized Loss on Foreign Currency
Exchange Contracts....................... (80)
Security Lending Fees Payable.............. (45)
Administrative Fees Payable................ (43)
Directors' Fees & Expenses Payable......... (15)
Distribution Fees Payable.................. (3)
Other Liabilities.......................... (48) (46,961)
---------- --------
NET ASSETS (100%)........................................ $323,728
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
19
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- -------------------------------------------------------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $290,816
Undistributed Net Investment Income............... 1,258
Accumulated Net Realized Gain..................... 1,154
Unrealized Appreciation on Investments and Foreign
Currency Translations (Net of accrual for
foreign taxes of $94 on unrealized aprreciation
on investments)................................. 30,500
--------
NET ASSETS........................................ $323,728
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $318,844
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 16,638,769 outstanding $.001 par
value shares (authorized 500,000,000 shares).... $19.16
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $4,884
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 255,010 outstanding $.001 par
value shares (authorized 500,000,000 shares).... $19.15
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver or is to receive 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>
- ------------- -------- ----------- --------------- -------- ------------
MYR 388 $ 154 7/01/97 U.S.$ 154 $ 154 $ --
U.S.$ 49 49 7/01/97 SGD 70 49 --
U.S.$ 460 460 7/01/97 IDR 1,117,083 459 (1)
IDR 398,277 164 7/02/97 U.S.$ 164 164 --
U.S.$ 88 88 7/02/97 THB 2,284 88 --
U.S.$ 296 296 7/02/97 IDR 720,331 296 --
U.S.$ 223 223 7/03/97 IDR 542,794 223 --
U.S.$ 1,381 1,381 7/03/97 HKD 10,700 1,381 --
U.S.$ 1,446 1,446 7/03/97 SGD 2,067 1,446 --
U.S.$ 108 108 7/03/97 THB 2,791 108 --
HKD 17,066 2,203 7/03/97 U.S.$ 2,202 2,202 (1)
HKD 3,341 431 7/07/97 U.S.$ 431 431 --
HKD 3,341 431 7/07/97 U.S.$ 431 431 --
U.S.$ 1,755 1,755 7/08/97 MYR 4,429 1,754 (1)
THB 315,361 11,955 8/18/97 U.S.$ 11,878 11,878 (77)
-------- -------- -----
$ 21,144 $ 21,064 $ (80)
-------- -------- -----
-------- -------- -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Securities (totaling $36,062 or 11.1% of net assets at June 30, 1997)
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
GDS -- Global Depositary Shares
PCL -- Public Company Limited
RFD -- Ranked for Dividend
THB -- Thai Baht
- --------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATIONS
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment...................... $ 47,486 14.7%
Consumer Goods......................... 37,386 11.5
Energy................................. 5,653 1.7
Finance................................ 149,834 46.3
Materials.............................. 22,181 6.9
Multi-Industry......................... 30,166 9.3
Services............................... 28,795 8.9
--------- ---
$ 321,501 99.3%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
20
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 2.4%
Brazil 16.5%
Bulgaria 0.4%
Chile 0.6%
China 0.1%
Colombia 0.2%
Egypt 1.3%
Hong Kong 2.8%
Hungary 0.5%
India 10.0%
Indonesia 5.2%
Israel 2.3%
Korea 7.0%
Malaysia 1.1%
Mexico 11.0%
Morocco 0.4%
Pakistan 3.1%
Peru 0.5%
Poland 1.6%
Russia 7.1%
Singapore 0.4%
South Africa 7.6%
Taiwan 4.5%
Thailand 5.2%
Turkey 4.2%
Venezuela 0.3%
Zimbabwe 0.9%
Other 2.8%
</TABLE>
PERFORMANCE COMPARED TO THE IFC GLOBAL
TOTAL RETURN COMPOSITE INDEX(1)
- -------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 25.78% 17.28% 17.01%
PORTFOLIO -- CLASS B.... 25.65 17.07 24.98
INDEX -- CLASS A........ 17.10 11.31 15.01
INDEX -- CLASS B........ 17.10 11.31 16.71
</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 (includes 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.
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 six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 25.78% and 17.28%, respectively, for the Class A shares; and
25.65% and 17.07%, respectively, for the Class B shares as compared to total
returns of 17.10% and 11.31%, respectively, for the IFC Global Total Return
Composite Index (the "Index"). From inception on September 25, 1992 to June 30,
1997, the average annual total return of Class A was 17.01% as compared to
15.01% for the Index. From inception on January 2, 1996 to June 30, 1997, the
average annual total return of Class B was 24.98% as compared to 16.71% for the
Index.
The second quarter was volatile, with returns ranging from -26.0% in Thailand to
44.5% in Russia. Latin America continued its outperformance in the second
quarter. All markets in the region were up during the second quarter. Brazil, up
51.2% year-to-date and 25.0% during the quarter, remains the anchor in the
region. Privatization and strong earnings growth underpinned the region's 20.9%
return in U.S. dollars terms over the quarter. While we remain optimistic about
the positive impact that privatization will have in the region, we are concerned
that the market may be anticipating too much good news on the horizon, and are
lightening up our exposure to Brazil. Going forward, our exposure in Brazil will
be concentrated in those stocks that have compelling valuations, superior
management expertise or limited downside risk to a macro shock. We continue to
like Mexico, where falling interest rates and a stable peso contribute to a
solid economic recovery. Positive news on the consumer front further supports
this market.
Asia continues to convulse with macro-economic imbalances created by
overinvestment, growth of current account deficits and inflexible exchange
rates. In May, a speculative attack on the Thai baht prompted officials to raise
interest rates precipitously and to institute a two-tiered currency system,
further diminishing badly needed inflows of foreign capital to this market.
The Bank of Thailand moved to a managed float of the baht in July. The value of
the baht would be set by market forces, but the flotation would be managed by
the authorities. The baht peg to a basket of currencies has been discontinued.
We hedged our Thai currency exposure in May as we believed that the Thai market
represented value but we also believed that a devaluation was in the offing. The
hedge was put on when the baht traded at 26. It subsequently went to 20 and
finally to 29. The baht
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
21
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
has been trading in a range since the announcement, but we believe that there
could be further depreciation near term. We also believe that the Thai market
has bottomed and that this event is bullish for the stock market, although
bearish for the economy. Our projection for the baht level in the near term is
in the 31-32 area. We have maintained approximately 50% of our hedge in the
aftermath of the devaluation. We achieved a return of approximately 8% on the
portion of the hedge that was closed out. We will continue to monitor this
situation closely to determine if and when we should unwind our remaining baht
hedges. Possible next steps include a financial sector restructuring package and
the elimination of the two tier foreign exchange system. Thailand needs foreign
capital flows to finance its economic recovery and these controls are hampering
capital inflows. Also, as the currency stabilizes the need for these controls
should disappear.
Further in the region, markets like Malaysia (-12.2% year-to-date) and the
Philippines (-12.2% year-to-date) have suffered as fears of Thai style property
and finance problems led to sell-offs. We are significantly underweight Malaysia
and are out of the Philippines, which has positively impacted Portfolio
performance. With these two markets 20-25% off their highs, we are re-examining
our extreme underweight in these countries.
In Russia, falling interest rates and significant progress on both the economic
restructuring and tax reform fronts supported the market. Russia was up 44.5%
during the second quarter and 117.3% year-to-date. Lower rates are luring local
investors, further boosting returns. The inclusion of Russia in the IFC's
investable index also favorably impacted performance. We favor energy and
electric utility stocks in this market, as valuations remain attractive and
growth prospects long-term are solid.
India has shaken off the malaise of political instability and is refocussed on
the business of market liberalization and reform. Tax cuts, lower interest rates
and the new coalition government have brought local and foreign investors into
the market, which is up 27.4% in the second quarter and 36.4% so far this year.
The market has been led so far by a select few companies, but with easing rates
and projected pick-ups in industrial production, we expect to see an increasing
breadth in advances. Pakistan has followed its political rival. Similar problems
have led to similar opportunities. The market continues to rise on the back of
low valuations and stabilizing politics. We will continue to raise our weight in
Pakistan, mainly through Pakistan Telecom, as we expect some positive
developments on tariff rates.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
MSCI Emerging Markets Indices
Performance ($US)
3 Months to June 30 1997
% Change
THAILAND -26.0%
CZECH REPUBLIC -20.4%
POLAND -15.5%
PHILIPPINES -14.3%
MALAYSIA -12.1%
TURKEY -0.6%
PAKISTAN 1.1%
SOUTH AFRICA 1.3%
GREECE 6.4%
INDONESIA 6.9%
COLOMBIA 7.7%
JORDAN 10.3%
ISRAEL 12.0%
CHINA 12.9%
KOREA 13.4%
PORTUGAL 14.4%
ARGENTINA 15.0%
CHILE 15.2%
TAIWAN 15.6%
PERU 16.0%
MEXICO 18.1%
HONGKONG 19.4%
BRAZIL 25.0%
HUNGARY 26.0%
INDIA 27.4%
SRI LANKA 29.5%
VENEZUELA 44.2%
RUSSIA 44.5%
</TABLE>
Madhav Dhar
PORTFOLIO MANAGER
Robert L. Meyer
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
22
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
COMMON STOCKS (96.0%)
ARGENTINA (2.4%)
(a)6 Acindar, Class B.................................. $ --
(a)119,870 Nortel ADR........................................ 3,251
293,038 Quilmes (Registered).............................. 3,004
96,208 Telecom Argentina ADR............................. 5,051
673,485 Telefonica Argentina ADR.......................... 23,319
286,585 YPF ADR........................................... 8,812
----------
43,437
----------
BRAZIL (16.5%)
(q)373,153,448 Banco Bradesco (Preferred)........................ 3,761
(a,d,q)295,998,880 Banco Nacional (Preferred)........................ 14
(q)40,997,030 Brahma (Preferred)................................ 31,226
351,070 Brahma ADR........................................ 5,376
(q)620,000 Brasmotor (Preferred)............................. 138
(e)20,000 CELESC GDR........................................ 2,780
(q)520,963,993 CEMIG (Preferred)................................. 26,856
237,486 CEMIG ADR......................................... 11,956
(e)84,361 CEMIG ADR......................................... 4,348
(q)11,559,000 Coteminas (Preferred)............................. 4,509
(a)33,704,500 CRT............................................... 50,716
(q)1,232,300 CRT (Preferred)................................... 1,854
45,390,000 Eletrobras........................................ 25,380
356,347 Eletrobras ADR.................................... 9,942
(q)17,525,850 Eletrobras, Class B (Preferred)................... 10,451
(q)18,089,800 Itaubanco (Preferred)............................. 10,132
9,666,000 Lightpar.......................................... 3,852
(q)119,019,000 Lojas Arapua (Preferred).......................... 1,935
(e)120,830 Lojas Arapua ADR.................................. 2,003
(q)52,673,000 Lojas Renner (Preferred).......................... 2,701
(a,q)39,236,000 Pao de Acucar (Preferred)......................... 893
(e,q)152,589 Pao de Acucar ADR (Preferred)..................... 3,471
(q)63,285,333 Petrobras (Preferred)............................. 17,577
(q)12,500 Sadia Concordia (Preferred)....................... 13
79,644,000 Telebras.......................................... 10,801
(q)128,136,000 Telebras (Preferred).............................. 19,436
(a,e)7,769 Telebras ADR...................................... 1,179
151,605 Telebras ADR...................................... 23,006
(a)4,957,162 TELESP............................................ 1,462
(q)6,496,914 TELESP(Preferred)................................. 2,124
(a,q)294,330 Unibanco GDR (Preferred).......................... 10,927
----------
300,819
----------
CHILE (0.6%)
147,900 CCU ADR........................................... 3,245
71,100 Enersis ADR....................................... 2,528
167,112 Santa Isabel ADR.................................. 5,389
----------
11,162
----------
CHINA (0.1%)
4,056,000 Guangshen Railway Co., Ltd., Class H.............. 1,780
----------
COLOMBIA (0.2%)
10,728,000 Banco de Colombia................................. 3,933
----------
EGYPT (1.3%)
89,993 Ameriyah Cement Co................................ 2,192
185,840 Commercial International Bank..................... 3,888
(a)187,700 Commercial International Bank GDR (Registered).... 3,913
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
114,650 Eastern Tobacco................................... $ 2,901
(a)11,525 Egypt American Bank............................... 454
49,350 Egyptian Finance & Industrial..................... 2,948
78,000 Helwan Cement..................................... 1,651
20,460 Madinet Nasr Housing & Development................ 1,445
21,655 North Cairo Flour Mills Co........................ 1,128
125,765 Torah Portland Cement............................. 3,182
----------
23,702
----------
HONG KONG (2.8%)
717,000 Cheung Kong Holdings Ltd.......................... 7,080
(a)2,748,000 China Everbright-IHD Holdings Ltd................. 8,211
7,143,000 China Resources Beijing Land...................... 5,301
2,392,000 China Resources Enterprise Ltd.................... 11,733
60,000 Guangshen Railway Co., Ltd. ADR................... 1,313
441,000 Hutchison Whampoa Ltd............................. 3,814
606,000 New World Development Co., Ltd.................... 3,614
1,098,000 Shanghai Industrial Holdings Ltd.................. 6,831
7,015,000 Zhenhai Refining & Chemical Co., Ltd., Class H.... 2,535
----------
50,432
----------
HUNGARY (0.5%)
(a)21,178 Borsod Chem Rt. GDR (Registered).................. 823
7,700 Gedeon Richter.................................... 709
28,300 Gedeon Richter GDR (Registered)................... 2,604
(a)158,984 MOL Magyar Olaj-es Gazipari Rt. GDR
(Registered).................................... 3,537
112,800 Tisza Vegyi Kombinat Rt. GDR (Registered)......... 1,932
----------
9,605
----------
INDIA (9.9%)
230,000 American Dry Fruits............................... 41
200 Andhra Valley Power Supply Co., Ltd............... 1
(a)485,675 Apollo Tyres Ltd.................................. 1,506
1,337 Associated Cement Cos., Ltd....................... 54
358 Bharat Forge Co., Ltd., Class A................... 1
4,525,900 Bharat Heavy Electricals.......................... 48,894
(a)151,400 Bharat Pipes & Fittings Ltd., Class B............. 3
710,040 Birla VXL Ltd..................................... 268
141,642 Carrier Aircon Ltd................................ 969
335,400 Ceat Ltd.......................................... 288
10,702 Century Textiles and Industries Ltd............... 658
1,148,400 Container Corp. of India Ltd...................... 16,777
350,100 Crompton Greaves Ltd.............................. 729
115,100 Dabur India Ltd................................... 771
(a)600,000 DCL Polyesters Ltd................................ 95
14,500 Delta Industries Ltd.............................. 4
260,300 Esab India Ltd.................................... 765
50,000 Essel Packagings Ltd.............................. 182
(d)2,200 Federal Bank Ltd. (New)........................... 5
</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 (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
INDIA (CONT.)
<TABLE>
<C> <S> <C>
(a,d)200,300 Garware Plastics & Polyester (New)................ $ 319
376,700 Garware Plastics & Polyester, Class A............. 621
688,500 Godrej Soaps Ltd.................................. 442
3,109,500 Great Eastern Shipping Co......................... 4,256
329,000 Gujarat Ambuja Cements Ltd........................ 3,184
75,100 Gujarat Narmada Valley Fertilizers Co., Ltd....... 48
(a)511,321 Hero Honda, Class B............................... 7,327
740,100 Hindustan Development Corp., Ltd.................. 219
129,706 Housing Development Finance Corp.................. 14,792
315,400 ICI India Ltd..................................... 1,603
(a,g)55,194 India Magnum Fund Ltd., (The) Class A............. 2,870
(a,f,g)78,000 India Magnum Fund Ltd., (The) Class A (acquired
11/25/92-3/01/94, Cost $3,872).................. 4,056
(a)644,615 India Organic Chemical Ltd........................ 81
(a)1,000,000 Indian Petrochemicals Corp., Ltd.................. 4,050
(a,d)4,125 Indian Seamless Metal Tubes Ltd. (New)............ 2
(a)200 Indian Seamless Steel & Alloys.................... --
(a)571,047 Indo Rama Synthetics Ltd.......................... 407
(d)171,154 Indo Rama Synthetics Ltd. (New)................... 111
140 Industrial Credit & Investment Corp. of Indian
Ltd............................................. --
1,149,500 Industrial Finance Corp. of India................. 1,027
100,000 Infosys Technology Ltd............................ 5,196
100 ITC Agrotech Ltd., Class B........................ --
(a)614,900 ITC Bhadrachalam Paperboards Ltd.................. 790
(d)500,913 ITC Bhadrachalam Paperboards Ltd. (New)........... 609
542,619 ITC Ltd........................................... 8,530
5,292 JCT Ltd. GDR...................................... 8
(a)1,500,162 JK Synthetics Ltd................................. 241
490,000 KEC International Ltd............................. 660
135,900 Kirloskar Oil Engines Ltd......................... 224
185,450 Lakme Ltd., Class B............................... 2,135
150,000 Lakshmi Precision Screws.......................... 88
10 Madras Cement Ltd................................. 2
748,800 Mahanagar Telephone Nigam......................... 6,353
309,534 Mahavir Spinning Mills Ltd........................ 640
(a,g)42,697,100 Morgan Stanley Growth Fund........................ 7,633
(a,g)19,389 Morgan Stanley India Investment Fund, Inc......... 251
98,631 MRF Ltd., Class B................................. 8,127
25,000 OM Sindoori Hotels Ltd............................ 59
350,000 Patheja Forgings & Auto Parts, Class B............ 140
530 PCS Data Products Ltd., Class B................... --
(a)218,440 Philips India Ltd................................. 531
150 Priyadarshini Cement Ltd., Class B................ --
(a)83,100 Raymond Ltd....................................... 151
(a,d)104,875 Raymond Ltd. (Bonus Shares)....................... 176
(a)1,248,100 Sanghi Polyesters Ltd............................. 209
190,900 Shanti Gears Ltd.................................. 747
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
(a)37,300 Sharp Industries Ltd.............................. $ 4
140,636 Shree Vindhya Paper Mills......................... 67
(a)50 Siemens India Ltd................................. --
(a)45,000 Sri Venkatesa Mills Ltd........................... 126
1,605,150 State Bank of India............................... 15,256
67,000 Sudarshan Chemical Industries Ltd................. 97
212,662 Tata Engineering & Locomotive, Class A............ 2,685
470 Tata Hydro-Electric Power Supply Co............... 1
111 Tata Iron and Steel Co., Ltd...................... 1
196,017 Tube Investments of India......................... 320
1,676 United Phosphorus Ltd. GDR........................ 11
1,092,200 Uttam Steels Ltd., Class A........................ 296
100 Videocon International Ltd., Class A.............. --
2,100 Videsh Sanchar Nigam Ltd.......................... 68
89,600 Wartsila Diesel Ltd............................... 995
----------
180,853
----------
INDONESIA (5.2%)
(a)6,118,500 Astra International (Foreign)..................... 25,158
(a,d)11,288,294 Bank International Indonesia (Foreign)............ 9,747
20,407,000 Bank Negara Indonesia (Foreign)................... 13,006
(d)4,580,500 Bimantara Citra (Foreign)......................... 8,005
(d)2,344,000 Gudang Garam (Foreign)............................ 9,831
(d)2,973,000 Hanjaya Mandala Sampoerna (Foreign)............... 11,338
6,148,789 Indah Kiat Pulp & Paper Corp...................... 1,075
(d)6,426,432 Indah Kiat Pulp & Paper Corp. (Foreign)........... 3,765
(a,d)2,150,400 Indofood Sukses Makmur (Foreign).................. 4,952
(a,d)3,480,500 Matahari Putra Prima (Foreign).................... 7,013
889,000 Mayora Indah (Foreign)............................ 503
365,000 Putra Surya Multidana (Foreign)................... 581
----------
94,974
----------
ISRAEL (2.3%)
(a)2,047,600 Bank Hapoalim Ltd. (Registered)................... 4,261
(a)152,300 Blue Square ADR................................... 2,627
413,803 Elbit Systems Ltd................................. 4,942
5,250 First International Bank of Israel, Class 1....... 760
4,561 First International Bank of Israel, Class 5....... 3,514
106,835 Koor Industries Ltd............................... 9,459
768,000 Osem Investment Ltd............................... 4,072
4,002,150 Supersol Ltd...................................... 12,838
----------
42,473
----------
KOREA (7.0%)
154,800 Cho Hung Bank Co., Ltd............................ 1,028
374,700 Cho Hung Bank Co., Ltd. GDR....................... 2,717
(a)215,640 Hansol Paper Co., Ltd............................. 5,464
(a)7,309 Hanwa Chemical Corp............................... 58
(a)449,710 Housing & Commercial Bank, Korea.................. 8,395
</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 (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
KOREA (CONT.)
<TABLE>
<C> <S> <C>
(a)265,160 Hyundai Engineering & Construction Co............. $ 6,808
385,247 Kookmin Bank GDR.................................. 8,138
(a,d)340,325 Kookmin Bank GDR (New)............................ 6,279
403,310 Korea Electric Power Corp......................... 12,036
270,400 Korea Exchange Bank............................... 1,781
140,720 LG Information & Communication Ltd................ 17,431
(d)94,980 Pohang Iron & Steel Co., Ltd...................... 9,728
101,070 Pohang Iron & Steel Co., Ltd. ADR................. 3,234
(a)281,325 Samsung Electronics............................... 31,492
(e)112,454 Samsung Electronics GDR........................... 6,311
433,830 Shinhan Bank Co., Ltd............................. 6,288
----------
127,188
----------
MALAYSIA (1.1%)
1,956,000 Commerce Asset Holding Bhd........................ 5,153
1,010,200 Genting Bhd....................................... 4,843
431,000 Rashid Hussain Bhd................................ 2,732
1,442,000 Resorts World Bhd................................. 4,342
390,000 United Engineers Ltd.............................. 2,812
----------
19,882
----------
MEXICO (11.0%)
397,452 Apasco............................................ 2,846
(a)2,959,139 Banacci, Class B.................................. 7,610
(a)966,103 Banacci, Class L.................................. 2,256
(a)2,991,308 Bancomer, Class B................................. 1,444
(a,e)878,610 Bancomer, Class B ADR............................. 8,566
212,805 Carso ADR......................................... 3,001
975,710 Carso, Class A1................................... 6,802
1,483,278 Cemex CPO......................................... 6,451
1,098,597 Cemex CPO ADR..................................... 9,530
(a)584,290 Cemex, Class B.................................... 2,858
660,570 Cemex, Class B ADR................................ 6,362
146,857 Cifra, Class A.................................... 272
1,200,725 Cifra, Class C.................................... 1,922
135,236 Desc ADR.......................................... 3,939
7,111,302 FEMSA, Class B.................................... 42,406
(a,e)62,006 Gruma ADR......................................... 1,147
(a)157,945 Gruma, Class B.................................... 732
2,537,746 Kimberly, Class A................................. 10,174
1,055,469 Maseca, Class B................................... 1,155
(a)985,073 Televisa CPO GDR.................................. 29,922
21,975 Telmex ADR........................................ 1,049
1,049,040 Telmex, Class L ADR............................... 50,092
----------
200,536
----------
MOROCCO (0.4%)
82,900 SNI Maroc, Series 'V' (Bearer).................... 6,302
----------
PAKISTAN (3.1%)
15 Cherat Cement Ltd................................. --
31,200 Dewan Salman Fibre................................ 27
(a)843,419 D.G. Khan Cement Ltd.............................. 254
6,776,500 Fauji Fertilizer Co., Ltd......................... 13,329
(a)5,289,000 Hub Power Co...................................... 5,352
(a)2,068,660 Karachi Electric Supply Corp...................... 614
(a)1,256,519 Nishat Mills Ltd.................................. 622
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
956,506 Pakistan State Oil Co., Ltd....................... $ 7,703
(a)38,350 Pakistan Telecommunications Corp. GDS............. 2,895
29,255,200 Pakistan Telecommunications Corp., Class A........ 22,257
(a)5,286,254 Sui Northern Gas.................................. 4,152
----------
57,205
----------
PERU (0.5%)
47 Cementos Lima..................................... --
248,010 Tel Peru, Class B ADR............................. 6,495
103,950 Telefonica del Peru S.A. ADR...................... 2,722
----------
9,217
----------
PHILIPPINES (0.0%)
28,120 Ayala Land, Inc., Class B......................... 26
----------
POLAND (1.6%)
(a)165,000 Agros Holding S.A., Class C....................... 4,393
(a)33,000 Agros Holding S.A., Class D....................... 703
(a)72,900 Bank of Handlowy W Warszawie S.A.................. 776
1,356,158 BIG, S.A.......................................... 1,630
27,340 Bank Slaski S.A................................... 1,955
68,000 BRE Bank.......................................... 1,428
139,560 Debica S.A........................................ 2,866
(a)33,400 Eastbridge NV..................................... 2,245
632,000 Elektrim S.A...................................... 5,500
(a)288,468 Exbud S.A......................................... 2,905
(a)2,085,038 International UNP Holdings Ltd.................... 302
(a)373,740 Mostostal Exports S.A............................. 1,183
491,000 Polifarb Wroclaw S.A.............................. 1,838
11,125 Wedel S.A......................................... 599
----------
28,323
----------
RUSSIA (6.5%)
(a)592,359 Alliance Cellulose Ltd............................ 3,981
82,039,000 Edinaya Energetics (2nd Issue).................... 29,690
(a)400,000 Global Tele-Systems Group, Inc. (Registered)...... 8,000
(a)13,765,000 Irkutskenergo..................................... 4,687
(a)322,100 LUKoil Holding.................................... 6,323
80,000 LUKoil Holding ADR................................ 6,280
(a,e)127,230 LUKoil Holding GDR................................ 9,988
11,038,000 Mosenergo......................................... 15,464
(a)352,340 Noyabrskneftegaz.................................. 3,885
(a)2,171,100 Rostelecom (New).................................. 8,424
(a)317,851 Russian Telecomm Development Corp................. 1,510
(a)990 Storyfirst Communications, Inc., Class C.......... 660
(a)2,640 Storyfirst Communications, Inc., Class D.......... 1,980
(a)3,250 Storyfirst Communications, Inc., Class E.......... 3,250
(a)1,331 Storyfirst Communications, Inc., Class F.......... 3,327
121,800 Surgutneftgaz ADR................................. 6,516
(a)45,000 Tatneft ADR....................................... 4,793
----------
118,758
----------
</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 (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
SINGAPORE (0.4%)
(a)1,891,200 Want Want Holdings................................ $ 6,279
----------
SOUTH AFRICA (7.5%)
523,000 Amalgamated Banks of South Africa................. 3,752
1,131,600 Barlow Rand Ltd................................... 12,309
288,725 Bidvest Group Ltd................................. 2,227
121,200 De Beers Centenary AG............................. 4,475
6,050 Dreifontein Consolidated Ltd...................... 41
1,291,000 Ellerine Holdings Ltd............................. 9,191
103,668 Foodcorp Ltd...................................... 788
769,000 First National Bank Holdings Ltd.................. 6,610
1,770,000 Gencor Ltd........................................ 8,154
(a)1,608,300 Illovo Sugar Ltd.................................. 3,687
924,300 Malbak Ltd........................................ 1,467
(g)224,490 Morgan Stanley Africa Investment Fund, Inc........ 4,013
23,526 New Clicks Holdings Ltd........................... 25
890,000 Persetel Holdings Ltd............................. 6,258
2,163,500 Rembrandt Group Ltd............................... 23,080
1,340,900 Reunert Ltd....................................... 4,596
152,416 South African Druggists Ltd....................... 1,277
500,000 Sage Group Ltd.................................... 2,645
3,078,900 Sasol Ltd......................................... 40,378
800,000 Spur Holdings Ltd................................. 1,534
----------
136,507
----------
TAIWAN (4.5%)
(a)2,420,000 Acer, Inc......................................... 8,705
(a)1,810,000 Asustek Computer, Inc............................. 23,960
(a)980,000 China Development Corp............................ 5,059
(a)3,832,400 Compal Electronics................................ 15,164
8,083,000 Far Eastern Textiles.............................. 12,706
1,536,900 Formosa Plastics Corp............................. 3,704
(a)1,919,060 Kuoyang Construction.............................. 4,625
1,950,200 Siliconware Precision Industries Co............... 6,594
----------
80,517
----------
THAILAND (5.2%)
283,000 Advanced Information Service PCL.................. 2,469
1,150,650 Advanced Information Service PCL (Foreign)........ 8,217
44,600 Ban Pu Coal Co., Ltd. (Foreign)................... 651
3,290,500 Bangkok Bank PCL (Foreign)........................ 22,610
818,000 Central Pattana PCL (Foreign)..................... 1,137
1,139,000 Industrial Finance Corp. of Thailand (Foreign).... 1,451
(a)212,000 Lanna Lignite PCL................................. 1,498
(a)12,000 Lanna Lignite PCL (Foreign)....................... 80
873,000 National Finance & Securities PCL................. 547
1,596,000 National Finance & Securities PCL (Foreign)....... 1,001
2,168,400 National Petrochemical PCL........................ 2,218
(d)265,000 National Petrochemical PCL (Foreign).............. 271
36,000 Shinawatra Computer Co. PCL....................... 249
(d)1,325,400 Shinawatra Computer Co. PCL (Foreign)............. 9,158
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
150,000 Siam Cement PCL (Foreign)......................... $ 2,594
3,017,600 Siam Commercial Bank PCL (Foreign)................ 12,348
4,919,600 Thai Farmers Bank PCL (Foreign)................... 20,890
352,000 Tipco Asphalt PCL................................. 1,834
1,297,000 United Communications Industry PCL................ 5,357
(d)71,200 United Communications Industry PCL (Foreign)...... 294
----------
94,874
----------
TURKEY (4.2%)
12,340,300 Aksa.............................................. 997
58,474,500 Arcelik........................................... 7,874
29,366,500 Bossa............................................. 662
41,314,050 Ege Biracilik..................................... 9,597
43,404,000 Erciyas Biracilik................................. 5,187
97,591,000 Eregli Demir Celik................................ 16,263
(a)157,929,699 Garanti Bankasi A.S............................... 5,955
85,297,759 Garanti Bankasi A.S. (New)........................ 3,216
896,750 Guney Biracilik Ve Malt Sanayii................... 51
4,060,000 Migros (Registered)............................... 2,870
45,393,000 Sabah............................................. 405
5,805,000 Trakya Cam Sanayii................................ 254
1,102,406 Turkiye Garanti Bankasi ADR....................... 4,158
36,780,000 Vestel Elektronik Sanayi Ve Ticaret A.S........... 2,055
(a)168,832,200 Yapi Kredi (New).................................. 3,865
601,356,510 Yapi Ve Kredi Bankasi A.S......................... 13,766
----------
77,175
----------
VENEZUELA (0.3%)
79,630 Cantv ADR......................................... 3,434
1,540,000 Electricidad de Caracas........................... 2,467
----------
5,901
----------
ZIMBABWE (0.9%)
1,740,000 Delta Corp........................................ 2,670
(a)559,500 Meikles Africa Ltd................................ 1,376
(e)9,900,000 Trans Zambezi Industries Ltd...................... 8,854
3,800,000 Trans Zambezi Industries Ltd. (Registered)........ 3,399
----------
16,299
----------
TOTAL COMMON STOCKS (Cost $1,473,941)................................ 1,748,159
----------
PREFERRED STOCKS (0.0%)
INDIA (0.0%)
(a)2,700 Fabworth (India) Ltd.............................. 1
----------
RUSSIA (0.0%)
(a)85,000 Norilsk Nickel.................................... 459
----------
TOTAL PREFERRED STOCKS (Cost $357)................................... 460
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -----------------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a)1,200,493 CRT............................................... 275
----------
INDIA (0.0%)
(a)2,700 Philips India Ltd................................. --
----------
</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 (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
MALAYSIA (0.0%)
(a)391,200 Commerce Asset Holding Bhd........................ $ 23
----------
TURKEY (0.0%)
(a)2,380,000 TAT Konserve...................................... 160
----------
TOTAL RIGHTS (Cost $0)............................................... 458
----------
</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............... 68
(a,d)27,383 Flex Industries Ltd., expiring 11/23/97........... 26
----------
94
----------
INDONESIA (0.0%)
(a)1,003,404 Bank International Indonesia (Foreign), expiring
1/17/00......................................... 392
(a)1,093,118 Indah Kiat Pulp & Paper Corp., expiring 7/11/02... 191
----------
583
----------
MALAYSIA (0.0%)
(a)244,500 Commerce Asset Holding Bhd, expiring 3/16/02...... --
----------
THAILAND (0.0%)
(a)800,000 Thai Farmers Bank PCL (Foreign), expiring
9/30/99......................................... 241
(a)970,662 Thai Farmers Bank PCL (Foreign), expiring
9/15/02......................................... 422
----------
663
----------
TOTAL WARRANTS (Cost $1,458)......................................... 1,340
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------------
FIXED INCOME SECURITIES (0.4%)
BULGARIA (0.4%)
U.S.$ (n)6,250 Bulgaria Front Loaded Interest Reduction Bond,
Series A, 2.25%, 7/28/12........................ 3,570
3,950 Bulgaria Discount Bond, Series A, 'Euro',
(Floating Rate) 6.563%, 7/28/24................. 2,913
----------
TOTAL FIXED INCOME SECURITIES (Cost $4,529).......................... 6,483
----------
CONVERTIBLE DEBENTURES (0.3%)
INDIA (0.0%)
INR (d)336 DCM Shriram Industries Ltd.,
7.50%, 2/21/02.................................. 373
----------
RUSSIA (0.2%)
U.S.$ 1 Storyfirst Communications, Inc.,
First Section, Tranche I, 25.00%, 7/30/97....... 802
1 Storyfirst Communications, Inc., Second Section,
Tranche I, 25.00%, 7/30/97...................... 885
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
U.S.$ (w)-- Storyfirst Communications, Inc., Tranche II,
26.00%, 7/30/97................................. $ 441
1 Storyfirst Communications, Inc., Tranche IV,
28.00%, 7/30/97................................. 667
(a)1 Storyfirst Communications, Inc., Tranche V,
29.00%, 7/30/97................................. 762
----------
3,557
----------
SOUTH AFRICA (0.1%)
ZAR 111 Sasol Ltd. 8.50%.................................. 1,387
----------
TOTAL CONVERTIBLE DEBENTURES (Cost $5,381)........................... 5,317
----------
NON-CONVERTIBLE DEBENTURES (0.1%)
INDIA (0.1%)
INR (d)341 DCM Shriram Industries Ltd.,
9.90%, 2/21/02.................................. 479
(d)700 Saurashtra Cement & Chemicals Ltd., 18.00%,
11/27/98........................................ 1,815
----------
TOTAL NON-CONVERTIBLE DEBENTURES (Cost $2,865)....................... 2,294
----------
LOAN AGREEMENTS (0.4%)
POLAND (0.0%)
U.S.$ 54 Republic of Poland Interest Arrears PDI Bonds,
(Floating Rate), 4.00%, 10/27/14................ 46
----------
RUSSIA (0.4%)
CHF (b)11,910 Bank for Foreign Economic Affairs, 0.00%,
12/31/00........................................ 7,240
----------
TOTAL LOAN AGREEMENTS (Cost $3,270).................................. 7,286
----------
TOTAL FOREIGN SECURITIES (97.2%) (Cost $1,491,801)................... 1,771,797
----------
SHORT-TERM INVESTMENT (1.4%)
REPURCHASE AGREEMENT (1.4%)
U.S.$ 24,636 Chase Securities, Inc. 5.70%, dated 7/01/97, to be
repurchased at $24,640, collateralized by U.S.
Treasury Notes, 5.625%, due 2/15/06, valued at
$25,049 (Cost $24,636).......................... 24,636
----------
FOREIGN CURRENCY (1.0%)
ARP 4 Argentine Peso.................................... 4
BRL 3,529 Brazilian Real.................................... 3,278
COP 160,515 Colombian Peso.................................... 147
HKD 1,533 Hong Kong Dollar.................................. 198
HUF 60,939 Hungarian Forint.................................. 326
INR 76,294 Indian Rupee...................................... 2,131
IDR 2,003,489 Indonesian Rupiah................................. 824
MYR 296 Malaysian Ringgit................................. 117
MXP 2,504 Mexican Peso...................................... 316
PKR 8,251 Pakistani Rupee................................... 204
PHP 3,204 Philippines Peso.................................. 121
PLZ 5,623 Polish Zloty...................................... 1,711
ZAR 12,597 South African Rand................................ 2,777
KRW 728,384 South Korean Won.................................. 820
LKR 2 Sri Lankan Rupee.................................. --
TWD 70,747 Taiwan Dollar..................................... 2,545
THB 45,802 Thai Baht......................................... 1,768
</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 (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY (CONT.)
<TABLE>
<C> <S> <C>
VALUE
(000)
AMOUNT
(000)
- ---------------------------------------------------------------------------------
TRL 46,049,113 Turkish Lira...................................... $ 310
VEB 423,461 Venezuelan Bolivar................................ 870
----------
TOTAL FOREIGN CURRENCY (Cost $18,649)................................ 18,467
----------
TOTAL INVESTMENTS (99.6%) (Cost $1,535,086).......................... 1,814,900
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (3.4%)
Cash................................................... $ 12,901
Receivable for Investments Sold........................ 34,144
Receivable for Portfolio Shares Sold................... 9,029
Dividends Receivable................................... 5,442
Interest Receivable.................................... 399
Foreign Withholding Tax Reclaim Receivable............. 55
Other.................................................. 59 62,029
----------
LIABILITIES (-3.0%)
Payable for Investments Purchased...................... (39,640)
Payable for Foreign Taxes.............................. (6,023)
Investment Advisory Fees Payable....................... (5,189)
Custodian Fees Payable................................. (1,094)
Payable for Portfolio Shares Redeemed.................. (870)
Net Unrealized Loss on Foreign Currency Exchange
Contracts............................................ (376)
Administrative Fees Payable............................ (218)
Payable for Closed Foreign Currency Exchange
Contracts............................................ (109)
Payable for Stamp Duty Tax............................. (61)
Directors' Fees & Expenses Payable..................... (47)
Sub-Administrative Fees Payable........................ (45)
Distribution Fees Payable.............................. (15)
Other Liabilities...................................... (319) (54,006)
---------- ----------
NET ASSETS (100%).................................................... $1,822,923
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................. $1,449,752
Undistributed Net Investment Income............. 3,548
Accumulated Net Realized Gain................... 96,308
Unrealized Appreciation on Investments and
Foreign Currency Translations (Net of accrual
for foreign taxes of $6,023 on unrealized
appreciation on investments).................. 273,315
----------
NET ASSETS...................................... $1,822,923
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ------------------------------------------------
NET ASSETS...................................... $1,808,434
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 98,090,062 outstanding $0.001
par value shares (authorized 500,000,000
shares)....................................... $18.44
----------
----------
CLASS B:
- ------------------------------------------------
NET ASSETS...................................... $14,489
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 786,792 outstanding $0.001 par
value shares (authorized 500,000,000
shares)....................................... $18.42
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver or is to receive 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>
PLZ 3,134 $ 954 7/01/97 U.S.$ 954 $ 954 $ --
U.S.$ 5,145 5,145 7/01/97 ZAR 23,279 5,131 (14)
U.S.$ 2,597 2,597 7/02/97 THB 67,182 2,593 (4)
U.S.$ 2,276 2,276 7/02/97 PKR 91,835 2,272 (4)
HKD 13,195 1,703 7/03/97 U.S.$ 1,703 1,703 --
U.S $ 2,896 2,896 7/03/97 THB 74,910 2,892 (4)
HKD 5,911 763 7/07/97 U.S.$ 763 763 --
THB 449,017 17,022 8/18/97 U.S.$ 16,800 16,800 (222)
THB 96,552 3,660 8/18/97 U.S.$ 3,600 3,600 (60)
THB 488,058 18,495 8/19/97 U.S.$ 18,130 18,130 (365)
U.S.$ 2,975 2,975 8/19/97 THB 8,176 3,038 63
THB 1,063,469 39,853 9/16/97 U.S.$ 40,087 40,087 234
-------- -------- ------------
$ 98,339 $ 97,963 $ (376)
-------- -------- ------------
-------- -------- ------------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Securities (totaling $84,378 or 4.6% of net assets at June 30, 1997)
were 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 June 30, 1997 was $4,056 or 0.2% of net assets. (Total cost $3,782)
(g) -- The fund is advised by an affliate
(n) -- Step Bond- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity date.
(q) -- Non-voting stock
(w) -- Amount is less than $500.
ADR -- American Depositary Receipt
CHF -- Swiss Franc
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
PCL -- Public Company Limited
PDI -- Past Due Interest
Floating Rate Security -- Interest rate changes on these instruments are based
on changes in a designated base rate. The rates shown are those in
effect on June 30, 1997.
SUMMARY OF FOREIGN SECURITIES BY INDUSTY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- --------------------------------------------------------------------------
Capital Equipment...................... $ 139,244 7.6%
Consumer Products...................... 314,183 17.2
Energy................................. 277,069 15.2
Finance................................ 342,975 18.8
Goldmines.............................. 6,093 0.4
Loan Agreements........................ 7,286 0.4
Materials.............................. 116,414 6.4
Multi-Industry......................... 165,859 9.1
Services............................... 402,674 22.1
----------- ---
$ 1,771,797 97.2%
----------- ---
----------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
28
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Austria 1.0%
Belgium 1.0%
Denmark 2.3%
Finland 3.7%
France 11.7%
Germany 13.0%
Italy 5.6%
Netherlands 10.8%
Norway 1.9%
Portugal 0.4%
Spain 4.6%
Sweden 5.6%
Switzerland 14.3%
United Kingdom 23.7%
Other 0.4%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EUROPE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 14.85% 25.57% 21.03%
PORTFOLIO -- CLASS B.... 14.82 25.20 24.47
INDEX -- CLASS A........ 14.26 29.99 18.83
INDEX -- CLASS B........ 14.26 29.99 23.78
</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.
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 appreciation 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 six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 14.85% and 25.57%, respectively, for the Class A shares; and
14.82% and 25.20%, respectively, for the Class B shares as compared to total
returns of 14.26% and 29.99%, respectively, for the Morgan Stanley Capital
International (MSCI) Europe Index (the "Index"). From inception on April 2, 1993
to June 30, 1997, the average annual total return of Class A was 21.03% as
compared to 18.83% for the Index. From inception on January 2, 1996 to June 30,
1997, the average annual total return of Class B was 24.47% as compared to
23.78% for the Index.
During this period the European equity markets continued their strong
performance. In U.S. dollar terms, the Swiss market was the top performer with
the export stocks leading the way helped by a weaker Swiss franc. The Spanish
market was also strong, up over 20% following excellent performance in 1996.
Telefonica, the telecommunications group has continued its strong performance
helped by the fast growing mobile phone market and their exposure to Latin
America. We have also started to see good returns from some of the smaller
stocks in Spain with Bodegas y Bebidas one of the top performers in the market.
The only European market to show negative returns year-to-date is Austria with
the banks being particularly poor performers.
- --------------------------------------------------------------------------------
European Equity Portfolio
29
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
The investment environment in continental Europe is largely similar across
markets and is positive for equities, with slow but steady growth and low
inflation. Growth continues to be driven by the export sector, helped by weaker
currencies, although in some markets there are some signs of a pick up in the
domestic economy. In France, the surprise win by the leftist coalition in the
general election initially led to a weak equity market but this was soon
reversed when the new government committed to a sound fiscal policy and a
pro-European stance. The exception has been the U.K. with stronger levels of
growth and inflationary concerns leading to the Bank of England raising interest
rates.
The Portfolio remains overweight in Switzerland, Spain and the Netherlands and
underweight the U.K.. However, we have been adding to the U.K. market as we find
value relative to other European Markets. In recent months we have added the
following stocks to the Portfolio.
Esselte is an office products manufacturer with a strong pan-European position
as well as strong market share in the USA and Australia. The firm's management
has had to restructure the group's operations to confront the competition from
superstore chains. This rationalization has included using the superstores as an
important outlet for their products. The company is now well placed to pick up
in the growth of this market, particularly in Europe.
Peninsular & Oriental Steam Navigation is a diverse conglomerate of
transport-related and investment property assets. Its most valuable business is
Peninsular & Oriental Steam Navigation Cruises, which owns the Peninsular &
Oriental Steam Navigation and Princess brands. Peninsular & Oriental Steam
Navigation's fundamental problem in the past has been poor capital allocation
and over-investment in capital-intensive, low return businesses, particularly
containers and bulk shipping. Peninsular & Oriental Steam Navigation should
increase its return on capital through better asset utilization, disposal of low
yielding assets and better allocation of capital. Peninsular & Oriental Steam
Navigation's discount to the sum of its parts should close up as better returns
start to emerge. In addition, Peninsular & Oriental Steam Navigation's extensive
U.K. property holdings makes it a backdoor play on the turning U.K. property
market and its asset intensity a backstop against any return of inflation.
Valora is a Swiss retail conglomerate whose main division runs a Kiosk network
commanding a 60% share of the Swiss market. Its two other divisions, foods
wholesaling and mattresses, are also market leaders. Following years of
mis-management, the group is currently restructuring the Kiosk division.
We expect this reorganization to unlock the significant cash generating
capabilities of the division. The benefits of the restructuring are not yet
priced in. Purchased on 7.1 times cash flow, the stock offers attractive value.
Valmet is the world's leading paper machine manufacturer with a strong global
position. In recent years it has expanded from its strong European base and is
now well established in both North America and the fast growing markets in Asia.
In recent years the group has reduced its cyclicality by increasing the use of
subcontractors and expanding the service and maintenance business. Valmet has a
strong financial position and is cheap on earnings and cash flow.
Pharmacia & Upjohn is a pharmaceutical company whose price has fallen in recent
months due to a combination of disappointing earnings announcements and the
surprise resignation of the CEO. Earnings have declined due to adverse currency
exposure and higher marketing costs ahead of new drug launches. We believe,
however, that the product pipeline is underrated and includes a potential
blockbuster, Detrusitol (incontinence), and this should lead to above sector
average revenue growth of 7-8% per annum over the next five years. Management is
targeting operating margins of 25% over the same period.
Spectra-Physics is a high-tech conglomerate currently slimming down its field of
activities. The company has had a weak track record in recent years after, by
the admission of the new CEO, having become 'lazy' on double digit margins
resulting in a lack of focused new product development and a number of
acquisitions in unrelated areas. The focus is now on measurement technology. The
new CEO is not only consolidating the business and rejuvenating new product
development, but also focusing on the cost base. The emphasis in the past had
tended to be on scientific and technological expertise while the commerciality
of the products and processes tended to take second place.
Robert Sargent
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
30
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
COMMON STOCKS (96.4%)
AUSTRIA (1.0%)
27,890 Boehler-Uddeholm AG............................... $ 2,163
6,230 Radex-Heraklith Industriebet...................... 263
----------
2,426
----------
BELGIUM (1.0%)
52,300 G.I.B. Holdings Ltd............................... 2,502
55 G.I.B. Holdings Ltd. VVPR (New)................... 3
----------
2,505
----------
DENMARK (2.3%)
50,000 BG Bank A/S....................................... 2,765
52,700 Unidanmark A/S, Class A (Registered).............. 2,962
----------
5,727
----------
FINLAND (3.7%)
(a)68,600 Amer-Yhtymae Oy, Class A.......................... 1,235
48,600 Huhtamaki Oy, Series 1............................ 2,093
6,825 Kone Oy, Class B.................................. 815
300,000 Merita Ltd., Class A.............................. 1,000
247,600 Rautaruukki Oy.................................... 2,600
69,700 Valmet Oy......................................... 1,206
----------
8,949
----------
FRANCE (11.7%)
10,800 Alcatel Alsthom................................... 1,353
25,804 Banque Nationale de Paris......................... 1,064
4,900 Bongrain S.A...................................... 1,918
22,000 Cie de Saint Gobain............................... 3,209
23,300 Elf Aquitaine S.A................................. 2,515
14,990 Eridania Beghin-Say S.A........................... 2,245
17,400 Groupe Danone..................................... 2,876
48,511 Lafarge S.A....................................... 3,018
53,600 Legris Industries S.A............................. 2,527
(a)22,800 SGS-Thompson Microelectronics N.V................. 1,801
35,600 Total S.A., Class B............................... 3,600
140,000 Usinor Sacilor.................................... 2,526
----------
28,652
----------
GERMANY (9.8%)
53,000 BASF AG........................................... 1,956
62,550 Bayer AG.......................................... 2,411
2,400 Buderus AG........................................ 1,333
111,100 Gerresheimer Glas AG.............................. 1,864
173,700 Lufthansa AG...................................... 3,343
2,300 Mannesmann AG..................................... 1,028
(a)11,800 Metro AG.......................................... 1,286
2,675 Suedzucker AG..................................... 1,435
46,400 VEBA AG........................................... 2,622
6,000 Viag AG........................................... 2,741
5,000 Volkswagen AG..................................... 3,791
----------
23,810
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
ITALY (5.6%)
605,000 Editoriale L'Expresso S.p.A....................... $ 2,015
270,800 Marzotto (Gaetano) & Figli S.p.A.................. 2,266
(a)921,400 Olivetti S.p.A.................................... 261
1,009,000 Sogefi S.p.A...................................... 2,553
765,000 Stet Di Risp (NCS)................................ 2,655
811,000 Telecom Italia S.p.A.............................. 2,429
814,000 Telecom Italia S.p.A. Di Risp (NCS)............... 1,611
----------
13,790
----------
NETHERLANDS (10.8%)
143,164 ABN Amro Holdings N.V............................. 2,672
18,600 Akzo Nobel N.V.................................... 2,551
10,357 Hollandsche Beton Groep N.V....................... 2,364
80,700 ING Groep N.V..................................... 3,724
40,800 KLM Royal Dutch Airlines N.V...................... 1,259
35,000 Koninklijke Bijenkorf Beheer N.V.................. 2,450
138,380 Koninklijke KNP BT N.V............................ 3,154
41,900 Koninklijke Van Ommeren N.V....................... 1,628
91,000 Philips Electronics N.V........................... 6,523
----------
26,325
----------
NORWAY (1.9%)
367,200 Den Norske Bank ASA............................... 1,438
130,120 Saga Petroleum A/S, Class B....................... 2,273
(a)167,600 Storebrand ASA.................................... 1,000
----------
4,711
----------
PORTUGAL (0.4%)
53,000 Banco Totta & Acores, S.A., Class B
(Registered).................................... 886
----------
SPAIN (4.6%)
11,518 Bodegas y Bebidas S.A............................. 524
204,000 Iberdrola S.A..................................... 2,577
156,600 Telefonica de Espana S.A.......................... 4,530
314,600 Uralita S.A....................................... 3,515
----------
11,146
----------
SWEDEN (5.6%)
21,950 Esselte AB, Class B............................... 517
117,500 Nordbanken AB..................................... 3,950
20,000 Pharmacia & Upjohn, Inc........................... 675
43,900 Skandia Forsakrings AB............................ 1,618
77,500 S.K.F. AB, Class B................................ 2,004
88,900 Sparbanken Sverige AB, Class A.................... 1,977
69,300 Spectra-Physics AB, Class A....................... 1,246
50,000 Svenska Handelsbanken, Class A.................... 1,600
----------
13,587
----------
SWITZERLAND (14.3%)
(a)2,440 Ascom Holdings AG (Bearer)........................ 3,411
(a)540 Baloise Holding Ltd. (Registered)................. 1,287
1,710 Bobst AG (Bearer)................................. 2,905
7,550 Forbo Holding AG (Registered)..................... 3,258
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
31
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SWITZERLAND (CONT.)
<TABLE>
<C> <S> <C>
3,800 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ $ 3,589
(a)4,000 Magazine Globus (Participating Certificates)...... 2,164
3,100 Nestle S.A. (Registered).......................... 4,090
486 Novartis AG (Bearer).............................. 776
1,173 Novartis AG (Registered).......................... 1,875
10,800 Oerlikon-Buehrle Holding AG (Registered).......... 1,265
600 Schindler Holding AG (Participating
Certificates)................................... 750
1,320 Schindler Holding AG (Registered)................. 1,695
1,760 Schweizerische Industrie-Gesellschaft Holdings AG
(Registered).................................... 2,616
3,030 Sulzer AG (Registered)............................ 2,594
(a)5,800 Valora Holding AG................................. 1,232
3,750 Zuerich Versicherung (Registered)................. 1,492
----------
34,999
----------
UNITED KINGDOM (23.7%)
262,700 Associated British Foods plc...................... 2,262
402,392 BAT Industries plc................................ 3,601
339,100 BG plc............................................ 1,242
191,600 Bank of Scotland.................................. 1,231
210,500 Bass plc.......................................... 2,569
421,600 British Telecommunications plc.................... 3,131
207,550 Burmah Castrol plc................................ 3,511
462,134 Christian Salvesen plc............................ 2,170
630,000 Courtaulds Textiles plc........................... 3,221
491,500 Grand Metropolitan plc............................ 4,730
563,900 Imperial Tobacco Group plc........................ 3,624
902,552 John Mowlem & Co. plc............................. 1,849
460,000 Kwik Save Group plc............................... 2,320
113,600 Peninsular & Oriental Steam
Navigation Co................................... 1,131
7,200 Premier Farnell plc............................... 56
302,900 Racal Electronic plc.............................. 1,210
258,000 Reckitt & Colman plc.............................. 3,854
346,822 Royal & Sun Alliance Insurance Group plc.......... 2,564
359,050 Scottish Hydro-Electric plc....................... 2,481
180,000 Southern Electric plc............................. 1,325
447,318 Tate & Lyle plc................................... 3,326
120,000 Unilever plc...................................... 3,435
728,600 WPP Group plc..................................... 2,978
----------
57,821
----------
TOTAL COMMON STOCKS (Cost $189,810)............................. 235,334
----------
PREFERRED STOCKS (3.2%)
GERMANY (3.2%)
8,263 Dyckerhoff AG..................................... 2,991
36,000 Hornbach Holding AG............................... 3,004
3,200 Volkswagen AG..................................... 1,790
----------
TOTAL PREFERRED STOCKS (Cost $4,926)............................ 7,785
----------
TOTAL FOREIGN SECURITIES (99.6%) (Cost $194,736)................ 243,119
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (0.2%)
REPURCHASE AGREEMENT (0.2%)
$ 523 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $523,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $533 (Cost $523)......... $ 523
----------
FOREIGN CURRENCY (1.0%)
GBP 1 British Pound..................................... 1
DKK 1 Danish Krone...................................... --
DEM 3,912 German Mark....................................... 2,244
ITL 28,976 Italian Lira...................................... 17
ESP 928 Spanish Peseta.................................... 6
CHF 175 Swiss Franc....................................... 120
----------
TOTAL FOREIGN CURRENCY (Cost $2,412)............................ 2,388
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.8%) (Cost $197,671)............... 246,030
--------
OTHER ASSETS (0.7%)
Dividends Receivable....................... $ 1,002
Foreign Withholding Tax Reclaim
Receivable............................... 334
Receivable for Investments Sold............ 245
Receivable for Portfolio Shares Sold....... 101
Other Assets............................... 1 1,683
----------
LIABILITIES (-1.5%)
Payable for Portfolio Shares Redeemed...... (1,912)
Bank Overdraft............................. (652)
Payable for Investments Purchased.......... (557)
Investment Advisory Fees Payable........... (399)
Custodian Fees Payable..................... (36)
Administrative Fees Payable................ (30)
Directors' Fees & Expenses Payable......... (6)
Distribution Fees Payable.................. (2)
Other Liabilities.......................... (36) (3,630)
---------- --------
NET ASSETS (100%)........................................ $244,083
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $185,994
Undistributed Net Investment Income............... 3,491
Accumulated Net Realized Gain..................... 6,235
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 48,363
--------
NET ASSETS........................................ $244,083
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
32
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- ------------------------------------------------------------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $239,958
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 12,511,764 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $19.18
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $4,125
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 215,469 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $19.14
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, the
portfolio is obligated to deliver or is to receive foreign currency in
exchange for US dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------ ------ ----------- ------------ ------ ------------
U.S.$ 380 $ 380 7/2/97 GBP 228 $ 380 $ --
------ ------ -----
------ ------ -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
NCS -- Non Convertible Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ---------------------------------------------------------------
<S> <C> <C>
Capital Equipment $ 42,469 17.4 %
Consumer Goods 55,693 22.8
Energy 16,057 6.6
Finance 33,230 13.6
Materials 51,375 21.1
Multi-Industry 6,448 2.6
Services 37,847 15.5
---------- ---
$ 243,119 99.6 %
---------- ---
---------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
33
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 1.2%
Canada 0.4%
France 4.0%
Germany 8.0%
Hong Kong 0.7%
Ireland 5.3%
Italy 2.8%
Japan 10.2%
Netherlands 4.8%
Spain 2.8%
Sweden 0.5%
Switzerland 4.8%
United Kingdom 9.3%
United States 42.0%
Other 3.2%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) WORLD INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 16.81% 26.51% 20.87%
PORTFOLIO -- CLASS B.... 16.60 26.05 26.64
INDEX -- CLASS A........ 15.38 22.27 15.17
INDEX -- CLASS B........ 15.38 22.27 19.45
</TABLE>
1. The MSCI World Index is an unmanaged index of common stocks and includes
securities representative of the market structure of 22 developed market
countries in North America, Europe, and the Asia/Pacific region (includes
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.
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 OR 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 long-term
capital appreciation by investing in equity securities of issuers throughout the
world, including U.S. issuers. Investments may also be made with discretion in
issuers located in emerging markets.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 16.81% and 26.51%, respectively, for the Class A shares; and
16.60% and 26.05%, respectively, for the Class B shares as compared to total
returns of 15.38% and 22.27%, respectively, for the Morgan Stanley Capital
International (MSCI) World Index (the "Index"). From inception on July 15, 1992
to June 30, 1997, the average annual total return of Class A was 20.87% as
compared to 15.17% for the Index. From inception on January 2, 1996 to June 30,
1997, the average annual total return of Class B was 26.64% as compared to
19.45% for the Index.
A stunning rally in the U.S. saw the MSCI USA Index up 17.7% for the second
quarter as indicators suggested second quarter GDP growth had slowed from the
first quarter's unsustainable 5.9%. Investors were encouraged by the Federal
Reserve Board's decision to leave interest rates unchanged at their May meeting,
reconfirmed on July 2nd. Inflation was key, the consumption price deflator at
1.8% suggests underlying inflation remains quiescent and below 2%. Further
budget deficit reductions, a mooted cut in capital gains tax, heavy mutual fund
inflows (for May, $20 billion) and continuing merger activity all helped power
the Index to new records.
Japan, unusually in recent times, was one of the strongest markets over the
quarter. The MSCI Japan Index rose 23.7% in U.S. dollars, 14.3% in yen,
reflecting the sharp currency rise that followed Japanese Treasury officials'
remarks in response to U.S. concerns about Japan's rising trade surplus.
Financial sector problems, most recently manifest in the Nomura Securities
scandal, continue to plague the banks. April's Value Added Tax (VAT) hike,
however, was less of a drag on domestic consumption than expected. Japan remains
a two tier market -- large manufacturers/ exporters thrive while smaller,
non-manufacturing companies from a range of sectors, particularly those facing
deregulation, continue to struggle.
The MSCI Europe Index rose 8.9% in U.S. dollar terms and 11.1% in local
currency. Political concerns dominated the quarter, with the initial shock of a
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
34
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
Socialist administration in France and the German government's unusual public
disagreement with the Bundesbank over the treatment of its gold reserves. Spain
and Switzerland were again outstanding performers.
The U.K. lagged the other major markets as interest rates rose to offset an
overheating domestic economy. The MSCI U.K. Index rose 8% in U.S. dollars and
6.5% in sterling terms. The 25 basis point rate rise that followed Labor's
landslide election in May was followed in June by a further 25 basis point
increase as the Bank of England quickly utilized its hard won independence.
While currency strength continued to dampen exports, this was offset by strong
gains in the financial sector with the listing of the Norwich Union Building
Society and takeover speculation at National Westminster Bank.
Clearly, it is difficult to argue that the U.S. market is other than fully
priced. Only time will tell whether there has been a 'paradigm' shift given the
continued lack of pricing power in the face of both robust economic growth and a
fully employed workforce. Earnings, however, have consistently beaten the
consensus for the past seventeen quarters, continuing to confound most market
strategists. Labor markets, however, remain tight and yet productivity gains are
strong and jobs are still perceived as being easily available. With early
indications of a return to 3-4% GDP growth in the second half of the year the
prospect of further interest rate tightening remains a strong possibility.
In terms of currencies, we still subscribe to the view that the U.S. dollar
should be underpinned as the Fed is likely to raise rates further and European
and Japanese central banks will initially be inclined not to follow. Low levels
of nominal yields will also continue to encourage capital outflows from these
regions despite recent words of caution from the Japanese as investors search
for higher returns. Ongoing financial sector problems are likely in our opinion
to prevent the Bank of Japan from raising rates this year.
Our overall position in the United States remains slightly underweight versus
the benchmark and we remain at about half weighting in Japan following a recent
visit there from our Chief Investment Officer, which reinforced our belief that
it is currently hard to find value in this market. We are overweight in Europe
where we continue to find relative value primarily in The Netherlands,
Switzerland and Germany.
Frances Campion
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Global Equity Portfolio
35
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (95.1%)
AUSTRALIA (1.2%)
163,407 Coles Myer Ltd.................................... $ 850
105,100 CSR Ltd........................................... 407
----------
1,257
----------
CANADA (0.4%)
5,350 Potash Corp. of Saskatchewan, Inc................. 403
----------
FRANCE (4.0%)
27,352 Banque Nationale de Paris......................... 1,128
2,010 Bongrain S.A...................................... 786
9,266 Elf Aquitaine S.A................................. 1,000
11,000 Scor S.A.......................................... 443
10,365 Valeo S.A......................................... 644
----------
4,001
----------
GERMANY (6.3%)
25,900 BASF AG........................................... 956
32,920 Bayer AG.......................................... 1,269
3,470 Karstadt AG....................................... 1,254
1,900 Mannesmann AG..................................... 849
(a)2,364 Sinn AG........................................... 502
(a)175 Varta AG.......................................... 28
6,600 VEBA AG........................................... 373
800 Viag AG........................................... 366
1,000 Volkswagen AG..................................... 758
----------
6,355
----------
HONG KONG (0.7%)
189,600 Jardine Strategic Holdings, Inc................... 717
----------
IRELAND (5.3%)
690,253 Anglo Irish Bank Corp. plc........................ 878
69,200 Clondalkin Group plc.............................. 671
264,836 Green Property plc................................ 1,435
462,436 Irish Life plc.................................... 2,380
----------
5,364
----------
ITALY (2.8%)
(a)624,000 Olivetti S.p.A.................................... 177
431,000 Stet Di Risp (NCS)................................ 1,496
603,400 Telecom Italia S.p.A. Di Risp (NCS)............... 1,195
----------
2,868
----------
JAPAN (10.2%)
140 East Japan Railway Co............................. 718
66,000 Fuji Photo Film Ltd............................... 2,656
21,000 Hitachi Ltd....................................... 235
81,000 Kao Corp.......................................... 1,124
47,000 Matsushita Electric Industries Ltd................ 948
140,000 Nichido Fire & Marine Insurance Co., Ltd.......... 1,021
222,000 NKK Corp.......................................... 477
9,000 Sony Corp......................................... 785
86,000 Sumitomo Rubber Industries........................ 579
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
13,000 TDK Corp.......................................... $ 954
37,400 Toyo Seikan Kaisha Ltd............................ 829
----------
10,326
----------
NETHERLANDS (4.8%)
83,012 ABN Amro Holdings N.V............................. 1,549
1,888 Hollandsche Beton Groep N.V....................... 431
35,324 ING Groep N.V..................................... 1,630
17,200 Philips Electronics N.V........................... 1,233
----------
4,843
----------
SPAIN (2.8%)
51,300 Iberdrola S.A..................................... 648
74,800 Telefonica de Espana S.A.......................... 2,164
----------
2,812
----------
SWEDEN (0.5%)
14,300 Skandia Forsakrings AB............................ 527
----------
SWITZERLAND (4.8%)
(a)400 Ascom Holdings AG (Bearer)........................ 559
370 Bobst AG (Bearer)................................. 629
1,200 Forbo Holding AG (Registered)..................... 518
835 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 789
(a)1,200 Magazine Globus (Participating Certificates)...... 649
780 Schweizerische Industrie-Gesellschaft Holdings AG
(Registered).................................... 1,159
680 Sulzer AG (Registered)............................ 582
----------
4,885
----------
UNITED KINGDOM (9.3%)
36,900 Bass plc.......................................... 450
26,500 Burmah Castrol plc................................ 448
228,888 Christian Salvesen plc............................ 1,075
61,000 Imperial Tobacco Group plc........................ 392
103,413 John Mowlem & Co. plc............................. 212
241,400 Matthews (Bernard) plc............................ 454
(a,d)653,333 Pentos plc........................................ --
85,550 Racal Electronic plc.............................. 342
138,491 Reckitt & Colman plc.............................. 2,069
63,702 Rolls-Royce plc................................... 243
57,600 Scottish Hydro-Electric plc....................... 398
126,553 Southern Electric plc............................. 931
101,577 Tate & Lyle plc................................... 755
40,000 Unilever plc...................................... 1,145
113,800 WPP Group plc..................................... 465
----------
9,379
----------
UNITED STATES (42.0%)
23,800 Albertson's, Inc.................................. 869
17,750 Aluminum Company of America....................... 1,338
(a)13,300 AMR Corp.......................................... 1,230
36,904 Ascent Entertainment Group, Inc................... 337
16,200 AT&T Corp......................................... 568
(a)26,300 Beazer Homes USA, Inc............................. 421
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
36
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED STATES (CONT.)
<TABLE>
<C> <S> <C>
21,800 Borg-Warner Automotive, Inc....................... $ 1,179
33,300 Browning-Ferris Industries, Inc................... 1,107
(a)129,300 Cadiz Land Co., Inc............................... 679
75,500 Comsat Corp....................................... 1,798
(a)69,000 Data General Corp................................. 1,794
(a)109,000 Egghead, Inc...................................... 429
43,100 Enhance Financial Services Group, Inc............. 1,891
23,500 Finova Group, Inc................................. 1,798
(a)90,600 GenRad, Inc....................................... 2,050
13,800 Georgia Pacific Corp.............................. 1,178
39,300 Greenfield Industries, Inc........................ 1,061
16,100 Greenpoint Financial Corp......................... 1,072
34,000 Houghton Mifflin Co............................... 2,270
22,500 IBP, Inc.......................................... 523
(a)83,000 InteliData Technologies Corp...................... 399
20,900 Lukens, Inc....................................... 393
11,200 MBIA, Inc......................................... 1,264
61,400 MCI Communications Corp........................... 2,350
24,600 Mellon Bank Corp.................................. 1,110
(a)1,012 NCR Corp.......................................... 30
34,700 Penncorp Financial Group, Inc..................... 1,336
4,900 Pennzoil Co....................................... 376
53,800 Pharmacia & Upjohn, Inc........................... 1,870
67,500 Philip Morris Cos., Inc........................... 2,995
22,000 Polaroid Corp..................................... 1,221
12,000 Prime Retail, Inc................................. 161
14,050 Tandy Corp........................................ 787
11,300 Tecumseh Products Co., Class A.................... 676
38,100 Terra Nova (Bermuda) Holdings Ltd., Class A....... 800
(a)16,800 Toys "R" Us, Inc.................................. 588
28,800 UST Corp.......................................... 644
(a)47,400 Waban, Inc........................................ 1,526
(a)135,400 WorldCorp, Inc.................................... 347
----------
42,465
----------
TOTAL COMMON STOCKS (Cost $71,244)............................... 96,202
----------
PREFERRED STOCKS (1.7%)
GERMANY (1.7%)
3,000 Volkswagen AG (Cost $647)......................... 1,678
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -------------
RIGHTS (0.0%)
SWITZERLAND (0.0%)
(a)680 Sulzer AG (Cost $0)............................... --
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
CONVERTIBLE BOND (0.0%)
HONG KONG (0.0%)
$ 21,000 Jardine Strategic Holdings, Inc., IDR, 7.50%,
5/07/49 (Cost $21).............................. $ 26
----------
TOTAL FOREIGN & U.S. SECURITIES (96.8%) (Cost $71,912)........... 97,906
----------
SHORT-TERM INVESTMENT (0.9%)
REPURCHASE AGREEMENT (0.9%)
895 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $895,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $913 (Cost $895)......... 895
----------
FOREIGN CURRENCY (1.5%)
GBP 1 British Pound..................................... 1
FRF 111 French Franc...................................... 19
DEM 2,329 German Mark....................................... 1,336
ITL 134,052 Italian Lira...................................... 79
JPY 3,676 Japanese Yen...................................... 32
NLG 64 Netherlands Guilder............................... 33
ESP 5 Spanish Peseta.................................... --
SEK 33 Swedish Krona..................................... 4
CHF 29 Swiss Franc....................................... 20
----------
TOTAL FOREIGN CURRENCY (Cost $1,540)............................. 1,524
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.2%) (Cost $74,347)................. 100,325
--------
OTHER ASSETS (1.0%)
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... $ 616
Dividends Receivable....................... 240
Receivable for Investments Sold............ 73
Foreign Withholding Tax Reclaim
Receivable............................... 64
Receivable for Portfolio Shares Sold....... 14
Other...................................... 5 1,012
----------
LIABILITIES (-0.2%)
Investment Advisory Fees Payable........... (161)
Administrative Fees Payable................ (13)
Custodian Fees Payable..................... (12)
Directors' Fees & Expenses Payable......... (4)
Distribution Fees Payable.................. (3)
Other Liabilities.......................... (25) (218)
---------- --------
NET ASSETS (100%)........................................ $101,119
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $ 70,095
Undistributed Net Investment Income............... 854
Accumulated Net Realized Gain..................... 3,578
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 26,592
--------
NET ASSETS........................................ $101,119
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
37
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- -------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $96,056
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 5,064,602 outstanding $.001 par
value shares (authorized 500,000,000 shares).... $18.97
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $5,063
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 267,847 outstanding $.001 par
value shares (authorized 500,000,000 shares).... $18.90
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
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>
- ----------- ------- ----------- ------------ ------- ------------
NLG 6,000 $ 3,072 08/25/97 U.S.$ 3,205 $ 3,205 $ 133
FRF 17,668 3,022 09/12/97 U.S.$ 3,500 3,500 478
FRF 2,703 465 12/05/97 U.S.$ 470 470 5
------- ------- -----
$ 6,559 $ 7,175 $ 616
-------
------- ------- -----
------- -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- See note A-1 to financial statements.
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN AND U.S. SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment...................... $ 21,724 21.5%
Consumer Goods......................... 1,678 1.7
Consumer Products...................... 14,906 14.7
Electrical & Electronics............... 4,327 4.3
Energy................................. 2,870 2.8
Finance................................ 20,564 20.3
Materials.............................. 7,453 7.4
Mining................................. 403 0.4
Multi-Industry......................... 4,221 4.2
Services............................... 19,760 19.5
-------- ---
$ 97,906 96.8%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
38
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GOLD PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Africa 24.0%
Australia 25.6%
Canada 23.5%
United Kingdom 1.9%
United States 17.9%
Other 7.1%
</TABLE>
PERFORMANCE COMPARED TO THE PHILADELPHIA
GOLD AND SILVER INDEX(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------
AVERAGE
ANNUAL
ONE SINCE
YTD YEAR INCEPTION
------- ------- -------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.......... -28.86% -35.04% -4.26%
PORTFOLIO -- CLASS B.......... -28.75 -35.04 -13.40
INDEX -- CLASS A.............. -17.73 -22.07 -8.13
INDEX -- CLASS B.............. -17.73 -22.07 -16.41
</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.
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 six months and one year periods ended June 30, 1997, the Portfolio had
total returns of -28.86% and -35.04%, respectively, for the Class A shares and
- -28.75% and -35.04%, respectively, for the Class B shares as compared to total
returns of -17.73% and -22.07%, respectively, for the Philadelphia Gold and
Silver Index (the "Index"). From inception on February 1, 1994 to June 30, 1997,
the average annual total return of Class A was -4.26% as compared to -8.13% for
the Index. From inception on January 2, 1996 to June 30, 1997, the average
annual total return of Class B was -13.40% as compared to -16.41% for the Index.
The Portfolio lagged XAU performance for the first half due to our exposure to
intermediate capitalization shares in North America, Australia, and South
Africa. The gold share market focused on the larger capitalization shares that
provide better liquidity but at significantly inferior valuations. The
Portfolio's positions in companies such as Arizona Star, Ashanti, Stillwater,
and Normandy provide outstanding values.
The dramatic and news-provoking new low in gold occurred immediately after the
quarter end and appears to culminate several months of negative news generated
by central banks and the persistent forward hedging of producers. Australia's
reserve reallocation announcement came as a nasty surprise to a market that was
focused on sales from European central banks relating to the EMU. The Australian
announcement followed rumblings during the second quarter by Belgium (relating
to increased coin sales),
- --------------------------------------------------------------------------------
Gold Portfolio
39
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GOLD PORTFOLIO (CONT.)
by Germany attempting to revalue its gold reserves, and by a June report
suggesting the possibility of gold sales from the US Federal Reserve.
Gold grabbed center stage in global financial discussions when Germany announced
plans to "re-value" its gold holdings in order to offset some of its debt, a
plan that was later rejected. This is an interesting maneuver because it
attempts to activate the "dormant" positions to provide a perceived benefit, and
does so without any physical flow into the market. The "mark to market" achieves
debt reduction without the sale. The revaluation also sheds light on the
long-term appreciation of gold holdings, which according to our work have
appreciated at a faster rate than U.S. T-Bills from 1970-1995, despite the
unusually low returns during the last 15 years of the financial asset boom. Gold
will remain a primary topic of discussion as the EMU evolves.
The foundation of our investment thesis is that gold is a negatively correlated
asset class that is a unique monetary reserve for safety and store of value. In
our year-end 1996 piece we applied Sir Isaac Newton's First Law of Motion to the
current financial landscape: "An object in motion remains in motion and an
object at rest remains at rest, at constant velocity, until acted upon by an
unbalanced force". As the S&P forges new ground into high valuation extremes,
the market has perversely diminished the role of safety.
Physical demand for gold is rising on a global basis and is increasing as the
price declines. First quarter demand was the highest ever, eclipsing the prior
record set at the 1993 price lows. Central banks have no vested interest in
driving the price lower, and large reserve holders could increase gold holdings.
Producers will reduce hedging as mines become unprofitable. They have no
interest in locking in losses; the better alternative is to shut down mines.
Speculators are at historic extremes for short positions. Change on the margin
will be toward buying in shorts. The standard commodity model is still at work:
as the commodity price goes lower, the demand increases and supply decreases.
Gold is at the bottom of its 4-, 12-, and 17-year trading range, and selective
gold shares represent outstanding value.
Peter F. Palmedo
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
GOLD PORTFOLIO
40
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (92.9%)
AFRICA (24.0%)
171,000 Ashanti Goldfields Co. GDR........................ $ 1,999
(a)700,000 Avgold Ltd........................................ 687
153,000 Free State Consolidated Gold Mines Ltd. ADR....... 765
(a)93,000 Harmony Gold Mining Co., Ltd. ADR................. 430
333,000 H.J. Joel Mining Co., Ltd......................... 257
15,000 Impala Platinum Holdings Ltd. ADR................. 168
25,000 Vaal Reefs Exploration & Mining Co., Ltd. ADR..... 120
(a)93,905 Western Area Gold Mining ADR...................... 632
42,700 Western Deep Levels Ltd. ADR...................... 1,019
----------
6,077
----------
AUSTRALIA (25.6%)
(a)366,000 Acacia Resources Ltd.............................. 481
(a)355,000 Emperor Mines Ltd................................. 496
(a)300,000 Lihir Gold Ltd.................................... 501
632,217 Newcrest Mining Ltd............................... 1,747
1,120,000 Normandy Mining Ltd............................... 1,260
267,000 Plutonic Resources Ltd............................ 835
199,500 Sons of Gwalia Ltd................................ 743
(a)1,186,594 Wiluna Mines Ltd.................................. 421
----------
6,484
----------
CANADA (23.5%)
83,000 Agnico-Eagle Mines Ltd............................ 797
(a)178,000 Arizona Star Resource Corp........................ 1,141
(a)50,000 Bema Gold Corp.................................... 302
(a)45,000 Eldorado Gold Corp., Ltd.......................... 176
(a)300,000 Meridian Gold, Inc. (Installment Receipts --
second installment: $2.50/Shr due on 7/31/97)... 815
(a)166,600 Miramar Mining Corp............................... 603
66,000 Placer Dome, Inc.................................. 1,081
132,000 Prime Resource Group, Inc......................... 956
(a)290,000 TVI Pacific, Inc.................................. 71
----------
5,942
----------
UNITED KINGDOM (1.9%)
227,200 Lonrho plc........................................ 480
----------
UNITED STATES (17.9%)
(a)206,000 Dakota Mining Corp................................ 206
(a)110,000 Gold Reserve Corp................................. 883
(a)141,600 Pegasus Gold, Inc................................. 867
(a)458,000 Royal Oak Mines, Inc.............................. 1,088
(a)66,000 Stillwater Mining Co.............................. 1,469
----------
4,513
----------
TOTAL COMMON STOCKS (Cost $34,759)............................ 23,496
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (7.4%)
REPURCHASE AGREEMENT (7.4%)
$ 1,882 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $1,882,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $1,917 (Cost $1,882)..... $ 1,882
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.3%) (Cost $36,641)................ 25,378
--------
OTHER ASSETS (0.1%)
Cash....................................... $ 1
Receivable for Portfolio Shares Sold....... 33
Dividends Receivable....................... 2 36
-----
LIABILITIES (-0.4%)
Investment Advisory Fees Payable........... (29)
Sub-Advisory Fees Payable.................. (20)
Payable for Portfolio Shares Redeemed...... (16)
Custodian Fees Payable..................... (6)
Administrative Fees Payable................ (4)
Distribution Fees Payable.................. (2)
Directors' Fees & Expenses Payable......... (1)
Other Liabilities.......................... (37) (115)
----- --------
NET ASSETS (100%)........................................ $ 25,299
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................... $ 42,479
Overdistributed Net Investment Income.............. (8)
Accumulated Net Realized Loss...................... (5,909)
Unrealized Depreciation on Investments and Foreign
Currency Translations............................ (11,263)
--------
NET ASSETS......................................... $ 25,299
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ---------------------------------------------------
NET ASSETS......................................... $24,180
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 3,662,600 outstanding $.001 par
value shares (authorized 500,000,000 shares)..... $6.60
--------
--------
CLASS B:
- ---------------------------------------------------
NET ASSETS......................................... $1,119
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 169,606 outstanding $.001 par value
shares (authorized 500,000,000 shares)........... $6.60
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
- ------------------------------------------------------------
SUMMARY OF FOREIGN AND U.S. SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Diversified............................ $ 480 1.9%
Gold Mines............................. 21,917 86.6
Materials.............................. 1,099 4.4
-------- ---
$ 23,496 92.9%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Gold Portfolio
41
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 2.8%
Belgium 0.4%
Denmark 1.9%
Finland 0.5%
France 10.6%
Germany 7.8%
Hong Kong 2.9%
Italy 1.6%
Japan 20.9%
Netherlands 7.8%
New Zealand 0.9%
Norway 0.3%
Spain 2.9%
Sweden 3.4%
Switzerland 5.6%
United Kingdom 20.0%
Other 9.7%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS
A.................... 15.58% 24.18% 17.92% 13.23%
PORTFOLIO -- CLASS
B.................... 15.42 23.79 N/A 23.39
INDEX -- CLASS A..... 11.21 12.84 12.83 5.15
INDEX -- CLASS B..... 11.21 12.84 N/A 11.65
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australia and the Far East (assumes dividends 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 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 six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 15.58% and 24.18%, respectively, for the Class A shares; and
15.42% and 23.79%, respectively, for the Class B shares as compared to total
returns of 11.21% and 12.84%, respectively, for the Morgan Stanley Capital
International (MSCI) EAFE Index (the "Index"). For the five-year period ended
June 30, 1997, the average annual total return for Class A was 17.92% as
compared to 12.83% for the Index. From inception on August 4, 1989 to June 30,
1997, the average annual total return of Class A was 13.23% as compared to 5.15%
for the Index. From inception on January 2, 1996 to June 30, 1997, the average
annual total return of Class B was 23.39% as compared to 11.65% for the Index.
The Portfolio's outperformance for the six month period ended June 30, 1997, was
driven by the underweight position in Japanese equities, strong returns from
Japanese stocks held and the zero weightings in Singapore and Malaysia. Other
positive factors were currency hedging and returns in the Netherlands. Negative
factors included U.K. stock returns and Hong Kong stock returns. Poor relative
returns were also observed in Spain and Sweden.
All cautious utterances made earlier in the year with respect to equity
valuations have been disregarded as investors on a global scale have migrated to
equities from bonds whose nominal yields have declined to what is perceived as
unattractive levels.
The justification for this move beyond the initial phase of self-justification
through price momentum will be continued growth in corporate profits as earnings
yields on most major markets exceed bond yields. In Continental Europe, a
combination of currency weakness and restructuring will ensure 1997 fulfills
heady expectations while the most recent news from the United States has been
surprisingly encouraging. However, with Japan's economy showing little signs of
life and the yen showing signs of reasserting itself this market looks extended
even on
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
42
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
1997 earnings. Elsewhere the problem is 1998, because the world needs an
extrapolation of current conditions to justify current share prices. The bulls
would argue that there is a self-sustaining dynamic at work in that global
competition is preventing any upward pricing in manufactured goods. Be that as
it may, this dynamic does not address the problems of rapidly tightening labor
markets in the U.K. and U.S. and the structural inefficiencies of Europe's labor
markets. Equally this dynamic is driving down corporate profitability in Japan
as the domestic economy deregulates and it is putting a cap on general corporate
profitability as no one has any pricing power.
The sole remaining concentrations of value in the world's developed stock
markets are to be found in Japan's domestic sectors and in the U.K. export
sector. While we believe most such Japanese companies deserve to be cheap due to
secular pressures on profitability which management is failing to confront, the
U.K. export sector boasts some fine franchises where currency strength is solely
a translational problem and where management are genuinely focused on
shareholder returns. This is one area where we are happy to add to holdings at
current levels.
However, even allowing for these opportunities there are numerous stocks in the
Portfolio which sell in absolute terms beyond our judgment of fair value. They
remain in the Portfolio as their relative attractions remain. This is a rather
evasive way of saying we are all, to an extent, momentum investors now.
GERMANY
The Morgan Stanley Capital International Germany Index increased by 4.90% in
U.S. dollar terms and by 9.56% in local currency terms in the second quarter of
1997. During the quarter the top performing sector was transportation with
Lufthansa the state airline up strongly. Other sectors to show above average
returns were media and engineering stocks. Underperformers this quarter included
alcoholic beverages, textile and chemical stocks. The German market continues to
offer some good value opportunities among the small and medium sized companies
while some large companies are again looking more interesting following a period
of underperformance. This would include stocks in the chemical and utility
sectors.
The investment environment in Germany remains favorable with steady growth and
continuing low levels of inflation. Growth continues to be driven by exports
although in recent months there has been a sign of a slight pick up in the
domestic market. Inflation declined from February to April but rose slightly in
May as consumer prices rose 0.4% over the previous month. Seasonal factors
including a rise in holiday prices and an increase in heating oil were blamed.
Inflation for the year should remain around 1.5%. In the current environment
there seems little reason for the Bundesbank to increase interest rates. A
concern for Germany remains the difficulties in meeting the fiscal criteria in
the Maastricht Treaty. The authorities will continue to make savings, however,
an increase in taxes now seems very unlikely. Even if they fail to reduce the
budget deficit below 3.0% of GDP by year end it is unlikely to jeopardize the
process.
FRANCE
During the second quarter of 1997, the Morgan Stanley Capital International
France Index increased by 3.05% in U.S. dollar terms and by 7.48% in French
franc terms. During the quarter, retail stocks showed good performance as did
chemical and the integrated oil companies, Total and Elf Aquitaine; poor
performers included building and tobacco sectors.
In recent weeks the French investment environment has been dominated by the
surprise win by the leftist coalition. The initial market reaction was negative
but this soon reversed when the new government committed to a sound fiscal
policy and a pro-European stance. Concerns must be realized however, in the
ability of France to reach the Maastricht criteria following this change in
government. Growth in France continues to be slow with GDP in the first three
months of 1997 up 0.2% quarter-on-quarter. As with other European countries,
growth is being driven by exports aided by currency weakness. Domestic demand,
on the other hand, continues to be weak. Economic indicators are pointing
towards an upward trend in economic activity helped by improved order intake and
continuing low interest rates. On the negative side, the change of company
restructuring to increase efficiency, a major driver of equity prices in Europe
in recent years, could be diminished by the arrival of the new government.
NETHERLANDS
In the second quarter of 1997 the Morgan Stanley Capital International
Netherlands Index increased by 13.54% in U.S. dollar terms and by 18.59% in
Dutch guilder terms. The top performing sector was
- --------------------------------------------------------------------------------
International Equity Portfolio
43
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
electronics driven by Philips, up over 30% in the month of June alone. Other
strong performing sectors included oil and insurance. The weakest performers
included distributors and textiles.
Economic growth in the Netherlands remains strong despite poor GDP numbers in
the first quarter of the year, down 0.6% when compared to the same period last
year. These figures fail to take into account that there were fewer working days
in the first quarter this year and the market is still expecting 3% GDP growth
for the full year. Growth is coming from both increased exports and the domestic
market. Manufacturing has been particularly strong with production up 4.7% in
the three months to April. Consumer confidence remains high and unemployment
levels are continuing to fall. The increase in economic activity is putting some
pressure on inflation which increased to 2.2% in May up from 1.8% in April.
There could be some increase later in the year due to higher wages and an
increase in the oil tax. The Netherlands should have no problems reaching the
Maastricht criteria for entry into EMU.
SWITZERLAND
The Morgan Stanley Capital International Switzerland Index increased by 19.04%
in U.S. dollar terms and by 20.46% in Swiss franc terms in the second quarter of
1997. In the first half of the year, the Swiss market is up 27.5% in U.S. dollar
terms making it the top performer among the mature global markets. During the
quarter the sectors that performed well included insurance and engineering.
Pharmaceuticals also showed relative strength with Novartis continuing to
perform well in the Portfolio, however, it is now reaching full valuation.
Following two years of quarterly declines, GDP actually rose in the first
quarter of 1997. The increase was only 0.1% quarter-on-quarter, however, there
are signs that the economy should continue to improve. Orders in the mechanical
engineering sector have risen for the first time since the second quarter of
1995. Retail sales were also stronger rising 2% year-on-year in April. Inflation
remains very low at an annual rate of 0.6%. Concerns remain in the employment
market with the weak domestic economy and company restructuring pushing up these
rates. The unemployment rate currently stands at 5.3%, low by some standards,
but high for Switzerland.
ITALY
The Morgan Stanley Capital International Italy Index increased by 9.77% in U.S.
dollar terms and by 11.95% in local currency terms during the second quarter of
the year. The telecommunication stocks continued to show relative outperformance
as did health care and textiles. Although the Italian market has been one of the
weakest in our universe there have been some strong individual price moves
particularly among small-and medium-sized companies. Despite the poor
performance of many Italian large cap stocks, we have not found many companies
of suitable quality to add to the Portfolio.
The Italian economy continues to be weak with the first quarter GDP falling 0.3%
quarter-on-quarter. The primary reason was a decline in activity of the
manufacturing sector. Growth should show signs of picking up in the second
quarter, however, due to a larger number of working days and an increase in
industrial activity. In particular, the number of cars purchased was up 50% in
April and 40% in May due to government purchasing incentives. The inflation rate
continues to fall with the year-on-year rate reaching 1.6% in April. Despite
this favorable inflation outlook, the Bank of Italy has hinted that it is
unlikely to further reduce interest rates due to uncertainty over EMU.
SPAIN
During the second quarter of 1997, the Morgan Stanley Capital International
Spain index increased by 22.33% in U.S. dollar terms and by 26.97% in local
currency terms. Having been one of the weakest equity markets in Europe during
the first three months of 1997, it has bounced back to be the top performer in
the second quarter. Retail stocks continued their strong run while banks and
engineering companies also performed well. The strong performance of our Spanish
stocks has enabled us to reduce our weightings, however, there is now no clear
value opportunities in Spain.
The economic environment in Spain is improving and the market now expects GDP
growth for 1997 to be over 3%. There was a pick up in consumer confidence at the
end of 1996 and this has been sustained through the first six months of this
year. The effects of lower interest rates are now being seen on the economy
while the unemployment rate continues to come down, however, it still stands at
over 20%. There is also a growing belief that Spain will be included in the
first wave of countries in EMU and that the worst of the austerity is over.
Inflation has
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
44
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
continued to fall rapidly reaching 1.5% in May. This has enabled the Bank of
Spain to cut the intervention rate to 5.25%, the fourth cut this year.
JAPAN
The Japanese stock market enjoyed a strong recovery in the second quarter, with
the MSCI Japan Index appreciating 14.3% in Japanese yen and 23.7% in U.S.
dollars.
Unsurprisingly, in a period of yen strength, it was domestic sectors of the
market rather than blue chip exporters that led the market with even the banking
sector enjoying a return to favor despite a less than encouraging news flow on
the bad debt situation. With the market's recent recovery the market appears
fairly valued with the only remaining cheap stocks deserving to remain so due to
their failure to adapt to a rapidly deregulating domestic market.
A recent visit to Japan to search for value in the domestic sectors was
disappointing. Many historic profit structures in areas associated with public
expenditure are under siege and corporate management is not confronting this
problem by undertaking further painful restructurings. There is a general sense
that yen weakness has made further downsizing unnecessary and the general aura
of comfort exuded by management was not justified by their unfocussed
strategies. Meanwhile the housing sector is slowing faster than generally
expected and margins continue to decline as general construction companies enter
a market which is buoyant relative to their own traditional area of operations.
Therefore, despite its poor relative performance, Japan fails to offer the
combination of value and quality required to justify an increased weighting. One
of the singular facts about our efforts to invest in international value stocks
has been our failure to make money out of apparently cheap Japanese companies
whose management are indifferent to the returns they achieve on their cash flow.
After twelve years of this experience we are not expecting it to change, and
therefore our weighting in Japan is unlikely to increase significantly.
HONG KONG
During the second quarter, the MSCI Hong Kong Index appreciated 20.3% in both
U.S. dollars and Hong Kong dollars.
Behind this strength, and largely outside the Index, lay extreme enthusiasm for
anything associated with mainland corporate interests with so called red chip
stocks enjoying quite remarkable absolute and relative strength. The banking
sector also strengthened buoyed by rapid loan growth and even Hong Kong Telecom
staged an impressive rally as the U.K.'s Cable and Wireless staged an elegant
partial exit from the stock while mainland interests increased their stake. With
a buoyant residential property market and a recovery in commercial rents, the
territory returned to China in an exuberant mood.
Unfortunately, this exuberance has led to excessive optimism in two areas of
extreme importance to Hong Kong's stock market: its residential property market
and economic returns from investment in mainland China. Affordability levels for
Hong Kong apartments are back at unsustainably low levels and it is at the top
of the territory's new Chief Executive's agenda to bring down prices by
increasing supply. Meanwhile, with respect to so called red chips, ratings are
currently beyond any level justified by foreseeable economic returns.
While the worldwide stampede into equities may underpin the market in the
short-to medium-term, the reality of current excesses does not bode well for
further sustained progress in equity prices. Residual value remains in the
stodgy property investment companies and the politically incorrect Jardine
group.
AUSTRALIA
During the second quarter, the MSCI Australia Index appreciated 8.0% in U.S.
dollars and 13.0% in Australian dollars.
Other than strong stock markets worldwide, factors acting in favor of the market
included a fall in short-term rates, a moderate weakening of the Australian
dollar, a more resilient than expected copper price and a bottoming out of the
housing cycle. These factors allowed broad strength to develop across the market
leaving it fully valued, though the economy continues to be stalled by weak
consumption. Meanwhile, News Corp. continues its underperformance as Mr. Murdoch
indulges in one of his acquisition binges. All empirical evidence suggests that
it is best to back him at such moments.
Dominic Caldecott
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
International Equity Portfolio
45
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
COMMON STOCKS (88.1%)
AUSTRALIA (2.8%)
1,418,400 Brambles Industries Ltd........................... $ 28,057
3,563,264 Coles Myer Ltd.................................... 18,542
7,300,000 CSR Ltd........................................... 28,284
1,055,276 North Ltd......................................... 4,025
----------
78,908
----------
BELGIUM (0.4%)
243,350 G.I.B. Holdings Ltd............................... 11,643
2,156 G.I.B. Holdings Ltd. VVPR (New)................... 102
----------
11,745
----------
DENMARK (1.9%)
190,000 Den Danske Bank A/S............................... 18,494
111,600 Novo-Nordisk A/S, Class B......................... 12,174
400,500 Unidanmark A/S, Class A (Registered).............. 22,508
----------
53,176
----------
FINLAND (0.5%)
350,000 Huhtamaki Oy, Series 1............................ 15,071
168,467 Merita Ltd., Class A.............................. 562
----------
15,633
----------
FRANCE (10.6%)
389,600 Alcatel Alsthom................................... 48,810
768,300 Banque Nationale de Paris......................... 31,675
16,110 Bongrain S.A...................................... 6,305
160,900 Cie de Saint Gobain............................... 23,472
419,300 Elf Aquitaine S.A................................. 45,251
223,500 Groupe Danone..................................... 36,941
488,900 Lafarge S.A....................................... 30,417
116,800 PSA Peugeot Citroen S.A........................... 11,293
315,600 Schneider S.A..................................... 16,804
264,750 Scor S.A.......................................... 10,663
255,000 Total S.A., Class B............................... 25,784
767,168 Usinor Sacilor.................................... 13,842
10,350 Valeo S.A......................................... 643
----------
301,900
----------
GERMANY (5.7%)
673,100 BASF AG........................................... 24,845
1,024,500 Bayer AG.......................................... 39,491
500,000 Commerzbank AG.................................... 14,283
389,300 Hoechst AG........................................ 16,502
40,090 Karstadt AG....................................... 14,488
17,335 Mannesmann AG..................................... 7,746
(a)24,900 Varta AG.......................................... 4,052
364,000 VEBA AG........................................... 20,566
43,480 Viag AG........................................... 19,865
----------
161,838
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
HONG KONG (2.8%)
8,728,186 Hong Kong Land Holdings Ltd....................... $ 23,217
14,991,500 Jardine Strategic Holdings, Inc................... 56,668
----------
79,885
----------
ITALY (1.6%)
(a)8,503,700 Olivetti S.p.A.................................... 2,409
(a)177,700 Olivetti Group S.p.A. Di Risp (NCS)............... 51
8,887,000 Stet Di Risp (NCS)................................ 30,849
6,800,000 Telecom Italia S.p.A. Di Risp (NCS)............... 13,462
----------
46,771
----------
JAPAN (20.9%)
1,120,000 Aisin Seiki Co., Ltd.............................. 17,108
347,500 Aoyama Trading Co., Ltd........................... 11,162
1,000,000 Canon, Inc........................................ 27,233
348,000 Chudenko Corp..................................... 9,325
1,640,000 Daibiru Corp...................................... 19,755
2,217,000 Daicel Chemical Industries Ltd.................... 8,573
2,111 East Japan Railway Co............................. 10,835
2,484,000 Fuji Photo Film Ltd............................... 99,954
2,726,000 Hitachi Ltd....................................... 30,457
3,340 Japan Tobacco, Inc................................ 26,384
3,142,000 Kao Corp.......................................... 43,607
1,461,000 Matsushita Electric Industries Ltd................ 29,458
3,626,000 Nichido Fire & Marine Insurance Co., Ltd.......... 26,460
3,025 Nippon Telegraph & Telephone Corp................. 29,045
5,757,000 NKK Corp.......................................... 12,362
232,000 Ryosan Co......................................... 5,427
444,000 Shionogi & Co., Ltd............................... 3,441
364,000 Sony Corp......................................... 31,741
4,224,000 Sumitomo Marine & Fire Insurance Co............... 34,658
1,432,000 Sumitomo Rubber Industries........................ 9,637
366,000 TDK Corp.......................................... 26,867
1,820,100 Toyo Seikan Kaisha Ltd............................ 40,353
1,470,000 Yamanouchi Pharmaceutical Co...................... 39,520
----------
593,362
----------
NETHERLANDS (7.8%)
1,395,600 ABN Amro Holdings N.V............................. 26,043
209,000 Akzo Nobel N.V.................................... 28,665
84,436 Hollandsche Beton Groep N.V....................... 19,274
1,272,700 ING Groep N.V..................................... 58,726
271,100 Koninklijke Bijenkorf Beheer N.V.................. 18,978
290,800 Koninklijke KNP BT N.V............................ 6,628
868,000 Philips Electronics N.V........................... 62,225
----------
220,539
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
46
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
NEW ZEALAND (0.9%)
2,236,054 Fisher & Paykel Industries Ltd.................... $ 8,733
6,322,500 Lion Nathan Ltd................................... 16,019
(a,d)392,500 Smith City Group Ltd.............................. --
----------
24,752
----------
NORWAY (0.3%)
2,493,000 Den Norske Bank ASA............................... 9,765
----------
SPAIN (2.9%)
2,255,000 Iberdrola S.A..................................... 28,484
616,500 Repsol S.A........................................ 26,083
941,000 Telefonica de Espana S.A.......................... 27,224
----------
81,791
----------
SWEDEN (3.4%)
207,070 Electrolux AB, Series B........................... 14,941
(a)103,535 Granges AB........................................ 1,372
429,300 Nordbanken AB..................................... 14,434
565,900 Pharmacia & Upjohn, Inc........................... 19,099
265,700 Skandia Forsakrings AB............................ 9,792
452,100 S.K.F. AB, Class B................................ 11,692
364,600 Sparbanken Sverige AB, Class A.................... 8,109
713,200 Svenska Cellulosa AB, Class B..................... 15,171
52,400 Svenska Handelsbanken, Class A.................... 1,677
----------
96,287
----------
SWITZERLAND (5.6%)
(a)2,605 Ascom Holdings AG (Bearer)........................ 3,642
23,040 Forbo Holding AG (Registered)..................... 9,942
20,981 Holderbank Financiere Glarus AG, (Bearer)......... 19,817
38,400 Nestle S.A. (Registered).......................... 50,656
18,200 Novartis AG (Registered).......................... 29,095
13,814 Schindler Holding AG (Participating
Certificates)................................... 17,268
33,900 Sulzer AG (Registered)............................ 29,024
----------
159,444
----------
UNITED KINGDOM (20.0%)
573,700 Associated British Foods plc...................... 4,939
2,162,400 Bank of Scotland.................................. 13,898
3,478,256 BAT Industries plc................................ 31,130
4,652,300 BG plc............................................ 17,043
2,434,300 British Telecommunications plc.................... 18,078
2,062,800 Burmah Castrol plc................................ 34,898
6,291,200 Christian Salvesen plc............................ 29,541
2,412,513 English China Clays plc........................... 8,195
5,462,200 Grand Metropolitan plc............................ 52,570
2,551,400 Imperial Tobacco Group plc........................ 16,399
5,004,063 John Mowlem & Co. plc............................. 10,249
2,748,800 Kwik Save Group plc............................... 13,862
691,600 McAlpine (Alfred) plc............................. 1,589
875,700 National Westminster Bank plc..................... 11,774
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
2,862,000 Peninsular & Oriental Steam Navigation Co. plc.... $ 28,498
179,100 Pilkington plc.................................... 412
865,500 Premier Farnell plc............................... 6,730
3,509,500 Racal Electronic plc.............................. 14,025
4,238,002 Reckitt & Colman plc.............................. 63,299
3,692,100 Redland plc....................................... 20,902
3,603,368 Rolls-Royce plc................................... 13,740
2,914,606 Royal & Sun Alliance Insurance Group plc.......... 21,548
1,066,450 Scottish Hydro-Electric plc....................... 7,369
1,859,073 Southern Electric plc............................. 13,682
2,638,702 Tate & Lyle plc................................... 19,618
2,252,100 Unilever plc...................................... 64,462
6,715,300 WPP Group plc..................................... 27,451
577,333 Williams plc...................................... 3,124
----------
569,025
----------
TOTAL COMMON STOCKS (Cost $1,867,985)............................. 2,504,821
----------
PREFERRED STOCKS (2.1%)
GERMANY (2.1%)
106,950 Volkswagen AG (Cost $21,041)...................... 59,814
----------
CONVERTIBLE PREFERRED STOCKS (0.1%)
HONG KONG (0.1%)
1,863,000 Jardine Strategic Holdings, Inc., IDR, 7.50%,
8/15/97 (Cost $1,908)........................... 2,301
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- --------------
RIGHTS (0.0%)
UNITED KINGDOM (0.0%)
(a)202,685 McAlpine (Alfred) plc, expiring 7/30/99 (Cost
$0)............................................. --
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- --------------
CONVERTIBLE BOND (0.0%)
HONG KONG (0.0%)
$ 20 Jardine Strategic Holdings, Inc., IDR, 7.50%,
5/07/49 (Cost $25).............................. 25
----------
TOTAL FOREIGN SECURITIES (90.3%) (Cost $1,890,959)................ 2,566,961
----------
SHORT-TERM INVESTMENT (3.8%)
REPURCHASE AGREEMENT (3.8%)
109,582 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97 to be repurchased at $109,599,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $111,418 (Cost
$109,582)....................................... 109,582
----------
FOREIGN CURRENCY (7.0%)
AUD 1,901 Australian Dollar................................. 1,436
GBP 32,386 British Pound..................................... 53,926
DKK 7 Danish Krone...................................... 1
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
47
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FOREIGN CURRENCY (CONT.)
<TABLE>
<C> <S> <C>
FRF 74,699 French Franc...................................... $ 12,716
DEM 138,763 German Mark....................................... 79,595
ITL 1,224,193 Italian Lira...................................... 720
JPY 5,246,114 Japanese Yen...................................... 45,792
NLG 84 Netherlands Guilder............................... 43
NOK 1 Norwegian Krone................................... --
ESP 638,637 Spanish Peseta.................................... 4,337
SEK 2 Swedish Krona..................................... --
CHF 21 Swiss Franc....................................... 15
----------
TOTAL FOREIGN CURRENCY (Cost $197,298)............................ 198,581
----------
TOTAL INVESTMENTS (101.1%) (Cost $2,197,839)...................... 2,875,124
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (17.9%)
Securities at Value, Held as Collateral for
Securities Loaned........................ $ 472,104
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 13,134
Receivable for Investments Sold............ 11,139
Dividends Receivable....................... 9,383
Foreign Withholding Tax Reclaim
Receivable............................... 1,893
Receivable for Portfolio Shares Sold....... 1,338
Receivable for Security Lending............ 54
Interest Receivable........................ 17
Other...................................... 77 509,139
----------
LIABILITIES (-19.0%)
Collateral on Securities Loaned, at
Value.................................... (472,104)
Payable for Investments Purchased.......... (61,663)
Investment Advisory Fees Payable........... (5,142)
Bank Overdraft............................. (740)
Administrative Fees Payable................ (347)
Payable for Portfolio Shares Redeemed...... (199)
Custodian Fees Payable..................... (160)
Directors' Fees & Expenses Payable......... (74)
Distribution Fees Payable.................. (2)
Other Liabilities.......................... (135) (540,566)
---------- ----------
NET ASSETS (100%)........................................ $2,843,697
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................. $1,970,143
Undistributed Net Investment Income............. 29,745
Accumulated Net Realized Gain................... 153,151
Unrealized Appreciation on Investments and
Foreign Currency Translations................. 690,658
----------
NET ASSETS...................................... $2,843,697
----------
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ------------------------------------------------
NET ASSETS...................................... $2,840,689
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 145,030,804 outstanding $0.001
par value shares (authorized 500,000,000
shares)....................................... $19.59
----------
----------
CLASS B:
- ------------------------------------------------
NET ASSETS...................................... $3,008
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 153,932 outstanding $0.001 par
value shares (authorized 500,000,000
shares)....................................... $19.54
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
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>
- --------------- --------- ----------- ----------- --------- ------------
ITL 1,214,092 $ 714 7/01/97 DEM 1,240 $ 711 $ (3)
ESP 307,783 2,090 7/01/97 DEM 3,635 2,085 (5)
U.S.$ 2,385 2,385 7/02/97 NLG 4,680 2,386 1
BEF 8,754 244 7/02/97 GBP 146 243 (1)
AUD 1,901 1,436 7/02/97 GBP 851 1,418 (18)
ESP 330,532 2,245 7/02/97 GBP 1,347 2,243 (2)
SEK 300,000 38,914 9/16/97 U.S.$45,188 45,188 6,274
ESP 5,400,000 36,767 12/02/97 U.S.$41,562 41,562 4,795
AUD 51,000 38,655 1/12/98 U.S.$39,913 39,913 1,258
FRF 970,000 169,260 6/19/98 U.S.$170,095 170,095 835
--------- --------- ------------
$ 292,710 $ 305,844 $ 13,134
---------
--------- --------- ------------
--------- ------------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- See note A-1 to financial
statements
BEF -- Belgian Franc
IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------
Capital Equipment...................... $ 474,396 16.7%
Consumer Goods......................... 772,462 27.2
Energy................................. 176,034 6.2
Finance................................ 379,401 13.3
Materials.............................. 376,157 13.2
Multi-Industry......................... 137,809 4.9
Services............................... 250,702 8.8
----------- ---
$ 2,566,961 90.3%
----------- ---
----------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
48
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 3.0%
Austria 0.6%
Belgium 0.5%
Denmark 1.3%
Finland 2.0%
France 6.4%
Germany 7.4%
Hong Kong 4.5%
Italy 2.4%
Japan 28.9%
Malaysia 2.3%
Netherlands 5.4%
New Zealand 0.3%
Norway 1.1%
Singapore 2.2%
Spain 2.7%
Sweden 3.4%
Switzerland 7.8%
United Kingdom 13.6%
Other 4.2%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 16.04% 20.32% 19.29%
PORTFOLIO -- CLASS B.... 15.99 20.11 18.95
INDEX................... 11.21 12.84 14.07
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australasia and the Far East (assumes dividends net of withholding
taxes).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING.
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 six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 16.04% and 20.32%, respectively, for the Class A shares; and
15.99% and 20.11%, respectively, for the Class B shares as compared to total
returns of 11.21% and 12.84%, respectively, for the Morgan Stanley Capital
International (MSCI) EAFE Index (the "Index"). From inception on March 15, 1996
to June 30, 1997, the average annual total return of Class A was 19.29% and
18.95% for Class B, as compared to 14.07% for the Index.
The second quarter of 1997 provided investors with almost an ideal global
investment environment. Markets around the world all posted impressive gains
driven by continued low inflation, surging liquidity and improving corporate
earnings, with several markets reaching new highs.
The Japanese market posted an impressive gain for the quarter (+23.8% in U.S.
dollar terms; +14.3% in local currency) following an extended period of
underperformance dating back through much of 1996. The economy in Japan is
finally picking up, thereby realizing the lagged benefits of low interest rates
and the devaluation of the yen. The new fiscal year, which began in April, also
saw a surge of liquidity as newly deregulated Japanese pension plans increased
exposure to the equity markets. Overall, consumer and business sentiment appears
to be improving despite an increase in the value added tax (VAT) which was
implemented in April. Nonetheless, the recovery is not so robust that we would
expect interest rates to begin rising any time soon. The Portfolio's weighting
in Japan was maintained at nearly 30% of net assets, contributing to our
substantial gains during the quarter. We also gained from our currency
management, as we unwound all our yen hedges in late April when the yen reached
a low near 126 yen/dollar.We felt the yen had fallen too far, too fast and were
rewarded as the yen
- --------------------------------------------------------------------------------
International Magnum Portfolio
49
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
recovered in May. We reinstated our hedges at around 111 yen/dollar, believing
that the yen has settled into a 110-123 trading range.
The markets in Europe continued their extended rally, rising 8.9% for the
quarter in U.S. dollar terms and 11.1% in local currency terms. Elections in
France and U.K. saw conservative incumbents replaced by more liberal leaders,
with the French election contributing to increasing uncertainty regarding the
future of the European Economic and Monetary Union (EMU). The French populous
effectively voted against the austerity measures implemented by the previous
government to achieve the Maastricht criteria, instead favoring a Socialist
government aiming to increase employment. Both France and Germany now look less
likely to achieve the 3% debt-to-GDP ratio required for entry into EMU. We
believe that EMU will go forward but with a larger number of countries in the
first round -- meaning that the Euro will be a weaker currency than the
Deutschemark. As a result, we have maintained our hedged exposure to the
Deutschemark bloc currencies as we expect the dollar to continue to strengthen
moderately against them. Overall, stock selection in Europe remains strong with
Philips Electronics, one of the Portfolio's larger holdings, gaining over 30%
during June (and over 60% during the quarter) on strong earnings reports and the
news of the Dutch company's link up with Lucent Technologies of the U.S. to
develop additional communications equipment.
In Asia, the story was mixed. The Hong Kong market rose over 20% during the
quarter as investors became euphoric ahead of the July 1 handover to China. The
market closed at a record high on June 30, Hong Kong's last day under British
rule. Red chip stock (companies with the strongest ties to China) performed
exceptionally well as investors looked to benefit from Hong Kong's new
sovereignty. In sharp contrast to these gains, the Thai market fell over 25%
during the quarter due to on-going concerns about the health of the nation's
banking system (which was burdened under non-performing real estate loans) and
currency (which the government devalued in early July). Although we are only
invested in the developed markets of Asia, the Thai crisis and the devaluation
of the currency have brought into focus the common ills of the fast growth
Southeast Asian economies. Thus, the markets in Malaysia (-11.8%) and Singapore
(-0.8%) both experienced corrections during the quarter. Overall, we have been
pulling back our allocation to Asia over the past several months. Within Asia,
we have been reducing exposure to Malaysia, Hong Kong and Singapore and
increasing exposure to Australia and New Zealand.
Overall, the markets have performed extremely well through the first half of
1997. Looking ahead, however, we are increasingly cautious as valuations look
extended in the majority of markets around the world. Nonetheless, we will
continue to endeavor to uncover stocks with value and monitor market conditions
to adjust our Portfolio accordingly.
Francine J. Bovich
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
50
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
COMMON STOCKS (94.2%)
AUSTRALIA (3.0%)
103,012 Amcor Ltd......................................... $ 685
57,200 Broken Hill Proprietary Co., Ltd.................. 842
57,600 Commonwealth Bank Of Australia.................... 696
32,630 Lend Lease Corp., Ltd............................. 690
46,030 National Australia Bank Ltd....................... 659
141,400 News Corp., Ltd................................... 678
139,500 WMC Ltd........................................... 880
----------
5,130
----------
AUSTRIA (0.6%)
12,500 Boehler-Uddeholm AG............................... 969
1,615 Radex-Heraklith Industriebet...................... 69
----------
1,038
----------
BELGIUM (0.5%)
16,980 G.I.B. Holdings Ltd............................... 812
----------
DENMARK (1.3%)
22,000 BG Bank A/S....................................... 1,217
17,300 Unidanmark A/S, Class A (Registered).............. 972
----------
2,189
----------
FINLAND (2.0%)
(a)26,900 Amer-Yhtymae Oy, Class A.......................... 485
16,800 Huhtamaki Oy, Series 1............................ 723
2,350 Kone Oy, Class B.................................. 281
(a)146,900 Merita Ltd., Class A.............................. 490
93,900 Rautaruukki Oy.................................... 986
28,400 Valmet Crop....................................... 491
----------
3,456
----------
FRANCE (6.4%)
4,100 Alcatel Alsthom................................... 514
11,400 Banque Nationale de Paris......................... 470
1,300 Bongrain S.A...................................... 509
9,800 Cie de Saint Gobain............................... 1,430
9,700 Elf Aquitaine S.A................................. 1,047
5,040 Eridania Beghin-Say S.A........................... 755
6,300 Groupe Danone..................................... 1,041
17,600 Lafarge S.A....................................... 1,095
19,700 Legris Industries S.A............................. 929
(a)8,200 SGS-Thompson Microelectronics N.V................. 648
14,700 Total S.A., Class B............................... 1,486
54,900 Usinor Sacilor.................................... 990
----------
10,914
----------
GERMANY (5.8%)
26,400 BASF AG........................................... 974
24,650 Bayer AG.......................................... 950
900 Buderus AG........................................ 500
58,100 Gerresheimer Glas AG.............................. 975
61,300 Lufthansa AG...................................... 1,180
630 Mannesmann AG..................................... 281
(a)5,300 Metro AG.......................................... 578
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
16,900 VEBA AG........................................... $ 955
2,700 Viag AG........................................... 1,234
2,900 Volkswagen AG..................................... 2,199
----------
9,826
----------
HONG KONG (4.5%)
127,000 Cheung Kong Holdings Ltd.......................... 1,254
181,000 China Resources Enterprise Ltd.................... 888
82,000 Dao Heng Bank Group Ltd........................... 449
90,000 Henderson Land Development Co., Ltd............... 799
46,200 HSBC Holdings plc................................. 1,389
129,000 Hutchison Whampoa Ltd............................. 1,116
81,000 New World Development Co., Ltd.................... 483
144,000 Shanghai Industrial Holdings Ltd.................. 896
37,000 Sun Hung Kai Properties Ltd....................... 445
----------
7,719
----------
ITALY (2.4%)
(a)176,000 Editoriale L'Expresso S.p.A....................... 586
89,000 Marzotto (Gaetano) & Figli S.p.A.................. 745
(a)195,300 Olivetti S.p.A.................................... 55
346,000 Sogefi S.p.A...................................... 875
268,000 Stet Di Risp (NCS)................................ 930
467,000 Telecom Italia S.p.A. Di Risp (NCS)............... 925
----------
4,116
----------
JAPAN (28.9%)
88,000 Amada Co., Ltd.................................... 776
78,000 Asahi Tec Corp.................................... 380
55,000 Canon, Inc........................................ 1,498
51,000 Dai Nippon Printing Co., Ltd...................... 1,153
137,000 Daicel Chemical Industries Ltd.................... 530
59,000 Daifuku Co., Ltd.................................. 778
76,000 Daikin Industries Ltd............................. 690
20,020 FamilyMart........................................ 982
35,000 Fuji Machine Manufacturing Co..................... 1,268
30,000 Fuji Photo Film Ltd............................... 1,207
53,000 Fujitec Co. Ltd................................... 629
118,000 Fujitsu Ltd....................................... 1,637
115,000 Furukawa Electric Co.............................. 732
26,000 Hitachi Credit Corp............................... 504
144,000 Hitachi Ltd....................................... 1,609
60,000 Inabata & Co...................................... 409
111,000 Kaneka Corp....................................... 696
36,000 Kurita Water Industries........................... 958
16,300 Kyocera Ltd....................................... 1,295
59,000 Kyudenko Co., Ltd................................. 497
30,000 Lintec............................................ 547
72,000 Matsushita Electric Industries Ltd................ 1,452
270,000 Mitsubishi Chemical Corp.......................... 881
50,000 Mitsubishi Estate Co., Ltd........................ 724
157,000 Mitsubishi Heavy Industries Ltd................... 1,205
53,000 Mitsumi Electric Co., Ltd......................... 1,263
24,000 Murata Manufacturing Co., Ltd..................... 955
107,000 NEC Corp.......................................... 1,494
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
51
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
47,000 Nifco, Inc........................................ $ 492
15,000 Nintendo Corp., Ltd............................... 1,257
29,000 Nippon Pillar Packing............................. 256
141 Nippon Telegraph & Telephone Corp................. 1,354
126,000 Nissan Motor Co................................... 978
45,000 Nissha Printing................................... 518
89,000 Obayashi Corp..................................... 596
110,000 Ricoh Co., Ltd.................................... 1,440
31,000 Rinnai Corp....................................... 666
18,000 Sangetsu Co., Ltd................................. 377
43,000 Sankyo Co., Ltd................................... 1,445
61,000 Sanwa Shutter..................................... 554
79,000 Sekisui Chemical Co............................... 800
71,000 Sekisui House Ltd................................. 719
12,000 Shimamura Co., Ltd................................ 427
17,700 Sony Corp......................................... 1,543
81,000 Sumitomo Marine & Fire Insurance Co............... 665
67,000 Suzuki Motor Co., Ltd............................. 848
19,000 TDK Corp.......................................... 1,395
141,000 Taisei Corp., Ltd................................. 653
31,900 Tokyo Electron Ltd................................ 1,526
196,000 Toshiba Corp...................................... 1,261
38,000 Toyota Motor Corp................................. 1,121
107,000 Tsubakimoto Chain................................. 653
40,000 Yamanouchi Pharmaceutical Co...................... 1,075
----------
49,368
----------
MALAYSIA (2.3%)
309,000 Berjaya Group Bhd................................. 380
66,000 Berjaya Sports Toto Bhd........................... 311
68,000 Commerce Asset Holdings Bhd....................... 179
14,000 Dialog Group Bhd.................................. 202
29,000 Edaran Otomobil Nasional Bhd...................... 247
39,000 Genting Bhd....................................... 187
17,000 Lityan Holdings Bhd............................... 207
50,000 Malayan Banking Bhd............................... 525
70,000 Malaysian Resources Corp. Bhd..................... 193
63,000 Rashid Hussain Bhd................................ 399
62,000 Resorts World Bhd................................. 187
157,000 Sime Darby Bhd.................................... 523
54,000 United Engineers Malaysia Bhd..................... 389
----------
3,929
----------
NETHERLANDS (5.4%)
53,000 ABN Amro Holdings N.V............................. 989
8,950 Akzo Nobel N.V.................................... 1,228
3,000 Hollandsche Beton Groep N.V....................... 685
31,501 ING Groep N.V..................................... 1,454
15,800 KLM Royal Dutch Airlines N.V...................... 487
12,000 Koninklijke Bijenkorf Beheer N.V.................. 840
52,000 Koninklijke KNP BT N.V............................ 1,185
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
16,300 Koninklijke Van Ommeren N.V....................... $ 633
25,100 Philips Electronics N.V........................... 1,799
----------
9,300
----------
NEW ZEALAND (0.3%)
189,280 Fletcher Challenge Forest......................... 459
----------
NORWAY (1.1%)
118,200 Den Norske Bank ASA............................... 463
59,100 Saga Petroleum ASA, Class B....................... 1,032
(a)57,500 Storebrand ASA.................................... 343
----------
1,838
----------
SINGAPORE (2.2%)
69,000 Datacraft Asia Ltd................................ 220
25,000 Development Bank of Singapore Ltd. (Foreign)...... 315
218,000 Electronic Resources Ltd.......................... 343
170,000 NatSteel.......................................... 433
30,040 Oversea-Chinese Banking Corp. (Foreign)........... 311
(a)146,000 Pacific Century Regional Development.............. 203
42,000 Parkway Holdings Ltd.............................. 188
24,000 Singapore Press Holdings (Foreign)................ 483
283,000 Summit Holdings Ltd............................... 214
(a)332,000 Super Coffeemix Manufacturing Ltd................. 276
30,000 United Overseas Bank Ltd. (Foreign)............... 308
(a)104,400 Want Want Holdings................................ 347
69,000 Wing Tai Holdings Ltd............................. 199
----------
3,840
----------
SPAIN (2.7%)
12,600 Banco Bilbao Vizcaya S.A. (Registered)............ 1,024
81,100 Iberdrola S.A..................................... 1,025
46,600 Telefonica de Espana S.A.......................... 1,348
108,200 Uralita S.A....................................... 1,209
----------
4,606
----------
SWEDEN (3.4%)
20,450 Esselte AB, Class B............................... 481
45,600 Nordbanken AB..................................... 1,533
14,500 Pharmacia & Upjohn, Inc........................... 489
25,100 S.K.F. AB, Class B................................ 649
20,000 Skandia Forsakrings AB............................ 737
32,400 Sparbanken Sverige AB, Class A.................... 721
37,700 Spectra-Physics AB, Class A....................... 678
15,900 Svenska Handelsbanken, Class A.................... 509
----------
5,797
----------
SWITZERLAND (7.8%)
(a)490 Ascom Holdings AG (Bearer)........................ 685
(a)410 Baloise Holding Ltd. (Registered)................. 977
600 Bobst AG (Bearer)................................. 1,019
3,290 Forbo Holding AG (Registered)..................... 1,420
1,530 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 1,445
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
52
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SWITZERLAND (CONT.)
<TABLE>
<C> <S> <C>
(a)380 Magazine Globus (Participating Certificates)...... $ 206
1,440 Nestle S.A. (Registered).......................... 1,900
(a)588 Novartis AG (Registered).......................... 940
(a)4,060 Oerlikon-Buehrle Holding AG (Registered).......... 476
150 Schindler Holding AG (Participating
Certificates)................................... 187
560 Schindler Holding AG (Registered)................. 719
670 Schweizerische Industrie-Gesellschaft Holdings
(Registered).................................... 996
1,380 Sulzer AG (Registered)............................ 1,181
(a)3,000 Valora Holding AG (Registered).................... 637
1,300 Zuerich Versicherung (Registered)................. 517
----------
13,305
----------
UNITED KINGDOM (13.6%)
114,000 Associated British Foods plc...................... 981
75,789 Bank of Scotland.................................. 487
93,000 Bass plc.......................................... 1,135
114,223 BAT Industries plc................................ 1,022
131,600 BG plc............................................ 482
156,000 British Telecommunications plc.................... 1,159
86,300 Burmah Castrol plc................................ 1,460
206,744 Christian Salvesen plc............................ 971
292,100 Courtaulds Textiles plc........................... 1,493
185,700 Grand Metropolitan plc............................ 1,787
232,400 Imperial Tobacco Group plc........................ 1,494
271,519 John Mowlem & Co. plc............................. 556
199,800 Kwik Save Group plc............................... 1,008
47,600 Peninsular & Oriental Steam Navigation Co......... 474
41,000 Premier Farnell plc............................... 319
122,400 Racal Electronic plc.............................. 489
100,500 Reckitt & Colman plc.............................. 1,501
130,000 Royal & Sun Alliance Insurance Group plc.......... 961
131,050 Scottish Hydro-Electric plc....................... 906
63,600 Southern Electric plc............................. 468
229,300 Tate & Lyle plc................................... 1,705
41,900 Unilever plc...................................... 1,199
294,800 WPP Group plc..................................... 1,205
----------
23,262
----------
TOTAL COMMON STOCKS (Cost $141,557)............................ 160,904
----------
PREFERRED STOCKS (1.6%)
GERMANY (1.6%)
2,710 Dyckerhoff AG..................................... 981
12,700 Hornbach Holding AG............................... 1,060
(a)1,300 Suedzucker AG..................................... 697
----------
TOTAL PREFERRED STOCKS (Cost $2,187)........................... 2,738
----------
</TABLE>
<TABLE>
<CAPTION>
NO OF VALUE
RIGHTS (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
RIGHTS (0.0%)
MALAYSIA (0.0%)
(a,d)27,200 Commerce Asset Holdings Bhd, expiring 7/23/97..... $ 2
----------
SINGAPORE (0.0%)
(a,d)109,000 Electronic Resources Ltd., expiring
7/07/97......................................... 72
----------
SWITZERLAND (0.0%)
(a,d)1,180 Sulzer AG, expiring 7/11/97....................... --
----------
TOTAL RIGHTS (Cost $0)......................................... 74
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- -----------
WARRANTS (0.0%)
MALAYSIA (0.0%)
(a,d)17,000 Commerce Asset Holdings Bhd, expiring 3/16/02..... --
(a,d)9,000 Rashid Hussain Bhd, expiring 12/31/02............. --
----------
TOTAL WARRANTS (Cost $0)....................................... --
----------
TOTAL FOREIGN SECURITIES (95.8%) (Cost $143,744)............... 163,716
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------
SHORT-TERM INVESTMENT (6.2%)
REPURCHASE AGREEMENT (6.2%)
$ 10,616 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $10,618,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $10,798 (Cost $10,616)... 10,616
----------
FOREIGN CURRENCY (0.9%)
GBP 147 British Pound..................................... 244
FRF 438 French Franc...................................... 75
DEM 530 German Mark....................................... 304
ITL 37,650 Italian Lira...................................... 22
JPY 90,454 Japanese Yen...................................... 790
MYR 14 Malaysian Ringgit................................. 6
NZD 151 New Zealand Dollar................................ 103
SGD 2 Singapore Dollar.................................. 1
CHF 65 Swiss Franc....................................... 44
----------
TOTAL FOREIGN CURRENCY (Cost $1,596)........................... 1,589
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
53
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
- ----------------------------------------------------------------
<C> <S> <C>
TOTAL INVESTMENTS (102.9%) (Cost $155,956)............ $175,921
--------
OTHER ASSETS (1.6%)
Cash....................................... $ 917
Dividends Receivable....................... 556
Receivable for Investments Sold............ 534
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 524
Foreign Withholding Tax Reclaim
Receivable............................... 127
Receivable for Portfolio Shares Sold....... 8
Interest Receivable........................ 2 2,668
-------
LIABILITIES (-4.5%)
Payable for Investments Purchased.......... (7,300)
Investment Advisory Fees Payable........... (227)
Payable for Closed Foreign Currency
Exchange Contracts....................... (128)
Custodian Fees Payable..................... (40)
Administrative Fees Payable................ (21)
Distribution Fees Payable.................. (16)
Payable for Portfolio Shares Redeemed...... (7)
Directors' Fees & Expenses Payable......... (2)
Other Liabilities.......................... (39) (7,780)
------- --------
NET ASSETS (100%)..................................... $170,809
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $144,713
Undistributed Net Investment Income............... 1,204
Accumulated Net Realized Gain..................... 4,369
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 20,523
--------
NET ASSETS........................................ $170,809
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $140,458
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 11,358,501 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $12.37
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $30,351
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,462,111 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $12.33
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------- -------- ---------- ------------- -------- -----------
U.S.$ 162 $ 162 7/02/97 GBP 97 $ 162 $ --
U.S.$ 258 258 7/02/97 AUD 342 258 --
CHF 416 286 8/18/97 U.S.$ 285 285 (1)
CHF 6,499 4,478 8/18/97 U.S.$ 4,573 4,573 95
NLG 7,447 3,810 8/18/97 U.S.$ 3,921 3,921 111
U.S.$ 1,650 1,650 8/18/97 NLG 3,193 1,633 (17)
U.S.$ 1,650 1,650 8/18/97 CHF 2,354 1,622 (28)
JPY 1,272,263 11,198 8/25/97 U.S.$ 11,400 11,400 202
BEF 19,501 545 8/29/97 U.S.$ 552 552 7
DEM 7,688 4,429 8/29/97 U.S.$ 4,489 4,489 60
U.S. 370 370 8/29/97 BEF 13,115 366 (4)
U.S.$ 1,550 1,550 8/29/97 DEM 2,662 1,534 (16)
FRF 24,463 4,186 9/15/97 U.S.$ 4,317 4,317 131
U.S.$ 1,650 1,650 9/15/97 FRF 9,553 1,634 (16)
-------- -------- -----
$ 36,222 $ 36,746 $524
-------- -------- -----
-------- -------- -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- See note A-1 to financial statements.
AUD -- Australian Dollar
BEF -- Belgian Franc
NCS -- Non Convertible Shares
NLG -- Netherlands Guilder
- ------------------------------------------------------------
SUMMARY OF FOREIGN AND U.S. SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment...................... $ 39,088 22.9%
Consumer Goods......................... 36,692 21.5
Electrical & Electronics............... 8,770 5.1
Energy................................. 7,459 4.4
Finance................................ 26,826 15.7
Materials.............................. 19,383 11.3
Multi-Industry......................... 4,169 2.4
Services............................... 21,329 12.5
--------- ---
$ 163,716 95.8%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
54
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 8.5%
Denmark 1.3%
Finland 5.7%
France 6.2%
Germany 7.7%
Hong Kong 2.7%
Ireland 2.6%
Italy 1.7%
Japan 11.8%
Netherlands 6.3%
New Zealand 1.0%
Norway 1.8%
Singapore 0.8%
Spain 3.0%
Sweden 1.9%
Switzerland 10.5%
United Kingdom 18.9%
Other 7.6%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO............... 8.14% 9.22% 16.49%
INDEX................... 11.21 12.84 14.89
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australasia and the Far East (assumes dividends 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 the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 8.14% and 9.22%, respectively, as compared to total returns of
11.21% and 12.84%, respectively, for the Morgan Stanley Capital International
(MSCI) EAFE Index (the "Index"). From inception on December 15, 1992 to June 30,
1997, the average annual total return was 16.49% as compared to 14.89% for the
Index.
The Portfolio's underperformance in the second quarter reversed the strong
outperformance of the first three months of the year and reflected the
Portfolio's significant underweighting in the strong Japanese market and yen,
and the widespread marked underperformance of the small cap universe against the
large cap EAFE Index.
Japan recovered strongly after its first quarter weakness with domestic stocks
the major beneficiaries given significant yen strength. Yet despite their
greater domestic focus, Japanese small caps continued to lag although the
Portfolio's stock selection contributed positively to performance.
In Continental Europe further dollar strength against the major currencies
continued to support the export sector, although there were some slight signs of
recovery in domestic consumption in Switzerland, Germany and Spain. French
stocks bounced back strongly in June given a more positive perception of the new
socialist Government's commitment to fiscal rectitude and the European single
currency. The Vontobel Swiss smaller companies index showed a 9.1%
underperformance relative to large caps during the first half, illustrating the
magnitude of small cap underperformance in Europe. This was also seen in the
U.K. where election euphoria drove the financial and pharmaceutical sectors
higher, completely bypassing small caps. The Hoare Govett smaller companies
index lagged the FT All Share by 5.7%. Sterling strength was a significant
negative to export stocks and hurt the Portfolio's stock selection.
Against this backdrop the Portfolio's strong stock selection in Japan, France,
Hong Kong and Ireland
- --------------------------------------------------------------------------------
International Small Cap Portfolio
55
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
was not sufficient to offset particularly weak small cap returns in the U.K.,
Switzerland, the Netherlands, Germany and Australia. The Australian small cap
index lagged large caps by a staggering 9.6% in the first six months of the
year. The Portfolio's Australian and French Franc hedges contributed positively,
offsetting some of the U.S. Dollar strength, while the Fund's underweighting in
Malaysia and Singapore was also of benefit.
Portfolio activity has been high during the first half to the date of this
letter as we sold Kuoni in Switzerland, Pico Far East in Hong Kong, Berentzen
and Spar in Germany, L'Espresso in Italy, Jyske Bank in Denmark and Arnotts and
Burswood in Australia -- all of which had reached over assessed fair value. The
proceeds were invested in a number of new positions.
Westminster Healthcare and Care First are U.K. listed managers of nursing homes,
a sector which has been significantly de-rated over the last few years as growth
expectations proved disappointing. We believe both companies have been oversold
and with strong management teams focused on extracting attractive returns from
their assets, offer good value. Recent acquisition multiples within the sector
lend support to this analysis.
Nutreco Group was a Dutch IPO which has already contributed strongly to the
Portfolio's performance. It is the global market leader in the rapidly growing
salmon fish food industry and the European leader in the compound feed industry.
It is at the forefront of research and development and focuses on higher
value-added products and services. Listed on under 6 times cash flow and 9 times
free cash flow the shares offered good value.
Zehnder is the Swiss listed leading European producer of specialty radiators
which had underperformed due to its exposure to the European construction
markets. Acquired on 4 times cash flow and 7 times free cash flow the stock was
inexpensive given its market positioning, strength of management and, in
particular, its ability to generate good cash flow and returns on capital
employed even at the bottom of the cycle.
Rauma, in Finland, is a world leader in logging equipment, pulp and paper
process technologies, valves and rock crushing equipment. Two of the divisions
are in the process of being restructured while the outlook for logging equipment
is extremely positive. The shares should be re-rated as research coverage
improves combined with enhanced liquidity following the reduction of
UPM-Kymmene's holding. Purchased on 10 times earnings and 8 times free cash flow
the shares offer attractive value.
Li and Fung is Hong Kong's premier trading company with 90 years of know how and
a unique pan Asian sourcing network and a host of value added services to offer
its clients. It acquired the former Inchcape trading arm in 1995 and is
substantially improving its margins with an expected ROI in excess of 55% within
three years. The shares were, acquired on 11 times 1997 earnings and free cash
flow and a yield of over 5.5%.
Looking forward we anticipate few changes in the Portfolio's geographic mix. We
continue to find attractive value in Australia, confirmed by a recent trip,
while in the UK value is also evident following a fairly indiscriminate sell off
of sterling-related stocks. We will, however, tread cautiously seeing no reason
why sterling will weaken in the short-term and our focus will be on translation
rather than transaction related sterling sensitives. The Japanese weighting may
rise modestly given some value is emerging following the massive relative
underperformance of small caps but, as discussed in the March 1997 First Quarter
Report, we are concerned that the pressing need for deregulation will hurt the
majority of Japanese companies. Few companies meet our quality threshold.
Elsewhere we continue to find attractive value in the small cap sector. The
dearth of quality research on many of these stocks creates extremely attractive
pricing inefficiencies and is all the more marked given the outperformance of
large caps this year and the general paucity of value. While it is impossible to
predict when small caps will start to outperform again, the valuations are
compelling.
Margaret Naylor
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
56
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS (87.4%)
AUSTRALIA (8.5%)
16,100 Arnotts Ltd....................................... $ 107
598,000 Auspine Ltd....................................... 1,603
(a)990,079 Bains Harding Ltd................................. 224
423,782 BRL Hardy Ltd..................................... 1,212
470,300 Burswood Property Trust........................... 622
2,486,636 Country Road Ltd.................................. 2,967
29,035 Eltin Ltd......................................... 55
4,449,421 E.R.G. Ltd........................................ 5,041
417,000 Morgan & Banks Ltd................................ 2,677
6,477,549 Parbury Ltd....................................... 3,963
950,000 Skilled Engineering Ltd........................... 1,744
(a)1,828,500 Solution 6 Holdings Ltd........................... 1,298
699,748 W.D. & H.O. Wills Holdings Ltd.................... 1,030
----------
22,543
----------
DENMARK (1.3%)
76,230 SYD-Sonderjylland Holdings........................ 3,480
----------
FINLAND (5.7%)
39,230 Aamulehti Yhtymae Oy, Series II................... 1,436
(a)63,100 Amer-Yhtymae Oy, Class A.......................... 1,137
55,370 KCI Konecranes International...................... 2,432
48,100 Kone Oy, Class B.................................. 5,745
309,250 Oy Tamro AB....................................... 2,145
56,600 Rauma Oy.......................................... 1,298
90,300 Rautaruukki Oy.................................... 948
----------
15,141
----------
FRANCE (6.2%)
37,576 Dauphin O.T.A..................................... 2,610
74,415 De Dietrich et Compagnie S.A...................... 3,293
71,490 Europeene d'Extincteurs........................... 4,916
92,400 Legris Industries S.A............................. 4,357
(a)59,768 Sediver S.A....................................... 1,221
----------
16,397
----------
GERMANY (2.8%)
16,500 Duerr AG.......................................... 681
120,900 Gerresheimer Glas AG.............................. 2,028
61,765 Marseille-Kliniken AG............................. 1,591
(a)11,433 Sinn AG........................................... 2,426
(a)4,420 Varta AG.......................................... 719
----------
7,445
----------
HONG KONG (2.7%)
1,754,000 Chen Hsong Holdings............................... 1,019
1,097,000 Jardine International Motor Holdings Ltd.......... 1,388
1,750,000 Li & Fung Ltd..................................... 1,965
6,542,000 Vitasoy International Holdings Ltd................ 2,934
----------
7,306
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
IRELAND (2.6%)
73,924 Anglo Irish Bank Corp. plc........................ $ 94
169,700 Clondalkin Group plc.............................. 1,644
955,274 Green Property plc................................ 5,178
----------
6,916
----------
ITALY (1.6%)
580,000 Sogefi S.p.A...................................... 1,467
787,000 Unicem Di Risp (NCS).............................. 2,005
81,000 Vincenzo Zucchi S.p.A............................. 428
199,050 Vincenzo Zucchi S.p.A. (NCS)...................... 469
----------
4,369
----------
JAPAN (11.8%)
15,000 Exedy Corp........................................ 191
231,000 Foster Electric Co., Ltd.......................... 1,553
463,000 Hankyu Realty..................................... 3,726
742,000 Japan Oil Transportation.......................... 2,817
213,000 Japan Vilene Co., Ltd............................. 976
134,000 Kansei Corp....................................... 1,037
388,000 Kirin Beverage Corp............................... 6,774
136,000 Nifco, Inc........................................ 1,425
722,250 Nissan Fire & Insurance Co........................ 3,972
61,000 Sangetsu Co., Ltd................................. 1,278
549,000 Toc Co............................................ 6,517
170,000 Toyoda Gosei Co................................... 1,187
----------
31,453
----------
NETHERLANDS (6.3%)
38,970 Ahrend Groep N.V.................................. 2,633
83,000 Apothekers Cooperatie OPG......................... 2,857
31,745 Atag Holding N.V.................................. 1,737
27,916 Hollandsche Beton Groep N.V....................... 6,372
45,830 Koninklijke Van Ommeren N.V....................... 1,780
(a)65,950 Nutreco Holding N.V............................... 1,369
4,122 Samas Groep N.V................................... 177
----------
16,925
----------
NEW ZEALAND (1.0%)
687,853 Fisher & Paykel Industries Ltd.................... 2,687
----------
NORWAY (1.8%)
73,850 Adelsten ASA, Class B............................. 1,593
103,000 Kverneland ASA.................................... 2,797
(a)228,020 Oceanor........................................... 311
----------
4,701
----------
SINGAPORE (0.8%)
671,000 GP Batteries International Ltd.................... 1,999
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
57
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
SPAIN (3.0%)
80,000 Bodegas y Bebidas S.A............................. $ 3,640
92,775 Empresa Nacional Hidroelectrica del Ribagorzana
S.A., Class B................................... 2,202
48,550 Miquel y Costas & Miquel S.A...................... 2,196
----------
8,038
----------
SWEDEN (1.9%)
108,700 Marieberg Tidnings AB............................. 2,699
(a)154,700 Scandic Hotels AB................................. 2,441
----------
5,140
----------
SWITZERLAND (10.5%)
2,600 Bobst AG (Bearer)................................. 4,417
4,967 Bucher Holdings AG (Bearer)....................... 5,171
9,800 Edipresse S.A. (Bearer)........................... 2,316
2,750 LEM Holdings AG................................... 603
(a)4,575 Magazine Globus (Participating Certificates)...... 2,476
4,450 Porst Holding AG (Bearer)......................... 689
14,385 Publicitas Holding S.A. (Registered).............. 2,739
2,865 Schweizerische Industrie-Gesellschaft Holdings AG
(Registered).................................... 4,258
(a)11,475 Valora Holding AG................................. 2,436
4,470 Zehnder Holding AG, Class B....................... 2,143
910 Zellweger Luwa AG (Bearer)........................ 674
----------
27,922
----------
UNITED KINGDOM (18.9%)
4,004,247 Anglo Irish Bank Corp. plc (British Pound
Shares)......................................... 5,201
1,211,900 Bluebird Toys plc................................. 1,857
1,371,200 BSM Group plc..................................... 2,512
462,400 Care First Group plc.............................. 893
796,500 Corporate Services Group plc...................... 2,480
821,300 Devro plc......................................... 4,636
(a)2,540,850 Donelon Tyson plc................................. --
1,782,600 GEI International plc............................. 2,864
519,600 Industrial Control Services Group plc............. 1,185
426,289 International Business Communications (Holdings)
plc............................................. 2,790
1,608,965 John Mowlem & Co. plc............................. 3,295
(a)33,795,100 Kendell plc....................................... --
206,800 Le Riches Stores Ltd.............................. 1,329
206,335 Mallett plc....................................... 332
2,354,600 Matthews (Bernard) plc............................ 4,430
120,000 Northern Leisure plc.............................. 504
651,000 Oriflame International S.A........................ 5,257
(a)2,659,393 Pentos plc........................................ --
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
667,000 Ricardo Group plc................................. $ 1,499
(a)503,100 SGB Group plc..................................... 1,298
(a)1,895,000 Tandem Group plc.................................. 205
1,344,500 The 600 Group plc................................. 2,687
728,700 UniChem plc....................................... 3,106
522,800 Waterman Partnership Holdings plc................. 501
344,000 Westminster Health Care Holdings plc.............. 1,512
----------
50,373
----------
TOTAL COMMON STOCKS (Cost $211,333)................................ 232,835
----------
PREFERRED STOCKS (4.9%)
GERMANY (4.9%)
10,923 Dyckerhoff AG..................................... 3,954
31,650 Hornbach Holding AG............................... 2,641
8,550 STO AG-Vorzug..................................... 3,556
16,100 Wuerttembergische Metallwarenfabrik AG............ 2,932
----------
TOTAL PREFERRED STOCKS (Cost $11,390).............................. 13,083
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------
CONVERTIBLE DEBENTURE (0.1%)
ITALY (0.1%)
ITL 518,000 Mediobanca S.p.A 5.50%, 1/01/00 (Cost $328)....... 310
----------
TOTAL FOREIGN SECURITIES (92.4%) (Cost $223,051)................... 246,228
----------
SHORT-TERM INVESTMENT (4.5%)
REPURCHASE AGREEMENT (4.5%)
$ 12,111 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $12,113,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $12,317 (Cost $12,111)... 12,111
----------
FOREIGN CURRENCY (1.6%)
AUD 40 Australian Dollar................................. 30
GBP 132 British Pound..................................... 221
FRF 208 French Franc...................................... 35
DEM 5,290 German Mark....................................... 3,035
ITL 178,509 Italian Lira...................................... 105
JPY 13,167 Japanese Yen...................................... 115
NLG 642 Netherlands Guilder............................... 327
ESP 126 Spanish Peseta.................................... 1
CHF 673 Swiss Franc....................................... 461
----------
TOTAL FOREIGN CURRENCY (Cost $4,359)............................... 4,330
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
58
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -------------------------------------------------------------------
TOTAL INVESTMENTS (98.5%) (Cost $239,521)................ $262,669
--------
OTHER ASSETS (2.2%)
Cash....................................... $ 19
Receivable for Investments Sold............ 1,703
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 1,666
Receivable for Portfolio Shares Sold....... 1,592
Dividends Receivable....................... 488
Foreign Withholding Tax Reclaim
Receivable............................... 258
Interest Receivable........................ 10
Other...................................... 9 5,745
----------
LIABILITIES (-0.7%)
Payable for Investments Purchased.......... (1,039)
Investment Advisory Fees Payable........... (547)
Payable for Closed Foreign Currency
Exchange Contracts....................... (187)
Custodian Fees Payable..................... (33)
Administrative Fees Payable................ (33)
Directors' Fees & Expenses Payable......... (9)
Other Liabilities.......................... (39) (1,887)
---------- --------
NET ASSETS (100%)........................................ $266,527
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $229,574
Undistributed Net Investment Income............... 2,550
Accumulated Net Realized Gain..................... 9,598
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 24,805
--------
NET ASSETS........................................ $266,527
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 14,643,353 outstanding $.001 par
value shares (authorized 1,000,000,000
shares)......................................... $18.20
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
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>
- ----------- -------- ----------- ------------ -------- ------------
FRF 55,000 $ 9,409 9/12/97 U.S.$ 10,896 $ 10,896 $ 1,487
AUD 9,100 6,897 1/12/98 U.S.$ 7,076 7,076 179
-------- -------- ------
$ 16,306 $ 17,972 $ 1,666
--------
-------- -------- ------
-------- ------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
NCS -- Non Convertible Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment...................... $ 61,057 22.9%
Consumer Goods......................... 62,025 23.3
Energy................................. 2,202 0.8
Finance................................ 31,155 11.7
Materials.............................. 31,692 11.9
Multi-Industry......................... 8,858 3.3
Services............................... 49,239 18.5
--------- ---
$ 246,228 92.4%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
59
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Appliances & Household Durables 7.6%
Audio/Video Products 0.4%
Automobiles 5.4%
Business Materials & Components 1.2%
Business & Public Services 1.7%
Chemicals 5.4%
Construction & Housing 4.9%
Data Processing & Reproduction 3.0%
Electrical & Electronics 13.7%
Electrical Components & Instruments 10.3%
Financial Services 1.2%
Health & Personal Care 5.2%
Industrial Components 0.9%
Insurance 1.2%
Machinery & Engineering 17.5%
Merchandising 3.6%
Metals -- Non-Ferrous 1.4%
Metals -- Steel 0.9%
Real Estate 1.1%
Recreation, Other Consumer Goods 6.0%
Telecommunications 4.6%
Textiles & Apparel 1.1%
Other 1.7%
</TABLE>
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) JAPAN INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ ----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 23.37% 12.87% 4.55%
PORTFOLIO -- CLASS B.... 23.05 12.26 13.61
INDEX -- CLASS A........ 9.07 -8.87 -1.81
INDEX -- CLASS B........ 9.07 -8.87 -4.83
</TABLE>
1. The MSCI Japan Index is an unmanaged index of common stocks (includes
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.
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 include common and preferred stocks, convertible
securities and rights and warrants to purchase common stocks.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 23.37% and 12.87%, respectively, for the Class A shares; and
23.05% and 12.26%, respectively, for the Class B shares as compared to total
returns of 9.07% and -8.87%, respectively, for the Morgan Stanley Capital
International (MSCI) Japan Index (the "Index"). From inception on April 25, 1994
to June 30, 1997, the average annual total return for Class A was 4.55% as
compared to -1.81% for the Index. From inception on January 2, 1996 to June 30,
1997, the average annual total return of Class B was 13.61% as compared to
- -4.83% for the Index.
During the second quarter of 1997, the Japanese equity market rebounded sharply
from the low set in February. This rally came despite a consumption tax hike
from 3 to 5% in April, the collapse of Nissan Life Insurance, scandals at Nomura
and DKB as well as sharp strengthening of the yen. Sentiment also improved after
April as the severely depressed banking sector stage a technical rally and
overall anxiety regarding the Japanese economy softened.
In retrospect, we believe that the stock market digested the weakening economic
growth of the April-June quarter (stemming from the consumption tax hike) in the
November to February sell-off. In fact, as the second quarter progressed many
market participants became more encouraged that economic prospects are brighter
than the prevailing negative consensus, with such conviction confirmed by the
release of June's Bank of Japan "Tankan" report. This quarterly survey was "+7",
significantly better than the consensus estimates. Moreover, on a global basis,
Japanese domestic shortcomings look less severe when compared with the French
election results and Germany's mounting budget deficit problems. Therefore, on a
global macro level, confidence and relative optimism for Japan yet again began
to emerge.
The financial sector, particularly banks, staged a sharp technical rebound from
severely oversold levels with large open short interest positions contributing
to a volatile rally during the second quarter. The
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
60
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO (CONT.)
announcement that troubled Nippon Credit Bank and Bankers Trust formed alliances
and that Hokkaido Bank and Takushoku Bank will merge also helped to raise
interest in the sector. The Ministry of Finance appeared to not allow large
banks to fail. Also, the 5% equity stake a large U.S. investor took in Wako
Securities provided evidence that mergers and acquisitions activity in the
Japanese financial sector with Big Bang looming may accelerate.
International Blue chips, the market bellcow since mid 1996, entered a
consolidation period in June. This sector, favored by domestic pension funds and
foreign investors for both value and growth, sold off primarily from the rapid
appreciation of the yen. The sharp appreciation of the yen came from a mounting
trade surplus between Japan and the U.S., particularly during April and May. At
the Washington G-7 meeting in April, statements were issued that "proper
currency levels are necessary" for the trade balance to correct. Moreover,
official U.S. statements directed to Japan posed strong language that the
Japanese domestic economy must be improved. As such, although most international
blue chips' earnings are more resilient now to a stronger yen, some investors
had ample reason to take profits in this sector.
We believe that focus should not be on the Japanese economic recovery but more
on the degree to which it will improve. Evidence such as June's Tankan report
and bottom-up earnings results we are witnessing from leading companies in Japan
suggest that the recovery is well on its way. However, the drag on the domestic
economy from mounting bankruptcy rates and banks' non-performing loans as well
as inefficient fiscal policy remain serious. In order for the domestic economy
to continue improving and show real private demand increases, additional policy
changes including further deregulation and administrative reform will need to
take place. We are hopeful this will occur. The LDP has recently shown it is
getting stronger with less internal friction and therefore a concerted policy
drive will be easier to implement.
While the scandals at Nomura, DKB and bankruptcy at Nissan Life were a few
casualties during the first half of 1996, we believe there are potentially more
such cases which could negatively affect the financial sector. On the other
hand, international blue chips and globally competitive deregulated Japanese
industries will likely see a continued improvement in earnings and demand from
domestic and foreign investors. Moreover, these companies are also "domestic
demand" plays because Japan is rapidly shifting to digital broadcasting, e-mail,
PC's and multimedia and therefore companies such as SONY are not only "export"
plays on the market but enjoy a large growing domestic market.
We believe that the yen will stabilize in a trading range of 110-123 to the
dollar and the recent 10% correction in the currency should begin to impact
trade surplus numbers less negatively. Our Portfolio will continue to favor
electronics, blue chips, multimedia and high technology companies which
represent value and show visible earning momentum.
John R. Alkire
PORTFOLIO MANAGER
Kunihiko Sugio
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
61
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (98.3%)
APPLIANCES & HOUSEHOLD DURABLES (7.6%)
253,000 Matsushita Electric Industries Ltd................ $ 5,101
127,400 Rinnai Corp....................................... 2,736
62,000 Sony Corp......................................... 5,406
----------
13,243
----------
AUDIO/VIDEO PRODUCTS (0.4%)
54,000 Nissha Printing................................... 622
----------
AUTOMOBILES (5.4%)
458,000 Nissan Motor Co................................... 3,554
234,000 Suzuki Motor Co., Ltd............................. 2,962
100,000 Toyota Motor Corp................................. 2,950
----------
9,466
----------
BUILDING MATERIALS & COMPONENTS (1.2%)
180,000 Fujitec Co., Ltd.................................. 2,137
----------
BUSINESS & PUBLIC SERVICES (1.7%)
133,000 Dai Nippon Printing Co., Ltd...................... 3,007
----------
CHEMICALS (5.4%)
461,000 Daicel Chemical Industries Ltd.................... 1,783
439,000 Kaneka Corp....................................... 2,751
623,000 Mitsubishi Chemical Corp.......................... 2,034
97,000 Okura Industrial Co., Ltd......................... 382
252,000 Sekisui Chemical Co............................... 2,551
----------
9,501
----------
CONSTRUCTION & HOUSING (4.9%)
200,000 Kyudenko Co., Ltd................................. 1,686
332,000 Obayashi Corp..................................... 2,223
257,000 Sekisui House Ltd................................. 2,602
430,000 Taisei Corp., Ltd................................. 1,993
----------
8,504
----------
DATA PROCESSING & REPRODUCTION (3.0%)
192,000 Canon, Inc........................................ 5,229
----------
ELECTRICAL & ELECTRONICS (13.7%)
395,000 Fujitsu Ltd....................................... 5,482
467,000 Hitachi Ltd....................................... 5,218
160,000 Mitsumi Electric Co., Ltd......................... 3,813
356,000 NEC Corp.......................................... 4,972
678,000 Toshiba Corp...................................... 4,361
----------
23,846
----------
ELECTRONIC COMPONENTS & INSTRUMENTS (10.3%)
57,000 Kyocera Ltd....................................... 4,528
90,000 Murata Manufacturing Co., Ltd..................... 3,582
65,000 TDK Corp.......................................... 4,771
107,700 Tokyo Electron Ltd................................ 5,152
----------
18,033
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FINANCIAL SERVICES (1.2%)
107,000 Hitachi Credit Corp............................... $ 2,073
----------
HEALTH & PERSONAL CARE (5.2%)
153,000 Sankyo Co., Ltd................................... 5,142
144,000 Yamanouchi Pharmaceutical Co...................... 3,871
----------
9,013
----------
INDUSTRIAL COMPONENTS (0.9%)
154,000 Nifco, Inc........................................ 1,613
----------
INSURANCE (1.2%)
266,000 Sumitomo Marine & Fire Insurance Co............... 2,182
----------
MACHINERY & ENGINEERING (17.5%)
373,000 Amada Co., Ltd.................................... 3,288
175,000 Daifuku Co., Ltd.................................. 2,307
252,000 Daikin Industries Ltd............................. 2,288
141,000 Fuji Machine Manufacturing Co..................... 5,108
139,000 Kurita Water Industries........................... 3,700
598,000 Mitsubishi Heavy Industries Ltd................... 4,588
203,000 Nippon Pillar Packing............................. 1,790
390,000 Ricoh Co., Ltd.................................... 5,106
397,000 Tsubakimoto Chain................................. 2,426
----------
30,601
----------
MERCHANDISING (3.6%)
66,020 Family Mart....................................... 3,239
223,000 Inabata & Co...................................... 1,520
76,000 Sangetsu Co., Ltd................................. 1,592
----------
6,351
----------
METAL-NON-FERROUS (1.4%)
259,000 Sanwa Shutter..................................... 2,351
----------
METALS-STEEL (0.9%)
320,000 Asahi Tec Corp.................................... 1,558
----------
REAL ESTATE (1.1%)
137,000 Mitsubishi Estate Co., Ltd........................ 1,985
----------
RECREATION, OTHER CONSUMER GOODS (6.0%)
90,000 Fuji Photo Film Ltd............................... 3,622
110,000 Lintec............................................ 2,007
57,000 Nintendo Corp., Ltd............................... 4,776
----------
10,405
----------
TELECOMMUNICATIONS (3.3%)
590 Nippon Telegraph & Telephone Corp................. 5,665
----------
TELECOMMUNICATIONS EQUIPMENT (1.3%)
350,000 Furukawa Electric Co.............................. 2,227
----------
TEXTILES & APPAREL (1.1%)
55,000 Shimamura Co., Ltd................................ 1,959
----------
TOTAL COMMON STOCKS (Cost $157,897)........................... 171,571
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
62
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FOREIGN CURRENCY (0.4%)
JPY 78,253 Japanese Yen (Cost $683).......................... $ 683
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.7%) (Cost $158,580)................ 172,254
--------
OTHER ASSETS (3.1%)
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... $ 3,124
Receivable for Investments Sold............ 1,880
Receivable for Portfolio Shares Sold....... 368
Dividends Receivable....................... 44
Other...................................... 4 5,420
----------
LIABILITIES (-1.8%)
Bank Overdraft............................. (1,358)
Payable for Portfolio Shares Redeemed...... (1,339)
Investment Advisory Fees Payable........... (309)
Payable for Investments Purchased.......... (47)
Administrative Fees Payable................ (23)
Custodian Fees Payable..................... (11)
Directors' Fees & Expenses Payable......... (7)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (30) (3,125)
---------- --------
NET ASSETS (100%)........................................ $174,549
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $167,338
Accumulated Net Investment Loss................... (9,142)
Accumulated Net Realized Loss..................... (443)
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 16,796
--------
NET ASSETS........................................ $174,549
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $172,141
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 17,538,339 outstanding
$.001 par value shares (authorized
500,000,000 shares).................. $9.82
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $2,408
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 246,580 outstanding
$.001 par value shares (authorized
500,000,000 shares).................. $9.77
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver or is to receive 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>
- -------------- --------- ----------- -------------- --------- ------------
JPY 4,197,500 $ 36,840 8/06/97 U.S.$ 34,864 $ 34,864 $ (1,976)
JPY 2,796,324 24,542 8/06/97 U.S.$ 23,100 23,100 (1,442)
U.S.$ 22,475 22,475 8/06/97 JPY 2,796,324 24,542 2,067
JPY 2,421,150 21,249 8/06/97 U.S.$ 20,000 20,000 (1,249)
U.S.$ 19,454 19,454 8/06/97 JPY 2,421,150 21,249 1,795
U.S.$ 33,743 33,743 8/06/97 JPY 4,197,500 36,840 3,097
JPY 4,824,820 43,168 12/11/97 U.S.$ 44,000 44,000 832
--------- --------- ------------
$ 201,471 $ 204,595 $ 3,124
---------
--------- --------- ------------
--------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
63
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 7.2%
Brazil 47.4%
Chile 8.4%
Colombia 2.1%
Mexico 27.4%
Peru 2.1%
Venezuela 3.1%
Other 2.3%
</TABLE>
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS GLOBAL LATIN AMERICA INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 44.08% 59.31% 31.55%
PORTFOLIO -- CLASS B.... 43.94 59.04 61.74
INDEX -- CLASS A........ 40.50 45.84 19.16
INDEX -- CLASS B........ 40.50 45.84 41.20
</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 Argentina,
Brazil, Chile, Colombia, Peru, Mexico and Venezuela (includes 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.
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 six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 44.08% and 59.31%, respectively, for the Class A shares; and
43.94% and 59.04%, respectively, for the Class B shares as compared to total
returns of 40.50% and 45.84%, respectively, for the Morgan Stanley Capital
International (MSCI) Emerging Markets Global Latin America Index (the "Index").
From inception on January 18, 1995 to June 30, 1997, the average annual total
return of Class A was 31.55% as compared to 19.16% for the Index. From inception
on January 2, 1996 to June 30, 1997, the average annual total return of Class B
was 61.74% as compared to 41.20% for the Index.
Overall the Latin American equity markets enjoyed a remarkable quarter, as the
MSCI Latin America Index advanced 22.0% for the three months ended June 30,
1997. The favorable performance was the result of a confluence of factors,
particularly positive momentum on the privatization front in Brazil, a
broadening of the economic recovery in Mexico, and an end to the drought in
Chile.
ARGENTINA
Argentina did not contain any particularly market-impacting news during the
quarter, and advanced largely in sympathy with the region. The strong economic
recovery, led by construction and mining, continues to accelerate and this has
provided a sound backdrop for the equity market. There has been little evidence
of a consumer recovery and, with unemployment hovering in the high teens, we do
not expect to see a robust turnaround in the near future. Our overall outlook
remains for the recovery to continue and center on infrastructure and fixed
investment, for the political environment to remain benign, and the equity
market to move more or less in line with the region.
BRAZIL
Brazil again propelled the region, both on the news front as well as the
performance front. Setting the tone for the second quarter was the successful
privatization of mining giant CVRD to a private consortium at a 20% premium to
the minimum price.
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
64
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO (CONT.)
Another boost was the positive change in tariffs for both the telecommunications
and electric utility industries; this measure not only should favorably impact
profitability in both sectors, but is also a positive step toward eventual
privatization. On the political reform front, there was not much tangible
progress made in the second quarter, but industry level improvements as well as
local liquidity factors -- i.e. a flow of local money from fixed income funds to
equity funds -- dominated the market's performance.
Looking ahead, we think the Brazilian market has perhaps verged on getting ahead
of itself. While we continue to be extremely bullish on the positive fundamental
developments in core segments of the economy, we are beginning to get the sense
that perhaps valuation and sentiment levels have reached the point where too
much good news is "being priced in." As such, we have modestly cut back on our
weighting in the market, and have a market weight position; that market weight
position is represented by stock specific ideas, as we are actually underweight
most of the blue chip "Bras" stocks.
CHILE
Chile, interestingly, is out of step with the rest of the region even though its
stock market has performed in line. The Chilean economy is in the midst of a
Chile-style "slowdown" (i.e. GDP growth of 5-6%) from an unsustainably brisk
pace last year, as the monetary authorities have engineered a soft landing. As a
result, interest rates have in fact been loosened this year in order to pick up
the economic pace and to acknowledge that inflationary pressures have been
contained. This easing of monetary policy has provided a favorable climate for
equity performance, notwithstanding the fact that overall earnings growth in the
market is lackluster.
Another important item driving the market, and in particular affecting the
all-important electric utility sector (roughly 35% of the total market
capitalization), has been the drought. The drought has had the effect of raising
costs for certain electric generators, thereby dampening profits. As the drought
ended in the second quarter due to a deluge of rain (in fact there were,
ironically enough, floods) the electric utility sector stocks surged as
investors' concerns eased.
COLOMBIA
Colombia was the laggard in the region as its market is the least correlated
with the region and boasted the best performance going in to the second quarter.
Further, economic growth continued to surprise on the downside as the
government's efforts to dampen stubborn inflationary pressures has slowed
economic activity. While valuation levels are still the cheapest in the region,
we feel that the country warrants a discount owing to its uncertain economic
outlook and political woes.
MEXICO
Mexico staged a dramatic turnaround in the latter part of the second quarter.
After having fallen precipitously early in the quarter on the back of
disappointing first quarter corporate earnings published in April, sentiment
subsequently reversed itself as a) signs of a broadening of the economic
recovery began to emerge, and b) investors began to realize that the
congressional and mayoral elections in July would be a benign event. These two
processes restored confidence to the market and it paced the region in the
latter part of the quarter.
We feel strongly that Mexico has made great strides to restore balance to its
fiscal, trade, and current accounts. The economy is on a solid footing,
employment levels are picking up, and the consumer is (albeit slowly)
recovering. Further, the political arena has opened up considerably. Free,
democratic elections will take place in July in what is widely viewed to be the
fairest electoral process Mexico has seen in this century. Although an opening
up of the political arena is not without risks, we believe that it is healthy
for the long-run sustainability of the economic program.
PERU
Peru had a strong quarter, stemming in large part from a dramatic turnaround in
the economy as well as from a dramatic end to the hostage crisis. GDP growth is
expected to recover quite strongly from the slowdown in 1996, and this should
bode well for earnings growth. However, the economy suffers from a natural
resource dependence which makes it vulnerable to commodity price swings, and the
political scenario is relatively uncertain. President Fujimori, while enjoying a
short spurt in popularity after the successful rescue of the hostages, continues
to plummet in popularity ratings and this has engendered a decline in confidence
in the country. We continue to underweight the market.
- --------------------------------------------------------------------------------
Latin American Portfolio
65
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO (CONT.)
VENEZUELA
After lagging in the first quarter, Venezuela played catch-up and paced the
region in the second quarter. Strong first quarter earnings by bellwether
telephone stock CANTV buoyed the market, and this was subsequently followed by a
successful resolution of the long-awaited "severance program," which will entail
short-term costs for private and government companies, but is a long-term
positive as it helps liberalize the labor markets. Overall we are constructive
on the Venezuelan market as the government appears genuinely committed to
following through on its reform program.
Robert L. Meyer
PORTFOLIO MANAGER
Andy Skov
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
66
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (97.7%)
ARGENTINA (7.2%)
(a)406,390 Acindar, Class B............................. $ 1,040
147,977 Banco del Suquia, Class B.................... 576
(a)10,106 Disco ADR.................................... 400
6,475 Quilmes...................................... 66
26,493 Quilmes ADR.................................. 308
167,291 Siderar, Class A............................. 686
(e)10,365 Siderar ADR.................................. 337
5,405 Telecom Argentina ADR........................ 284
25,143 Telefonica Argentina ADR..................... 871
35,595 YPF ADR...................................... 1,095
----------
5,663
----------
BRAZIL (47.4%)
(a,d,q)11,847,000 Banco Nacional (Preferred)................... 1
(q)2,390,000 Brahma (Preferred)........................... 1,820
(q)39,655 Brahma ADR (Preferred)....................... 607
(q)14,069 CEMIG ADR (Preferred)........................ 708
(e,q)1,042 CEMIG ADR (Preferred)........................ 54
(q)51,779,010 CEMIG (Preferred)............................ 2,669
(q)2,516,000 Coteminas (Preferred)........................ 982
(q)2,098,316 CPFL (Preferred)............................. 349
(a,q)6,510,258 CRT (Preferred).............................. 9,796
(q)29,986 CVRD (Preferred)............................. 663
(q)34,986 CVRD (Preferred B)........................... --
(q)6,170 CVRD ADR (Preferred)......................... 138
4,756,000 Eletrobras................................... 2,659
71,750 Eletrobras ADR............................... 2,002
(q)742,000 Eletrobras, Class B (Preferred).............. 442
(q)5,375 Eletrobras, Class B ADR (Preferred).......... 159
(q)13,284,000 Ericsson Telecomunicacoes (Preferred)........ 790
(q)562,000 Iven (Preferred)............................. 384
949,000 Lightpar..................................... 378
(e,q)13,460 Lojas Arapua ADR (Preferred)................. 223
(q)32,237,000 Lojas Arapua (Preferred)..................... 524
(q)18,223,000 Lojas Renner (Preferred)..................... 934
(q)21,450 Pao de Acucar ADR (Preferred)................ 492
(q)9,213,000 Petrobras (Preferred)........................ 2,559
11,474,000 Telebras..................................... 1,556
(q)17,185 Telebras ADR (Preferred)..................... 2,608
(q)21,683,000 Telebras (Preferred)......................... 3,289
(q)20,120 Unibanco GDR (Preferred)..................... 747
----------
37,533
----------
CHILE (8.4%)
16,265 Andina, Class B ADR.......................... 339
56,325 CCU ADR...................................... 1,236
37,083 Chilectra ADR................................ 1,067
10,380 Enersis ADR.................................. 369
18,870 Quinenco ADR................................. 349
91,193 Santa Isabel ADR............................. 2,941
19,400 Unimarc ADR.................................. 364
----------
6,665
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COLOMBIA (2.1%)
1,796,923 Banco de Colombia............................ $ 659
141,690 Bavaria...................................... 1,017
----------
1,676
----------
MEXICO (27.4%)
(a)203,429 Banacci, Class B............................. 523
(a)78,246 Banacci, Class L............................. 183
(a)406,140 Bancomer, Class B............................ 196
(a,e)3,224 Bancomer, Class B ADR........................ 31
(a)306,754 Banorte, Class B............................. 320
59,553 Carso, Class A1.............................. 415
2,790 Carso ADR.................................... 39
259,935 Cemex CPO.................................... 1,131
34,620 Cemex ADR CPO................................ 300
89,290 Cemex, Class B............................... 437
90,910 Cemex, Class B ADR........................... 876
42,505 Cifra, Class B............................... 79
78,823 Cifra, Class B ADR........................... 145
34,270 Cifra, Class C............................... 55
16,072 Coke Femsa ADR............................... 830
669,655 FEMSA, Class B............................... 3,993
(e)46,440 FEMSA ADR.................................... 276
25,975 Grupo Modelo, Class C........................ 180
12,020 Hylsamex GDR (Registered).................... 359
862,900 Kimberly, Class A............................ 3,459
123,225 Maseca, Class B.............................. 135
39,395 Maseca, Class B ADR.......................... 650
14,936 Panamco...................................... 491
324,150 Soriana, Class B............................. 815
(a)21,115 Tamsa, ADR................................... 389
(a)76,145 Televisa GDR CPO............................. 2,313
63,927 Telmex ADR................................... 3,053
----------
21,673
----------
PERU (2.1%)
49,220 Banco Wiese ADR.............................. 320
5,900 Credicorp.................................... 130
328,694 Ferreyros.................................... 378
14,000 Luz Del Sur.................................. 16
30,550 Peru, Class B ADR............................ 800
----------
1,644
----------
VENEZUELA (3.1%)
24,660 CANTV ADR.................................... 1,063
832,177 Electricidad de Caracas...................... 1,333
6,580 Mavesa ADR................................... 67
----------
2,463
----------
TOTAL COMMON STOCKS (Cost $64,274)............................... 77,317
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Latin American Portfolio
67
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a)11,000 Lojas Arapua, expiring 12/31/97 (Cost $0).... $ --
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ------------------
FOREIGN CURRENCY (0.1%)
ARP 1 Argentine Peso............................... 1
COP 38,893 Colombian Peso............................... 36
MXP 497 Mexican Peso................................. 63
PSS 2 Peruvian New Sol............................. 1
VEB 2,164 Venezuelan Bolivar........................... 4
----------
TOTAL FOREIGN CURRENCY (Cost $105)............................... 105
----------
TOTAL INVESTMENTS (97.8%) (Cost $64,379)......................... 77,422
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (7.7%)
Cash......................................... 1,441
Receivable for Investments Sold.............. 2,708
Receivable for Portfolio Shares Sold......... 1,609
Dividends Receivable......................... 293
Other........................................ 17 6,068
----------
LIABILITIES (-5.5%)
Payable for Investments Purchased............ (3,402)
Payable for Portfolio Shares Redeemed........ (449)
Unrealized Loss on Foreign Currency Exchange
Contracts.................................. (203)
Investment Advisory Fees Payable............. (184)
Custodian Fees Payable....................... (51)
Payable for Foreign Taxes.................... (13)
Administrative Fees Payable.................. (10)
Sub-Administration Fees Payable.............. (3)
Distribution Fees Payable.................... (2)
Directors' Fees & Expenses Payable........... (2)
Other Liabilities............................ (31) (4,350)
---------- --------
NET ASSETS (100%)........................................ $ 79,140
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 54,738
Undistributed Net Investment Income.... 143
Accumulated Net Realized Gain.......... 11,232
Unrealized Appreciation on Investments
and Foreign Currency Translations
(Net of accrued foreign tax of $13 on
unrealized appreciation on
investments)......................... 13,027
----------
NET ASSETS............................. $ 79,140
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $75,766
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 4,644,502 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................. $16.31
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $3,374
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 207,292 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................. $16.28
----------
----------
</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.
(q) -- Non-voting stock
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment...................... $ 364 0.5%
Consumer Goods......................... 17,327 21.9
Energy................................. 15,844 20.0
Finance................................ 3,685 4.6
Materials.............................. 11,482 14.5
Multi-Industry......................... 2,193 2.8
Services............................... 26,422 33.4
-------- ---
$ 77,317 97.7%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Latin American Portfolio
68
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods/Construction 11.1%
Consumer Cyclical 33.5%
Consumer Staples 13.7%
Diversified 14.7%
Energy 1.3%
Finance 20.3%
Materials 1.1%
Services 2.0%
Technology 1.4%
Other 0.9%
</TABLE>
PERFORMANCE COMPARED TO THE LIPPER CAPITAL
APPRECIATION INDEX AND THE S&P 500 INDEX(1)
- ----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.......... 13.76% 30.71% 42.33%
PORTFOLIO -- CLASS B.......... 13.71 30.50 36.35
LIPPER CAP. APPRECIATION INDEX
-- CLASS A................... 10.16 14.87 22.61
S&P 500 INDEX -- CLASS A...... 20.61 34.70 32.98
LIPPER CAP. APPRECIATION INDEX
-- CLASS B................... 10.16 14.87 16.89
S&P 500 INDEX -- CLASS B...... 20.61 34.70 29.55
</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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE PORTFOLIO'S CONCENTRATION OF ITS ASSETS IN A SMALLER NUMBER OF ISSUERS AND
ITS USE OF EQUITY-LINKED SECURITIES WILL SUBJECT IT TO GREATER RISKS. 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 capital appreciation through a
concentrated, non-diversified portfolio of corporate equity and equity-linked
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.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 13.76% and 30.71%, respectively, for the Class A shares; and
13.71% and 30.50%, respectively, for the Class B shares as compared to total
returns of 10.16% and 14.87%, respectively, for the Lipper Capital Appreciation
Index and 20.61% and 34.70%, respectively, for the S&P 500 Index. From inception
on March 8, 1995 to June 30, 1997, the average annual total return of Class A
was 42.33% as compared to 22.61% for the Lipper Capital Appreciation Index and
32.98% for the S&P 500 Index. From inception on January 2, 1996 to June 30,
1997, the average annual total return of Class B was 36.35% as compared to
16.89% for the Lipper Capital Appreciation Index and 29.55% for the S&P 500
Index.
While the Portfolio delivered strong returns in the first quarter (3.60% versus
2.69% for the S&P 500 and -4.54% for the Lipper Capital Appreciation Index), the
June quarter was a difficult period for the Portfolio relative both to the
overall U.S. market and to our large cap growth benchmarks.
Our investment style is to concentrate quite heavily when our conviction in a
security is high and we believe the growth fundamentals of a company are very
strong. We also concentrate when positive earnings surprise vis-a-vis consensus
expectations is likely. But it is not a "surprise" if the stock is already owned
in virtually every growth portfolio and has surged. We tend to feel more
comfortable with stocks that may be temporarily under a cloud but where growth
fundamentals remain intact. We refer to this as "headline" risk as opposed to
earnings risk.
Since late 1996, we have felt that many of the high quality, large
capitalization growth stocks are not attractive investments, favoring instead
higher beta, less well established growth company stocks where growth is rapid
and the price/earnings ratio to growth rate is reasonable. Our call was either
wrong or painfully early. In both the first and second quarters of 1997, many of
the largest capitalization stocks
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
69
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONT.)
moved sharply higher, typically without any upward earnings estimate revisions
and sometimes in the face of downward revisions. The following statistics
illustrate this point.
<TABLE>
<CAPTION>
% GAIN IN RECENT P/E ON AVERAGE P/E
FIRST HALF ESTIMATE SUSTAINABLE PROJECTED -----------------
1997 REVISIONS GROWTH RATE 1997 EARNINGS 1994 1995 1996
------------- ----------- ---------------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
GE............ 33% Up 13% 26.0 14.9 15.8 19.4
Merck......... 28% Down 14% 26.9 15.4 19.6 23.2
Coca Cola..... 28% Flat 18% 40.1 24.3 26.5 32.1
Gillette...... 22% Down 18% 36.4 21.9 24.9 39.1
Disney........ 14% Down 18% 29.4 21.7 20.2 32.8
</TABLE>
Many factors are driving the powerful bull market in U.S. stocks, including
strong corporate profit growth, sustained low inflation, moderate interest rates
and increased shareholder orientation among corporate managements. But what is
driving the strong performance of the blue chip stocks versus the broader equity
market? There are a variety of possible factors, but the explosion in passive
index investing is likely the most important. Active managers in U.S. stocks
underperformed index funds by a wide margin in 1994, 1995, 1996 and again in
1997 (year-to-date). This has led to a perverse situation in which larger cap
means better due to money flows. This is further compounded by the buying power
of price momentum investors who are purchasing blue chips on the basis of the
strong uptrends in stock prices.
We do not know where all this will lead, but one thing is clear: stocks cannot
rise faster than the underlying companies' growth rates over the long term. Our
best guess is that the blue chips will begin to flatten out as investors accept
more risk for greater reward. Our largest holding at June 30, HFS, represents
the type of stock we think should outperform over the next 12-18 months.
HFS, a consumer services and franchising company that recently announced a
merger with direct marketer CUC International, is trading at about 25 times
projected 1997 earnings, with a near-term growth rate of 30% plus and a
sustainable growth rate, we think, of 20-25%. The balance sheet, pro forma for
the merger, is underleveraged and free cash flow generation is extremely strong.
Consensus earnings estimates should rise over the next 12 months. Looking out 18
months, we could see HFS trading, conservatively, at 20-25 times projected 1999
earnings, within a range of $82-102 (up 32-65%). But a much higher multiple is
conceivable given the price/earnings to growth ratios enjoyed by the blue chip
growth stocks. Other names in the Portfolio at June that fit into this category
of high beta/low P/E ratio to growth include: Clear Channel Communications,
Gtech, KIII Communications and Cracker Barrel.
Our second largest holding at June 30 was Philip Morris. After taking profits
and downsizing our big tobacco bet in early 1997, shareholders may wonder why we
added to it again in the second quarter. The tobacco stocks have once again
drifted to huge P/E discounts to their true peer group of stocks -- consumer
products, food, beverage and drug stocks. The result is that the tobacco stocks
appear to be in a "win-win" position, much like last year when they had sold off
in the spring and again in the autumn on litigation fears. The current fear is
that the recently proposed $368 billion global settlement will not make it
through Congress without more pain being inflicted on the industry. Our view is
that, as usual, the industry is in a much stronger position in this battle than
what is portrayed in the media. We say this for several reasons:
- - Consumers have been warned for 30 years, and the product cannot be made
illegal since it creates gigantic tax revenues and prohibition would lead to a
black market. Combining income and excise taxes, Philip Morris is the largest
taxpayer in America.
- - Despite all the noise in the media, plaintiffs continue to have a very hard
time battling the deep-pocketed cigarette industry. After winning a case last
August, the plaintiffs lost the next two cases. The industry has never paid a
dime to plaintiffs. Hence, while health advocates and other anti-tobacco
activists scream about wanting the industry to feel more pain, the plaintiffs'
bar and state attorneys general want the deal to go through.
- - Finally, and importantly, business is strong and we expect solid EPS growth in
1998 and beyond.
Our third largest holding at June 30 was United Technologies, a global
multi-industry company with interests in jet engines (Pratt and Whitney), air
conditioning (Carrier), elevators (Otis), automotive parts (UT Automotive) and
helicopters (Sikorsky). Like our other multi-industry holdings -- Allied Signal,
Textron and ITT Industries -- United Technologies provides some cyclical
exposure to the Portfolio. But these companies are really "growth cyclicals"
benefiting from increased international demand, rising profit margins due to
restructuring and substantial free cash flow generation. We believe each of
these
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
70
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONT.)
companies is executing a GE-type transformation from cyclical to stable growth
company. We expect UTX and Allied Signal to each grow in excess of 15%
compounded over the next 3-5 years, with Textron growing about 15%. ITT is a
cheaper, turnaround play but fundamentals are strong.
Kurt A. Feuerman
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
71
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (99.1%)
CAPITAL GOODS-CONSTRUCTION (11.1%)
AEROSPACE & DEFENSE (11.1%)
41,100 Boeing Co......................................... $ 2,181
(a)25,700 Litton Industries, Inc............................ 1,242
24,300 McDonnell Douglas Corp............................ 1,665
25,300 Thiokol Corp...................................... 1,771
116,400 United Technologies Corp.......................... 9,661
----------
TOTAL CAPITAL GOODS-CONSTRUCTION............................ 16,520
----------
CONSUMER-CYCLICAL (33.5%)
BROADCAST-RADIO & TELEVISION (2.5%)
(a)47,900 Clear Channel Communications, Inc................. 2,946
15,800 Time Warner, Inc.................................. 762
----------
3,708
----------
ENTERTAINMENT & LEISURE (3.1%)
(a)144,300 GTECH Holdings Corp............................... 4,654
----------
FOOD SERVICE & LODGING (2.3%)
80,300 Cracker Barrel Old Country Store, Inc............. 2,128
24,700 McDonald's Corp................................... 1,193
----------
3,321
----------
GAMING & LODGING (19.5%)
(a)498,900 HFS, Inc.......................................... 28,936
----------
LEISURE RELATED (1.0%)
81,400 International Game Technology..................... 1,445
----------
PUBLISHING (2.5%)
(a)311,500 K-III Communications Corp......................... 3,738
----------
RETAIL-GENERAL (2.6%)
56,700 Home Depot, Inc................................... 3,909
----------
TOTAL CONSUMER-CYCLICAL..................................... 49,711
----------
CONSUMER-STAPLES (13.7%)
BEVERAGES (4.1%)
266,700 Coca Cola Enterprises, Inc........................ 6,134
----------
HEALTH CARE SUPPLIES & SERVICES (2.1%)
30,300 Aetna, Inc........................................ 3,102
----------
CIGARETTES (7.5%)
249,200 Philip Morris Cos., Inc........................... 11,058
----------
TOTAL CONSUMER-STAPLES...................................... 20,294
----------
DIVERSIFIED (14.7%)
38,100 Allied Signal, Inc................................ 3,200
(a)156 Berkshire Hathaway, Inc., Class A................. 7,363
63,300 ITT Industries, Inc............................... 1,630
42,200 Loews Corp........................................ 4,225
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
50,800 Textron, Inc...................................... $ 3,372
102,300 Viad Corp......................................... 1,969
----------
TOTAL DIVERSIFIED............................................. 21,759
----------
ENERGY (1.3%)
COAL, GAS, & OIL (1.3%)
(a)25,800 Diamond Offshore Drilling, Inc.................... 2,016
----------
FINANCE (20.3%)
BANKING (7.1%)
35,800 BankAmerica Corp.................................. 2,311
25,100 Citicorp.......................................... 3,026
19,400 Wells Fargo & Co.................................. 5,228
----------
10,565
----------
FINANCIAL SERVICES (4.7%)
33,400 American Express Co............................... 2,488
19,250 Franklin Resources, Inc........................... 1,397
24,200 Student Loan Marketing Association................ 3,073
----------
6,958
----------
INSURANCE (8.5%)
34,000 Ace Ltd........................................... 2,512
52,000 CMAC Investment Corp.............................. 2,483
(a)34,500 CNA Financial Corp................................ 3,638
30,700 MGIC Investment Corp.............................. 1,472
17,400 Progressive Corp.................................. 1,514
37,300 USF&G Corp........................................ 895
----------
12,514
----------
TOTAL FINANCE............................................... 30,037
----------
MATERIALS (1.1%)
CHEMICALS (1.1%)
25,600 E.I. du Pont de Nemours & Co...................... 1,610
----------
SERVICES (2.0%)
TRANSPORTATION (2.0%)
(a)15,800 AMR Corp.......................................... 1,462
(a)42,100 US Airways Group, Inc............................. 1,474
----------
TOTAL SERVICES.............................................. 2,936
----------
TECHNOLOGY (1.4%)
ELECTRONICS (0.4%)
20,200 Watkins-Johnson Co................................ 621
----------
OFFICE EQUIPMENT (1.0%)
19,200 Xerox Corp........................................ 1,514
----------
TOTAL TECHNOLOGY............................................ 2,135
----------
TOTAL COMMON STOCKS (Cost $134,697)........................... 147,018
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
72
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT (3.2%)
$ 4,736 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $4,737
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $4,818 (Cost $4,736)..... $ 4,736
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (102.3%) (Cost $139,433)............... 151,754
--------
OTHER ASSETS (7.5%)
Cash....................................... $ 2,978
Receivable for Securities Sold Short....... 5,745
Receivable for Investments Sold............ 2,152
Dividends Receivable....................... 136
Receivable for Portfolio Shares Sold....... 75
Interest Receivable........................ 1 11,087
----------
LIABILITIES (-9.8%)
Payable for Investments Purchased.......... (6,532)
Securities Sold Short, at Value (Proceeds
$5,745).................................. (6,332)
Payable for Portfolio Shares Redeemed...... (1,344)
Investment Advisory Fees Payable........... (256)
Administrative Fees Payable................ (18)
Custodian Fees Payable..................... (17)
Distribution Fees Payable.................. (7)
Directors' Fees & Expenses Payable......... (3)
Other Liabilities.......................... (33) (14,542)
---------- --------
NET ASSETS (100%)........................................ $148,299
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 126,802
Undistributed Net Investment Income.... 29
Accumulated Net Realized Gain.......... 9,734
Unrealized Appreciation on Investments
and Securities Sold Short............ 11,734
----------
NET ASSETS............................. $ 148,299
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $ 133,897
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 8,163,568 outstanding
$.001 par value shares (authorized
500,000,000 shares).................. $16.40
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $14,402
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 878,973 outstanding
$.001 par value shares (authorized
500,000,000 shares).................. $16.39
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
<TABLE>
<CAPTION>
SECURITIES SOLD SHORT (NOTE A-9)
<S> <C> <C>
VALUE
SHARES (000)
- --------- ---------
CUC International, Inc. (Total Proceeds
245,300 $5,745).............................. $ 6,332
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
73
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods -
Construction 0.2%
Consumer - Cyclical 17.3%
Consumer - Staples 17.7%
Diversified 0.4%
Energy 3.8%
Finance 9.4%
Materials 0.3%
Services 17.6%
Technology 32.8%
Other 0.5%
</TABLE>
PERFORMANCE COMPARED TO THE NASDAQ
COMPOSITE INDEX(1)
- -----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO CLASS --
A................... 0.74% -2.42% 8.65% 11.25%
PORTFOLIO CLASS --
B................... 0.60 -2.65 N/A 2.79
INDEX -- CLASS A.... 11.70 21.69 20.67 16.22
INDEX -- CLASS B.... 11.70 21.69 N/A 23.02
</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.
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 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 six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 0.74% and -2.42%, respectively, for the Class A shares; and
0.60% and -2.65%, respectively, for the Class B shares as compared to total
returns of 11.70% and 21.69%, respectively, for the NASDAQ Composite Index (the
"Index"). For the five-year period ended June 30, 1997, the average annual total
return for Class A was 8.65% as compared to 20.67% for the Index. From inception
on November 1, 1989 to June 30, 1997, the average annual total return of Class A
was 11.25% as compared to 16.22% for the Index. From inception on January 2,
1996 to June 30, 1997, the average annual total return of Class B was 2.79% as
compared to 23.02% for the Index.
The first six months of 1997 have been a difficult period for the Portfolio. For
the first quarter of 1997, the Portfolio underperformed the Index (-11.63% for
the Class A shares vs. -5.37%). In April we saw a continuation of trends
experienced in the first quarter of 1997 when small capitalization stocks
significantly underperformed their larger cap brethren.
The small cap-weighted Russell 2000 index increased only 0.13% while the larger
cap S&P 500 rose 5.84% for the month. This underperformance, which began 12-18
months ago, came to an abrupt halt in May when small capitalization stocks
rallied strongly. The Russell 2000 climbed 11.1% with the S&P 500 up only 5.86%
for the month. In June, the Russell 2000 rose 4.1% in line with the S&P 500
which increased 4.4%.
During the period we increased the number of securities held in the Portfolio as
we broadened our exposure to the Health Care and Technology sectors while
introducing a number of new companies in the Energy, Finance and Real Estate
sectors. In Health Care, we increased our weighting across all sub-groups
including devices, services and pharmaceuticals. Notable additions include
Nitinol Medical, a recent IPO that has developed a number of innovative medical
devices and established marketing partnerships with two leading device
companies. In pharmaceuticals, we added to our position in Sangstat
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
74
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO (CONT.)
Medical, a company that is awaiting approval on two potentially significant
drugs targeting the organ transplantation market.
In Technology, we added a number of new positions such as Tekelec Inc. and PMC
Sierra, and increased our weighting in such stocks as Linear Technology. Despite
the underperformance of the technology-laden NASDAQ and the relatively
lackluster performance of the Russell 2000 Technology sub-group over the month
of June our increased weighting proved to be an effective strategy due to strong
stock selection. In Energy, we introduced a number of new positions with
exposure to the offshore drilling markets which are currently experiencing a
favorable supply-demand imbalance resulting in increasing pricing. Notable
additions include Falcon Drilling and Ensco International.
We established a number of small positions in the Finance sector including Texas
Regional Bancshares and Triad Guaranty Inc. In the Real Estate sector we added
Crescent Real Estate Equities and Starwood Lodging Trust while eliminating our
position in Promus Hotel Corporation.
At June 30, the Portfolio held 135 positions and approximately 2% in cash. In
addition to focusing on stock selection during the weak period for small caps
one of our strategies has been to broaden out the securities portfolio in terms
of number of holdings. While we remain concentrated in our favorite issues, we
now have a very extensive "farm team" of names in the Portfolio -- smaller
positions in dynamic, high quality emerging growth companies in industries that
are newer to us (energy, REITS). This strategy of broadening the portfolio
contributed significantly to our outperformance in June.
Looking forward we believe the U.S. market's breadth late in the period, as
demonstrated by the recent strength in both large and small cap stocks, supports
our belief in the underlying vitality of Emerging Growth stocks (which previous
to May had been underperforming). While we have seen some narrowing of the
valuation gap between large and small caps we believe significant opportunity
remains in small cap stocks. We feel confident that the changes we have made in
the portfolio leave us well positioned to capitalize on this opportunity.
Kurt A. Feuerman
PORTFOLIO MANAGER
David R. Lascano
PORTFOLIO MANAGER
Christopher R. Blair
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
75
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (99.5%)
CAPITAL GOODS-CONSTRUCTION (0.2%)
ELECTRICAL EQUIPMENT (0.2%)
(a)2,900 Semtech Corp...................................... $ 106
----------
CONSUMER-CYCLICAL (17.3%)
AUTOMOTIVE (1.3%)
(a)20,200 O'Reilly Automotive, Inc.......................... 778
----------
BROADCAST-RADIO & TELEVISION (2.5%)
(a)18,800 Clear Channel Communications, Inc................. 1,156
(a)6,400 Heftel Broadcasting Corp., Class A................ 349
----------
1,505
----------
ENTERTAINMENT & LEISURE (3.1%)
8,700 Electronic Arts, Inc.............................. 293
(a)47,200 GTECH Holdings Corp............................... 1,522
----------
1,815
----------
FOOD SERVICE & LODGING (1.0%)
9,000 Cracker Barrel Old Country Store, Inc............. 237
(a)11,200 Einstein/Noah Bagel Corp.......................... 133
9,500 La Quinta Inns, Inc............................... 208
----------
578
----------
GAMING & LODGING (6.3%)
(a)64,300 HFS, Inc.......................................... 3,729
----------
PRINTING & PUBLISHING (2.0%)
(a)101,400 K-III Communications Corp......................... 1,217
----------
RETAIL-GENERAL (1.1%)
(a)23,800 General Nutrition Cos., Inc....................... 663
----------
TOTAL CONSUMER-CYCLICAL..................................... 10,285
----------
CONSUMER-STAPLES (17.7%)
BEVERAGES & TOBACCO (1.4%)
(a)10,400 Consolidated Cigar Holdings, Inc.................. 289
(a)14,000 Starbucks Corp.................................... 545
----------
834
----------
DRUGS (1.1%)
(a)22,800 Genzyme Corp.-General Division.................... 630
----------
HEALTH CARE SUPPLIES & SERVICES (14.3%)
(a)3,500 Advanced Health Corp.............................. 63
(a)2,000 Agouron Pharmaceuticals, Inc...................... 162
(a)18,700 Applied Imaging Corp.............................. 117
(a)13,200 ArQule, Inc....................................... 226
(a)5,300 Arterial Vascular Engineering, Inc................ 170
(a)8,400 Aviron............................................ 103
(a)6,000 CRA Managed Care, Inc............................. 313
(a)9,000 Dura Pharmaceuticals, Inc......................... 358
(a)9,300 Elan Corp. plc ADR................................ 421
(a)1,900 EmCare Holdings, Inc.............................. 69
(a)18,500 HEALTHSOUTH Corp.................................. 461
(a)13,400 Health Management Associates, Inc.,
Class A......................................... 382
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(a)6,000 Henry Schein, Inc................................. $ 184
9,300 Horizon Mental Health Management, Inc............. 209
(a)2,300 Human Genome Sciences, Inc........................ 76
(a)800 Incyte Pharmaceuticals, Inc....................... 52
(a)7,600 Inhale Therapeutic Systems........................ 182
7,500 Jones Medical Industries, Inc..................... 356
2,300 Manor Care, Inc................................... 75
(a)9,800 Medicis Pharmaceutical, Class A................... 487
(a)12,900 Mentor Corp....................................... 382
(a)19,000 Nitinol Medical Technologies, Inc................. 283
3,300 Novoste Corp...................................... 54
11,900 OccuSystems, Inc.................................. 345
4,100 Omnicare, Inc..................................... 129
(a)3,600 Parexel International Corp........................ 113
(a)1,700 Perclose, Inc..................................... 42
(a)20,100 Phycor, Inc....................................... 691
(a)1,300 Quintiles Transnational Corp...................... 90
(a)3,000 Renal Care Group, Inc............................. 125
(a)8,200 Renal Treatment Centers, Inc...................... 220
(a)22,200 SangStat Medical Corp............................. 500
(a)13,000 Total Renal Care Holdings, Inc.................... 522
(a)4,700 Vertex Pharmaceuticals, Inc....................... 179
(a)7,200 Vivus, Inc........................................ 171
(a)11,200 Zonagen, Inc...................................... 242
----------
8,554
----------
HOSPITAL SUPPLIES & SERVICES (0.9%)
(a)12,100 Pediatrix Medical Group, Inc...................... 554
----------
TOTAL CONSUMER-STAPLES...................................... 10,572
----------
DIVERSIFIED (0.4%)
7,400 Matthews International Corp., Class A............. 266
----------
ENERGY (3.8%)
COAL, GAS, & OIL (3.8%)
3,400 Camco International, Inc.......................... 186
23,900 Elan Energy, Inc.................................. 172
(a)8,500 ENSCO International, Inc.......................... 448
9,900 EVI, Inc.......................................... 416
(a)5,400 Falcon Drilling Co., Inc.......................... 311
(a)9,800 Forecenergy, Inc.................................. 298
(a)8,900 Newfield Exploration Co........................... 178
(a)5,200 Ocean Energy, Inc................................. 241
----------
TOTAL ENERGY................................................ 2,250
----------
FINANCE (9.4%)
BANKING (0.2%)
3,000 Texas Regional Bancshares, Inc., Class A.......... 124
----------
FINANCIAL SERVICES (4.7%)
12,800 Advanta Corp, Class A............................. 469
(a)14,400 BA Merchant Services, Inc., Class A............... 275
36,500 CMAC Investment Corp.............................. 1,743
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
76
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FINANCE (CONT.)
FINANCIAL SERVICES (CONT.)
<TABLE>
<C> <S> <C>
6,700 FIRSTPLUS Financial Group, Inc.................... $ 228
(a)1,800 Triad Guaranty, Inc............................... 80
----------
2,795
----------
INSURANCE (0.6%)
7,500 Mutual Risk Management Ltd........................ 344
----------
REAL ESTATE (3.9%)
8,700 Beacon Properties Corp. REIT...................... 290
9,900 CarrAmerica Realty Corp. REIT..................... 285
(a)1,000 Crescent Operating, Inc........................... 12
10,000 Crescent Real Estate Equities, Inc................ 318
8,100 Federal Realty REIT............................... 219
17,600 Homeside, Inc..................................... 385
7,000 Starwood Lodging REIT............................. 299
13,000 Trizec Hahn Corp. REIT............................ 278
(a)14,600 Westfield America, Inc............................ 246
----------
2,332
----------
TOTAL FINANCE............................................... 5,595
----------
MATERIALS (0.3%)
BUILDING MATERIALS & COMPONENTS (0.1%)
(a)4,400 Kaynar Technologies, Inc.......................... 80
----------
MISCELLANEOUS (0.2%)
3,700 Delta & Pine Land Co.............................. 132
----------
TOTAL MATERIALS............................................. 212
----------
SERVICES (17.6%)
BUSINESS SERVICES (10.2%)
(a)16,200 Acxiom Corp....................................... 332
(a)23,900 BISYS Group, Inc.................................. 1,002
(a)9,400 Data Processing Resources Corp.................... 216
11,600 First USA Paymentech, Inc......................... 336
(a)10,200 Gartner Group, Inc., Class A...................... 366
4,900 JLK Direct Distribution, Inc., Class A............ 126
(a)3,100 Keane, Inc........................................ 161
(a)29,050 Paychex, Inc...................................... 1,115
(a)19,700 SunGard Data Systems, Inc......................... 916
(a)15,800 TeleTech Holdings, Inc............................ 414
(a)40,500 Whittman-Hart, Inc................................ 1,139
----------
6,123
----------
PROFESSIONAL SERVICES (7.4%)
(a)12,200 Apollo Group, Inc., Class A....................... 430
(a)15,200 Corrections Corp. of America...................... 604
(a)9,800 DeVry, Inc........................................ 265
9,500 G & K Services, Inc., Class A..................... 349
17,000 NFO Research, Inc................................. 421
(a)18,900 Robert Half International, Inc.................... 889
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(a)30,300 Romac International, Inc.......................... $ 992
(a)18,200 Wilmar Industries, Inc............................ 448
----------
4,398
----------
TOTAL SERVICES.............................................. 10,521
----------
TECHNOLOGY (32.8%)
COMPUTERS (1.1%)
(a)25,100 PMC-Sierra, Inc................................... 656
----------
ELECTRONICS (12.2%)
(a)4,000 Altera Corp....................................... 202
(a)11,200 Fusion Systems Corp............................... 443
(a)16,000 Kent Electronics Corp............................. 587
(a)12,900 KLA............................................... 629
(a)11,100 Level One Communications, Inc..................... 425
32,700 Linear Technology Corp............................ 1,688
(a)8,900 Maxim Integrated Products, Inc.................... 505
27,150 Molex, Inc., Class A.............................. 942
(a)300 Sierra Semiconductor Corp......................... 8
29,400 Watkins-Johnson Co................................ 904
(a)19,700 Xilinx, Inc....................................... 965
----------
7,298
----------
OFFICE EQUIPMENT (1.3%)
(a)12,900 Compuware Corp.................................... 616
(a)6,700 ONTRACK Data International, Inc................... 151
----------
767
----------
SOFTWARE SERVICES (9.4%)
(a)3,100 America Online, Inc............................... 172
4,800 Autodesk, Inc..................................... 184
(a)12,400 Avant Corp........................................ 400
(a)1,900 Baan Company, N.V................................. 131
(a)5,100 Citrix Systems, Inc............................... 224
(a)14,000 Peoplesoft, Inc................................... 739
(a)7,700 Siebel Systems, Inc............................... 248
(a)23,700 Sterling Commerce, Inc............................ 779
(a)15,500 Symantec Corp..................................... 302
(a)15,900 Transaction Systems Architects, Inc., Class A..... 545
(a)41,000 USCS International, Inc........................... 1,343
(a)19,100 Vantive Corp...................................... 540
----------
5,607
----------
TELECOMMUNICATIONS (8.8%)
(a)23,500 ADC Telecommunications, Inc....................... 784
(a)16,400 Advanced Fibre Communications..................... 991
(a)17,600 Glenayre Technologies, Inc........................ 288
(a)3,200 Globalstar Telecommunications, Ltd................ 96
(a)10,900 LCI International, Inc............................ 238
(a)3,000 LHS Group, Inc.................................... 131
(a)20,700 Mobile Telecommunications Technologies Corp....... 296
(a)14,000 Octel Communications Corp......................... 327
(a)11,200 Premisys Communications, Inc...................... 176
(a)6,600 Tekelec, Inc...................................... 233
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
77
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
TECHNOLOGY (CONT.)
TELECOMMUNICATIONS (CONT.)
<TABLE>
<C> <S> <C>
(a)15,300 Teleport Communications Group, Inc., Class A...... $ 520
(a)21,200 Tellabs, Inc...................................... 1,182
----------
5,262
----------
TOTAL TECHNOLOGY............................................ 19,590
----------
TOTAL COMMON STOCKS (Cost $50,424)............................ 59,397
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (1.9%)
REPURCHASE AGREEMENT (1.9%)
$ 1,159 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $1,159,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $1,182 (Cost $1,159)..... $ 1,159
----------
TOTAL INVESTMENTS (101.4%) (Cost $51,583)..................... 60,556
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (3.0%)
Receivable for Investments Sold............ $ 1,705
Receivable for Portfolio Shares Sold....... 87
Dividends Receivable....................... 4
Other...................................... 7 1,803
----------
LIABILITIES (-4.4%)
Payable for Investments Purchased.......... (2,208)
Bank Overdraft............................. (273)
Investment Advisory Fees Payable........... (133)
Custodian Fees Payable..................... (10)
Payable for Portfolio Shares Redeemed...... (9)
Administrative Fees Payable................ (8)
Directors' Fees & Expenses Payable......... (4)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (20) (2,666)
---------- ----------
NET ASSETS (100%)........................................ $ 59,693
----------
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................... $ 27,578
Accumulated Net Investment Loss.................... (274)
Accumulated Net Realized Gain...................... 23,417
Unrealized Appreciation on Investments............. 8,972
----------
NET ASSETS......................................... $ 59,693
----------
----------
CLASS A:
- ---------------------------------------------------
NET ASSETS......................................... $58,596
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 4,309,755 outstanding $.001 par
value shares (authorized 500,000,000 shares)..... $13.60
----------
----------
CLASS B:
- ---------------------------------------------------
NET ASSETS......................................... $1,097
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 81,061 outstanding $.001 par value
shares (authorized 500,000,000 shares)........... $13.53
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
78
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods-Construction 9.8%
Consumer Cyclical 24.7%
Consumer Staples 13.4%
Diversified 11.5%
Energy 2.6%
Finance 20.0%
Materials 1.1%
Services 2.6%
Technology 10.3%
Other 4.0%
</TABLE>
PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A... 13.74% 27.71% 20.92% 18.01%
PORTFOLIO -- CLASS B... 13.62 27.35 N/A 29.80
INDEX -- CLASS A....... 20.61 34.70 19.78 18.05
INDEX -- CLASS B....... 20.61 34.70 N/A 29.55
</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.
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.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 13.74% and 27.71%, respectively, for the Class A shares; and
13.62% and 27.35%, respectively, for the Class B shares as compared to total
returns of 20.61% and 34.70%, respectively, for the S&P 500 Index (the "Index").
For the five-year period ended June 30, 1997, the average annual total return
for Class A was 20.92% as compared to 19.78% for the Index. From inception on
April 2, 1991 to June 30, 1997, the average annual total return of Class A was
18.01% as compared to 18.05% for the Index. From inception on January 2, 1996 to
June 30, 1997, the average annual total return of Class B was 29.80% as compared
to 29.55% for the Index.
After generating reasonable returns in the first quarter (the Portfolio gained
1.67% for Class A shares versus 2.69% for the S&P 500, 0.43% for the Russell
1000 Growth Index and -0.34 for the Lipper Growth Index), the June quarter was a
difficult period for the Portfolio relative both to the overall U.S. market and
to our large cap growth benchmarks. The Portfolio's Class A shares rose 11.87%
in the quarter, while the S&P 500, Russell 1000 Growth and Lipper Growth indices
rose 17.45%, 18.68% and 15.79%, respectively. Year-to-date the Portfolio's Class
A shares gained 13.58% against 20.58% for the S&P 500, 15.79% for the Russell
1000 Growth Index and 15.4% for the Lipper Growth Index.
Our investment style is to concentrate quite heavily when our conviction in a
security is high and we believe the growth fundamentals of a company are very
strong. We also concentrate when positive earnings surprise vis-a-vis consensus
expectations is likely. But it is not a "surprise" if the stock is already owned
in virtually every growth portfolio and has surged. We tend to feel more
comfortable with stocks that may be temporarily under a cloud but where growth
fundamentals remain intact. We refer to this as "headline" risk as opposed to
earnings risk.
Since late 1996, we have felt that many of the high quality, large
capitalization growth stocks are not attractive investments, favoring instead
higher beta, less
- --------------------------------------------------------------------------------
Equity Growth Portfolio
79
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
well established growth company stocks where growth is rapid and the
price/earnings ratio to growth rate is reasonable. Our call was either wrong or
painfully early. In both the first and second quarters of 1997, many of the
largest capitalization stocks moved sharply higher, typically without any upward
earnings estimate revisions and sometimes in the face of downward revisions. The
following statistics illustrate this point.
<TABLE>
<CAPTION>
% GAIN IN RECENT P/E ON AVERAGE P/E
FIRST HALF ESTIMATE SUSTAINABLE PROJECTED -----------------
1997 REVISIONS GROWTH RATE 1997 EARNINGS 1994 1995 1996
------------- ----------- ---------------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
GE............. 33% Up 13% 26.0 14.9 15.8 19.4
Merck.......... 28% Down 14% 26.9 15.4 19.6 23.2
Coca Cola...... 28% Flat 18% 40.1 24.3 26.5 32.1
Gillette....... 22% Down 18% 36.4 21.9 24.9 39.1
Disney......... 14% Down 18% 29.4 21.7 20.2 32.8
</TABLE>
Many factors are driving the powerful bull market in U.S. stocks, including
strong corporate profit growth, sustained low inflation, moderate interest rates
and increased shareholder orientation among corporate managements. But what is
driving the strong performance of the blue chip stocks versus the broader equity
market? There are a variety of possible factors, but the explosion in passive
index investing is likely the most important. Active managers in U.S. stocks
underperformed index funds by a wide margin in 1994, 1995, 1996 and again
year-to-date in 1997. This has led to a perverse situation in which larger cap
means better due to money flows. This is further compounded by the buying power
of price momentum investors who are purchasing blue chips on the basis of the
strong uptrends in stock prices.
We do not know where all this will lead, but one thing is clear: stocks cannot
rise faster than the underlying companies' growth rates over the long term. Our
best guess is that the blue chips will begin to flatten out as investors accept
more risk for greater reward. Our largest holding at June 30, HFS, represents
the type of stock we think should outperform over the next 12-18 months.
HFS, a consumer services and franchising company that recently announced a
merger with direct marketer CUC International, is trading at about 25 times
projected 1997 earnings, with a near-term growth rate of 30% plus and a
sustainable growth rate, we think, of 20-25%. The balance sheet, pro forma for
the merger, is underleveraged and free cash flow generation is extremely strong.
Consensus earnings estimates should rise over the next 12 months. Looking out 18
months, we could see HFS trading, conservatively, at 20-25 times projected 1999
earnings, within a range of $82-102 (up 32-65%). But a much higher multiple is
conceivable given the price/earnings to growth ratios enjoyed by the blue chip
growth stocks. Other names in the Portfolio at June that fit into this category
of high beta/low P/E ratio to growth include: Clear Channel Communications,
GTech, KIII Communications and Cracker Barrel.
Three groups that represent major commitments in the Portfolio are financial
services; multi-industry/aerospace; and tobacco. Financial services represented
approximately 20% of the Portfolio (based on net assets) at June 30, compared to
15% for the S&P 500 index and 6% for the Russell 1000 Growth Index. We have
believed for several years, and continue to feel, that selected financial
services companies enjoy robust growth fundamentals, yet investors tend to look
backwards and treat these stocks like the cyclical, interest-sensitive names
they used to be. We believe that the banking, credit card, brokerage/asset
management and insurance industries all have greater growth prospects than is
generally acknowledged. In addition, earnings estimates have been rising, even
in the face of the recent Fed Funds rate hike, and we feel confident that, for
the better positioned companies, further rate increases would not lead to
downward estimate revisions. In banking, our largest holding is Wells Fargo, and
we also hold meaningful positions in Citicorp, BankAmerica and Chase. We own
American Express, the dominant player in credit cards with a strong money
management arm. In the brokerage/asset management area we own Merrill Lynch and
Franklin Resources and in insurance our significant holdings include Aetna,
CMAC, Ace Limited, CNA Financial and Berkshire Hathaway (which owns 100% of
Geico).
Our third largest holding at June 30 was United Technologies, a global
multi-industry company with interests in jet engines (Pratt and Whitney), air
conditioning (Carrier), elevators (Otis), automotive parts (UT Automotive) and
helicopters (Sikorsky). Like our other multi-industry holdings --Allied Signal,
Textron and ITT Industries -- United Technologies provides some cyclical
exposure to the Portfolio. But these companies are really "growth cyclicals"
benefiting from increased international demand, rising profit margins due to
restructuring and substantial free cash flow generation. We believe each of
these companies is executing a GE-type transformation from cyclical to stable
growth company. We expect United Technologies and Allied Signal to each grow in
excess of 15%
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
80
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
compounded over the next 3-5 years, with Textron growing about 15%. ITT is a
cheaper, turnaround play but fundamentals are strong.
United Technologies is also appealing because its Pratt and Whitney division is
benefiting from the strong upcycle in the commercial aircraft industry. The
purest play in this, of course, is Boeing, which is also a major holding in the
Portfolio. Boeing is expected to close on its merger with McDonnell Douglas this
summer. We hold a combined position of about 3% in Boeing and McDonnell Douglas.
The new Boeing will be a unique and exciting cyclical growth story due to a
confluence of positives:
- - With Douglas Aircraft gone, Boeing will be the larger of two players in a
global duopoly, perfectly positioned to benefit from rising demand for
commercial aircraft.
- - As one of the largest defense contractors, Boeing should be far less
vulnerable to a weakening economy than before.
- - It is very unlikely that Boeing will need to develop a new aircraft during
this cycle, instead focusing on less costly derivatives of existing models.
This should drive profit margins much higher.
- - Earnings momentum should be very strong, with EPS growth of 40% projected in
1998, followed by close to 20% growth in 1999.
- - The balance sheet is underleveraged, meaning the company may begin to
repurchase shares by 1999.
After taking profits and downsizing our big tobacco bet in early 1997, we added
to it again in the second quarter. Why? The tobacco stocks have once again
drifted to huge P/E discounts to their true peer group of stocks -- consumer
products, food, beverage and drug stocks. The result is that the tobacco stocks
appear to be in a "win-win" position, much like last year when they had sold off
in the spring and again in the autumn on litigation fears. The current fear is
that the recently proposed $368 billion global settlement will not make it
through Congress without more pain being inflicted on the industry. Our view is
that, as usual, the industry is in a much stronger position in this battle than
what is portrayed in the media. We say this for these reasons:
- - Consumers have been warned for 30 years, and the product cannot be made
illegal since it creates gigantic tax revenues and prohibition would lead to a
black market. Combining income and excise taxes, Philip Morris is the largest
taxpayer in America.
- - Despite all the noise in the media, plaintiffs continue to have a very hard
time battling the deep-pocketed cigarette industry. After winning a case last
August, the plaintiffs lost the next two cases. The industry has never paid a
dime to plaintiffs. Hence, while health advocates and other anti-tobacco
activists scream about wanting the industry to feel more pain, the plaintiffs'
bar and state attorneys general want the deal to go through.
- - Finally, and importantly, business is strong and we expect solid EPS growth in
1998 and beyond.
We own two tobacco stocks, Philip Morris and Loews. Philip Morris is our second
largest holding and together the two stocks account for about 9% of the
Portfolio (based on net assets).
Kurt Feuerman
PORTFOLIO MANAGER
Margaret K. Johnson
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Equity Growth Portfolio
81
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (96.0%)
CAPITAL GOODS-CONSTRUCTION (9.8%)
AEROSPACE & DEFENSE (9.8%)
121,600 Boeing Co......................................... $ 6,452
(a)72,700 Gulfstream Aerospace Corp......................... 2,145
(a)90,900 Litton Industries, Inc............................ 4,392
117,689 McDonnell Douglas Corp............................ 8,062
70,100 Thiokol Corp...................................... 4,907
291,500 United Technologies Corp.......................... 24,195
----------
TOTAL CAPITAL GOODS-CONSTRUCTION............................ 50,153
----------
CONSUMER-CYCLICAL (24.7%)
AUTOMOTIVE (1.0%)
60,600 Ford Motor Co..................................... 2,288
(a)70,000 O'Reilly Automotive, Inc.......................... 2,695
----------
4,983
----------
BROADCAST-RADIO & TELEVISION (3.1%)
(a)166,800 Clear Channel Communications, Inc................. 10,258
(a)54,950 Heftel Broadcasting Corp., Class A................ 3,036
55,200 Time Warner, Inc.................................. 2,663
----------
15,957
----------
ENTERTAINMENT & LEISURE (2.7%)
(a)376,900 GTECH Holdings Corp............................... 12,155
(a)58,100 WMS Industries, Inc............................... 1,456
----------
13,611
----------
FOOD SERVICE (2.7%)
282,500 Cracker Barrel Old Country Store, Inc............. 7,486
(a)88,900 Einstein/Noah Bagel Corp.......................... 1,061
106,600 McDonald's Corp................................... 5,150
----------
13,697
----------
GAMING & LODGING (9.5%)
500 Doubletree Corp................................... 21
(a)759,200 HFS, Inc.......................................... 44,034
258,900 International Game Technology..................... 4,595
----------
48,650
----------
PUBLISHING (2.7%)
26,300 Gannett Co., Inc.................................. 2,597
(a)913,100 K-III Communications Corp......................... 10,957
----------
13,554
----------
RETAIL-FOODS (0.3%)
(a)59,500 Dominick's Supermarkets, Inc...................... 1,584
----------
RETAIL-GENERAL (2.7%)
174,200 Home Depot, Inc................................... 12,009
(a)68,500 Woolworth Corp.................................... 1,644
----------
13,653
----------
TOTAL CONSUMER-CYCLICAL..................................... 125,689
----------
CONSUMER-STAPLES (13.4%)
BEVERAGES (2.0%)
445,500 Coca Cola Enterprises, Inc........................ 10,247
----------
CIGARETTES (6.8%)
779,000 Philip Morris Cos., Inc........................... 34,568
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FOOD (1.2%)
121,500 Campbell Soup Co.................................. $ 6,075
----------
HOSPITAL SUPPLIES & SERVICES (3.4%)
92,000 Aetna, Inc........................................ 9,418
105,300 Becton Dickinson & Co............................. 5,331
64,850 Columbia/HCA Healthcare Corp...................... 2,549
----------
17,298
----------
TOTAL CONSUMER-STAPLES...................................... 68,188
----------
DIVERSIFIED (11.5%)
116,400 Allied Signal, Inc................................ 9,778
(a)356 Berkshire Hathaway, Inc., Class A................. 16,803
84,900 Hillenbrand Industries............................ 4,033
218,900 ITT Industries, Inc............................... 5,637
101,400 Loews Corp........................................ 10,153
600 Service Corp. International....................... 20
124,600 Textron, Inc...................................... 8,270
2,400 U.S. Industries, Inc.............................. 85
209,200 Viad Corp......................................... 4,027
----------
TOTAL DIVERSIFIED............................................. 58,806
----------
ENERGY (2.6%)
COAL, GAS, & OIL (2.6%)
(a)32,000 AES Corp.......................................... 2,264
34,700 Amoco Corp........................................ 3,017
23,200 British Petroleum Co. plc ADR..................... 1,737
(a)47,600 Diamond Offshore Drilling, Inc.................... 3,719
2,700 Santa Fe International Corp....................... 92
19,600 Schlumberger, Ltd................................. 2,450
----------
TOTAL ENERGY................................................ 13,279
----------
FINANCE (20.0%)
BANKING (7.4%)
124,800 BankAmerica Corp.................................. 8,057
54,568 Chase Manhattan Corp.............................. 5,297
50,600 Citicorp.......................................... 6,100
51,900 H.F. Ahmanson & Co................................ 2,232
59,133 Wells Fargo & Co.................................. 15,936
----------
37,622
----------
FINANCIAL SERVICES (5.7%)
102,700 American Express Co............................... 7,651
83,900 Charles Schwab Corp............................... 3,414
5,600 CIGNA Corp........................................ 994
66,050 Franklin Resources, Inc........................... 4,793
89,400 Merrill Lynch & Co................................ 5,330
(a)36,200 Ocwen Financial Corp.............................. 1,181
44,800 Student Loan Marketing Association................ 5,690
----------
29,053
----------
INSURANCE (6.9%)
(a)121,800 Ace Ltd........................................... 8,998
223,700 CMAC Investment Corp.............................. 10,682
(a)39,200 CNA Financial Corp................................ 4,133
38,000 Equitable Of Iowa Cos............................. 2,128
53,600 MGIC Investment Corp.............................. 2,569
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
82
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FINANCE (CONT.)
INSURANCE (CONT.)
<TABLE>
<C> <S> <C>
32,500 Progressive Corp.................................. $ 2,828
152,400 USF&G Corp........................................ 3,658
----------
34,996
----------
TOTAL FINANCE............................................... 101,671
----------
MATERIALS (1.1%)
CHEMICALS (1.1%)
45,000 E.I. DuPont De Nemours & Co....................... 2,829
65,000 Monsanto Co....................................... 2,799
----------
5,628
----------
SERVICES (2.6%)
PROFESSIONAL SERVICES (0.3%)
(a)60,700 Synder Communications, Inc........................ 1,635
----------
TRANSPORTATION (2.3%)
(a)62,900 AMR Corp.......................................... 5,818
(a)165,400 US Airways Group, Inc............................. 5,789
----------
11,607
----------
TOTAL SERVICES.............................................. 13,242
----------
TECHNOLOGY (10.3%)
COMPUTERS (1.4%)
(a)33,500 Compaq Computer Corp.............................. 3,325
(a)21,800 Dell Computer Corp................................ 2,560
(a)34,900 Seagate Technology, Inc........................... 1,228
----------
7,113
----------
ELECTRONICS (2.9%)
(a)46,800 Applied Materials, Inc............................ 3,314
26,100 Intel Corp........................................ 3,701
46,500 Linear Technology Corp............................ 2,406
41,900 Motorola, Inc..................................... 3,185
24,400 Texas Instruments, Inc............................ 2,051
----------
14,657
----------
OFFICE EQUIPMENT (2.4%)
1,500 Ikon Office Solutions, Inc........................ 37
96,100 International Business Machines Corp.............. 8,667
43,500 Xerox Corp........................................ 3,431
----------
12,135
----------
SOFTWARE SERVICES (2.9%)
(a)43,400 America Online, Inc............................... 2,414
(a)60,200 Microsoft Corp.................................... 7,608
900 Netscape Communications Corp...................... 29
(a)59,200 Oracle System, Corp............................... 2,982
(a)45,900 Sterling Commerce, Inc............................ 1,509
----------
14,542
----------
TELECOMMUNICATIONS (0.7%)
(a)25,800 Globalstar Telecommunications Ltd................. 790
34,700 Iridium World Communications Ltd.................. 629
(a)74,900 WorldCom, Inc..................................... 2,397
----------
3,816
----------
TOTAL TECHNOLOGY............................................ 52,263
----------
TOTAL COMMON STOCKS (Cost $429,041)........................... 488,919
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (4.8%)
REPURCHASE AGREEMENT(4.8%)
$ 24,334 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $24,338,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $24,742 (Cost $24,334)... $ 24,334
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.8%) (Cost $453,375)............... 513,253
--------
OTHER ASSETS (0.8%)
Receivable for Investments Sold............ $ 3,708
Dividends Receivable....................... 456
Receivable for Portfolio Shares Sold....... 177
Interest Receivable........................ 4
Other...................................... 7 4,352
----------
LIABILITIES (-1.6%)
Payable for Investments Purchased.......... (6,714)
Bank Overdraft............................. (698)
Investment Advisory Fees Payable........... (688)
Payable for Portfolio Shares Redeemed...... (74)
Administrative Fees Payable................ (61)
Custodian Fees Payable..................... (36)
Directors' Fees & Expenses Payable......... (9)
Distribution Fees Payable.................. (4)
Other Liabilities.......................... (64) (8,348)
---------- --------
NET ASSETS (100%)........................................ $509,257
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital.............................. $418,542
Undistributed Net Investment Income.......... 426
Accumulated Net Realized Gain................ 30,411
Unrealized Appreciation on Investments....... 59,878
--------
NET ASSETS............................................... $509,257
--------
--------
CLASS A:
- ---------------------------------------------
NET ASSETS................................... $500,808
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 29,517,538 outstanding $.001
par value shares (authorized 500,000,000
shares).................................... $16.97
--------
--------
CLASS B:
- ---------------------------------------------
NET ASSETS................................... $8,449
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 498,831 outstanding $.001 par
value shares (authorized 500,000,000
shares).................................... $16.94
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
83
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 1.6%
Banking 8.7%
Building 1.7%
Capital Goods 1.5%
Chemicals 1.5%
Communications 3.2%
Computers 7.6%
Consumer - Durables 1.0%
Consumer - Retail 10.3%
Consumer - Service & Growth 0.9%
Consumer - Staples 2.1%
Electric 1.6%
Energy 7.4%
Entertainment 1.8%
Financial - Diversified 3.5%
Health Care 7.3%
Industrial 7.1%
Insurance 5.5%
Metals 2.0%
Paper & Packaging 1.1%
Restaurants 0.3%
Services 3.9%
Technology 3.2%
Tobacco 1.3%
Transportation 7.0%
Utilities 2.2%
Other 4.7%
</TABLE>
PERFORMANCE COMPARED TO THE RUSSELL 2500 INDEX
AND S&P 500 INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ ----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A... 16.23% 30.24% 16.45%
PORTFOLIO -- CLASS B... 16.17 30.00 26.54
RUSSELL 2500 INDEX --
CLASS A............... 11.25 20.09 17.44
S&P 500 INDEX -- CLASS
A..................... 20.61 34.70 20.14
RUSSELL 2500 INDEX --
CLASS B............... 11.25 20.09 20.48
S&P 500 INDEX -- CLASS
B..................... 20.61 34.70 29.55
</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.
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 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 six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 16.23% and 30.24%, respectively, for the Class A shares; and
16.17% and 30.00%, respectively, for the Class B shares as compared to total
returns of 11.25% and 20.09%, respectively, for the Russell 2500 Index and
20.61% and 34.70%, respectively, for the S&P 500 Index. From inception on
December 17, 1992 to June 30, 1997, the average annual total return of Class A
was 16.45% as compared to 17.44% for the Russell 2500 Index and 20.14% for the
S&P 500 Index. From inception on January 2, 1996 to June 30,
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
84
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
1997, the average annual total return of Class B was 26.54% as compared to
20.48% for the Russell 2500 Index and 29.55% for the S&P 500 Index.
For the three months ended June 30, 1997, the Portfolio had a total return of
15.07% for the Class A shares and 15.01% for the Class B shares as compared to a
total return of 15.12% for the Russell 2500 Index and 17.46% for the S&P 500
Index.
Both sector and stock selection supported the Portfolio's second quarter
outperformance. Particularly additive was the overweighting in financial
services, a sector which outperformed, and our underweight in utilities, a
sector which underperformed. Individual stocks which were additive to
performance included Franklin Resources in the financials, Computer Products in
technology, Crane, Accustaff, and Air Express in heavy industry and
transportation, and Noble Drilling in the energy sector.
At the start of the quarter we reduced our weighting in financials following the
Federal Reserve tightening. Subsequently, we reversed course and added to
financials after news on inflation and economic growth was moderate,
profitability was better than expected, and the strength of the dollar helped
mitigate inflation pressures. Importantly, sustained labor productivity gains
have reduced the effect of rising wages on profits and prices.
In addition to our overweighting in financials, we are also overweighted in the
oil service and business service stocks. We are maintaining an underweighting in
utilities and basic resources.
Gary G. Schlarbaum
PORTFOLIO MANAGER
William B. Gerlach
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
85
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (95.3%)
AEROSPACE (1.6%)
(a)1,300 Coltec Industries, Inc............................ $ 25
2,600 Doncasters plc ADR................................ 60
1,200 Penn Engineering & Manufacturing Corp............. 24
5,500 Thiokol Corp...................................... 385
----------
494
----------
BANKING (8.7%)
2,400 Amsouth Bancorp................................... 91
2,300 Astoria Financial Corp............................ 109
1,600 City National Corp................................ 39
1,900 Collective Bancorp, Inc........................... 85
5,700 Comerica, Inc..................................... 388
7,400 Community First Bankshares, Inc................... 284
5,000 Cullen/Frost Bankers, Inc......................... 212
2,000 MAF Bancorp, Inc.................................. 84
9,000 North Fork Bancorp., Inc.......................... 192
7,800 Southtrust Corp................................... 323
3,900 Summit Bancorp.................................... 195
8,500 Union Planters Corp............................... 441
2,300 UnionBanCal Corp.................................. 165
2,500 Wilmington Trust Corp............................. 114
----------
2,722
----------
BUILDING (1.7%)
(a)5,800 Champion Enterprises, Inc......................... 87
2,300 Hughes Supply, Inc................................ 92
4,100 Southdown, Inc.................................... 179
(a)4,800 USG Corp.......................................... 175
----------
533
----------
CAPITAL GOODS (1.5%)
12,600 Herman Miller, Inc................................ 454
----------
CHEMICALS (1.5%)
2,400 Fuller (H.B.) Co.................................. 132
7,500 Quaker Chemical Corp.............................. 130
(a)5,700 USA Waste Services, Inc........................... 220
----------
482
----------
COMMUNICATIONS (3.2%)
(a)3,400 ADC Telecommunications, Inc....................... 113
15,800 Journal Register Co............................... 314
5,100 McClatchy Newspapers, Inc......................... 150
1,700 New York Times Co., Class A....................... 84
(a)4,000 Nextel Communications, Inc., Class A.............. 76
(a)4,000 Valassis Communications, Inc...................... 96
400 Washington Post Co., Class B...................... 159
----------
992
----------
COMPUTERS (7.6%)
2,700 Adobe Systems, Inc................................ 95
(a)3,200 Altera Corp....................................... 162
(a)1,600 BMC Software, Inc................................. 89
(a)4,100 Cadence Design Systems, Inc....................... 137
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(a)4,600 Ceridian Corp..................................... $ 194
(a)6,400 Computer Products, Inc............................ 160
(a)7,000 Fiserv, Inc....................................... 312
(a)7,800 Gateway 2000, Inc................................. 253
10,900 HMT Technology Corp............................... 141
(a)14,900 Overland Data, Inc................................ 80
4,100 Seagate Technology, Inc........................... 144
(a)2,900 Solectron Corp.................................... 203
(a)4,700 Tech Data Corp.................................... 148
(a)7,700 Western Digital Corp.............................. 244
----------
2,362
----------
CONSUMER-DURABLES (1.0%)
5,900 Arvin Industries, Inc............................. 161
(a)4,300 Furniture Brands International, Inc............... 83
1,800 Smith (A.O.) Corp., Class B....................... 64
----------
308
----------
CONSUMER-RETAIL (10.3%)
1,800 American Stores Co................................ 89
3,600 Brylane, Inc...................................... 139
2,800 Callaway Golf Co.................................. 99
13,400 Crane Co.......................................... 560
8,800 CVS Corp.......................................... 451
1,500 Designer Holdings Ltd............................. 15
4,400 Family Dollar Stores, Inc......................... 120
(a)2,200 Fred Meyer, Inc................................... 114
3,100 Guilford Mills, Inc............................... 65
600 Jostens, Inc...................................... 16
(a)8,100 Office Depot, Inc................................. 157
8,500 Pier 1 Imports, Inc............................... 225
2,200 Polo Ralph Lauren Corp............................ 60
4,600 Premark International, Inc........................ 123
8,800 Ross Stores, Inc.................................. 288
12,000 TJX Cos., Inc..................................... 317
4,300 V.F. Corp......................................... 364
----------
3,202
----------
CONSUMER-SERVICE & GROWTH (0.9%)
7,100 Danka Business Systems plc ADR.................... 290
----------
CONSUMER-STAPLES (2.1%)
2,600 Dean Foods Co..................................... 105
1,700 Interstate Bakeries Corp.......................... 101
1,900 Lancaster Colony Corp............................. 92
6,800 Richfood Holdings, Inc............................ 177
9,900 Tyson Foods, Inc., Class A........................ 189
----------
664
----------
ELECTRIC (1.6%)
5,100 Black Hills Corp.................................. 145
(a)5,000 ESS Technology, Inc............................... 67
2,800 Public Service Co. of Colorado.................... 116
(a)2,800 SCI Systems, Inc.................................. 179
----------
507
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
86
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
ENERGY (7.4%)
4,400 Apache Corp....................................... $ 143
(a)200 Ashland Coal, Inc................................. 6
3,500 Columbia Gas System, Inc.......................... 228
(a)1,100 Diamond Offshore Drilling, Inc.................... 86
1,200 El Paso Natural Gas Co............................ 66
(a)8,000 ENSCO International, Inc.......................... 422
5,000 Global Marine, Inc................................ 116
4,600 National Fuel Gas Co.............................. 193
(a)19,800 Noble Drilling Corp............................... 447
1,800 Pacific Enterprises............................... 61
100 Parker & Parsley Petroleum Co..................... 4
2,400 Sun Co., Inc...................................... 74
3,700 Transocean Offshore, Inc.......................... 269
5,800 Union Texas Petro Holdings, Inc................... 121
(a)2,200 Weatherford Enterra, Inc.......................... 85
----------
2,321
----------
ENTERTAINMENT (1.8%)
(a)3,500 MGM Grand, Inc.................................... 129
13,500 Universal Corp.................................... 429
----------
558
----------
FINANCIAL-DIVERSIFIED (3.5%)
4,800 Bear Stearns Cos., Inc............................ 164
4,600 Capital One Financial Corp........................ 174
5,400 First Financial Corp.............................. 159
5,600 National Commerce Bancorp......................... 123
2,500 Paine Webber Group, Inc........................... 88
900 Student Loan Marketing Association................ 114
9,000 United Asset Management, Inc...................... 255
725 Wellsford Real Porperties, Inc.................... 8
----------
1,085
----------
HEALTH CARE (7.3%)
9,800 Beckman Instruments, Inc.......................... 473
(a)3,900 Biogen, Inc....................................... 132
(a)7,000 FPA Medical Management, Inc....................... 166
(a)2,500 Health Care & Retirement Corp..................... 83
(a)1,300 Healthcare Financial Partners, Inc................ 26
(a)4,200 Marquette Medical Systems, Class A................ 92
(a)12,300 Nellcor Puritan Bennett, Inc...................... 223
1,400 RoTech Medical Corp............................... 28
15,900 Sullivan Dental Products, Inc..................... 290
(a)4,500 Universal Health Services, Inc., Class B.......... 173
(a)3,700 Vencor, Inc....................................... 156
(a)9,200 Wellpoint Health Networks, Inc.................... 422
----------
2,264
----------
INDUSTRIAL (7.1%)
2,600 AGCO Corp......................................... 93
(a)5,600 BJ Services Co.................................... 300
(a)10,300 CDI Corp.......................................... 429
2,000 Franklin Resources, Inc........................... 145
(a)3,300 Hirsch International Corp., Class A............... 73
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
3,100 JLG Industries, Inc............................... $ 42
(a)5,300 Lear Corp......................................... 235
4,100 MascoTech, Inc.................................... 86
4,100 Precision Drilling Corp........................... 198
(a)5,300 Teradyne, Inc..................................... 208
(a)6,800 Tetra Technologies, Inc........................... 168
(a)3,800 Triumph Group, Inc................................ 118
(a)2,200 Tuboscope Vetco International Corp................ 44
(a)2,800 Varco International, Inc.......................... 90
----------
2,229
----------
INSURANCE (5.5%)
1,500 AMBAC, Inc........................................ 115
4,700 CMAC Investment Corp.............................. 224
3,000 Everest Reinsurance Holdings, Inc................. 119
2,700 Hartford Life, Inc., Class A...................... 101
3,100 Mercury General Corp.............................. 226
11,400 Nationwide Financial Services, Inc.,
Class A......................................... 303
3,000 Progressive Corp.................................. 261
7,300 Reliance Group Holdings, Inc...................... 87
2,200 Torchmark Corp.................................... 157
(a)4,500 Western National Corp............................. 121
----------
1,714
----------
METALS (2.0%)
6,700 General Cable Corp................................ 172
2,700 Kaydon Corp....................................... 134
(a)5,300 Precision Castparts Corp.......................... 316
----------
622
----------
PAPER & PACKAGING (1.1%)
10,000 P.H. Glatfelter Co................................ 200
4,000 Schweitzer-Mauduit International, Inc............. 150
----------
350
----------
RESTAURANTS (0.3%)
5,000 Boston Chicken, Inc............................... 70
(a)2,600 ProSource, Inc.................................... 19
----------
89
----------
SERVICES (3.9%)
(a)20,300 AccuStaff, Inc.................................... 481
9,800 Angelica Corp..................................... 172
(a)3,600 Interim Services, Inc............................. 160
10,500 New England Business Services, Inc................ 276
3,900 Personnel Group of America, Inc................... 112
----------
1,201
----------
TECHNOLOGY (3.2%)
3,700 Coherent, Inc..................................... 165
(a)2,600 Cooper Cameron Corp............................... 122
(a)16,700 Healthdyne Technologies, Inc...................... 288
(a)2,700 Inacom Corp....................................... 84
500 Lam Research Corp................................. 19
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
87
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
TECHNOLOGY (CONT.)
<TABLE>
<C> <S> <C>
(a)7,700 Symantec Corp..................................... $ 150
900 Tektronix, Inc.................................... 54
2,400 Vishay Intertechnology, Inc....................... 69
(a)1,400 Watson Pharmaceuticals, Inc....................... 59
----------
1,010
----------
TOBACCO (1.3%)
(a)3,600 Consolidated Cigar Holdings, Inc.................. 100
11,600 DIMON, Inc........................................ 307
----------
407
----------
TRANSPORTATION (7.0%)
17,500 Air Express International Corp.................... 696
11,000 Arnold Industries, Inc............................ 187
(a)6,000 Aviation Sales Co................................. 147
5,000 Expeditors International of
Washington, Inc................................. 142
3,600 Harley-Davidson, Inc.............................. 173
1,400 Hertz Corp., Class A.............................. 50
(a)5,300 Midwest Express Holdings.......................... 145
(a)8,700 Offshore Logistics, Inc........................... 164
(a)14,500 OMI Corp.......................................... 139
3,500 PACCAR, Inc....................................... 163
(a)4,100 Tower Automotive, Inc............................. 176
----------
2,182
----------
UTILITIES (2.2%)
5,600 IPALCO Enterprises, Inc........................... 175
6,200 LG&E Energy Corp.................................. 137
6,200 Nevada Power Co................................... 132
2,700 NICOR, Inc........................................ 97
3,000 Oneok, Inc........................................ 97
2,000 Pinnacle West Capital Corp........................ 60
----------
698
----------
TOTAL COMMON STOCKS (Cost $26,727)............................ 29,740
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (6.7%)
REPURCHASE AGREEMENT (6.7%)
$ 2,087 Chase Securities, Inc. 6.685%, dated 6/30/97, due
7/01/97, to be repurchased at $2,087,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $2,123 (Cost $2,087)..... 2,087
----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -------------------------------------------------------------------
TOTAL INVESTMENTS (102.0%) (Cost $28,814)................ $ 31,827
--------
OTHER ASSETS (1.3%)
Receivable for Investments Sold............ $ 285
Receivable for Portfolio Shares Sold....... 100
Dividends Receivable....................... 33
Other...................................... 2 420
----------
LIABILITIES (-3.3%)
Payable for Investments Purchased.......... (851)
Bank Overdraft Payable..................... (90)
Investment Advisory Fees Payable........... (45)
Payable for Portfolio Shares Redeemed...... (13)
Custodian Fees Payable..................... (7)
Administrative Fees Payable................ (4)
Directors' Fees & Expenses Payable......... (2)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (18) (1,031)
---------- --------
NET ASSETS (100.0%)...................................... $ 31,216
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................... $ 21,900
Undistributed Net Investment Income................ 61
Accumulated Net Realized Gain...................... 6,242
Unrealized Appreciation on Investments............. 3,013
--------
NET ASSETS......................................... $ 31,216
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ---------------------------------------------------
NET ASSETS......................................... $27,149
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,154,016 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $12.60
--------
--------
CLASS B:
- ---------------------------------------------------
NET ASSETS......................................... $4,067
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 323,101 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $12.59
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
88
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Communication Equipment 33.1%
Communication Services 3.8%
Business Services 11.9%
Diversified 2.8%
Drugs 1.4%
Electronic Computers 7.0%
Personal Services 1.5%
Semiconductors & Related Services 17.6%
Surgical & Medical Instruments & Apparatus 0.8%
Software 17.4%
Toys 0.4%
Other 2.3%
</TABLE>
PERFORMANCE COMPARED TO THE S&P 500 INDEX AND THE LIPPER SCIENCE AND TECHNOLOGY
FUNDS INDEX(1)
- -----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN(2)
------------------------
SINCE
YTD INCEPTION(3)
---------- ------------
<S> <C> <C>
PORTFOLIO -- CLASS A.................... 27.45% 36.50%
PORTFOLIO -- CLASS B.................... 27.17 36.20
S&P 500 INDEX........................... 20.61 32.12
LIPPER SCIENCE & TECHNOLOGY FUNDS
INDEX................................... 6.94 18.04
</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 six months ended June 30, 1997 the Portfolio had a total return of
27.45% for the Class A shares and 27.17% for the Class B shares, as compared to
a total return of 20.61% for the S&P 500 Index and 6.94% for the Lipper Science
& Technology Funds Index. For the period from inception on September 16, 1996 to
June 30, 1997 the Portfolio had a total return of 36.50% for the Class A shares
and 36.20% for the Class B shares, as compared to a total return of 32.12% for
the S&P 500 Index, and a total return of 18.04% for the Lipper Science &
Technology Funds Index.
For the three month period ended June 30, 1997, the Portfolio had a total return
of 29.38% for the Class A shares and 29.22% for the Class B shares as compared
to a total return of 17.46% for the S&P 500 Index and 17.84% for the Lipper
Science and Technology Funds Index.
We are quite pleased with the Portfolio's outperformance for the most recent
quarter as we managed to create substantial absolute gains as well as relative
gains within the three month period.
The outperformance for the second quarter was due to broadbased strength across
both our large and small capitalization stocks, as well as each tech sub-sector.
The networking and tech services sectors and the smaller capitalization
companies performed particularly well.
We look forward to the remainder of 1997. Overall fundamentals for technology
continue to be favorable and the healthy U.S. economy provides a supportive
backdrop. There are over 2,000 public technology companies and we strive to
remain invested in the best 100. Some high profile companies will continue to
face obstacles but it is our job to identify
- --------------------------------------------------------------------------------
Technology Portfolio
89
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO (CONT.)
opportunities as these events unfold. Our goal remains the same; identify the
premier sectors and companies which present compelling investment opportunities
and avoid the sectors and companies with deteriorating fundamentals.
Christopher R. Blair
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
90
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCK (97.7%)
COMMUNICATION EQUIPMENT (33.1%)
COMPUTER INTEGRATED SYSTEMS DESIGN (10.0%)
(a)11,600 Bay Networks, Inc................................. $ 308
(a)7,000 3Com Corp......................................... 315
(a)13,700 Cisco Systems, Inc................................ 920
(a)6,300 Premisys Communications, Inc...................... 99
5,100 Scientific-Atlanta, Inc........................... 112
----------
1,754
----------
COMPUTER PERIPHERAL EQUIPMENT (1.9%)
(a)2,000 Adaptec, Inc...................................... 70
(a)10,000 PMC-Sierra, Inc................................... 262
----------
332
----------
ELECTRONIC COMPONENTS & ACCESSORIES (3.8%)
(a)2,500 Integrated Process Equipment Corp................. 63
(a)7,200 Kent Electronics Corp............................. 264
7,066 Molex, Inc., Class A.............................. 246
(a)1,000 Solectron Corp.................................... 70
10,000 Syquest Technology, Inc........................... 23
----------
666
----------
ELECTRONIC PARTS & EQUIPMENT (4.9%)
11,300 Motorola, Inc..................................... 859
----------
TELEPHONE & TELEGRAPH APPARATUS (12.5%)
(a)8,600 ADC Telecommunications, Inc....................... 287
(a)5,000 Advanced Fibre Communications..................... 302
(a)14,000 Intelect Communications Systems................... 59
3,200 Lucent Technologies Inc........................... 231
(a)5,400 Newbridge Networks Corp........................... 235
2,500 Northern Telecommunications Ltd................... 227
(a)7,100 Octel Communications Corp......................... 166
(a)12,000 Polycom Inc....................................... 63
(a)4,700 Tekelec........................................... 166
(a)7,000 Tellabs, Inc...................................... 391
(a)3,000 World Access, Inc................................. 61
----------
2,188
----------
TOTAL COMMUNICATION EQUIPMENT............................... 5,799
----------
COMMUNICATION SERVICES (3.8%)
COMPUTER PROCESSING & DATA PREPARATION (0.4%)
2,200 First USA Paymentech, Inc......................... 64
----------
DIRECT MAIL ADVERTISING SERVICE (0.8%)
5,900 Tele-Communications, Inc., Class A................ 140
----------
RADIO/TELEPHONE COMMUNICATIONS (1.5%)
(a)7,500 Glenayre Technologies, Inc........................ 123
(a)10,200 Mobile Telecommunications Technologies Corp....... 146
----------
269
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
TELEPHONE COMMUNICATIONS (1.1%)
(a)2,200 LCI International, Inc............................ $ 48
(a)4,300 Teleport Communications Group, Inc., Class A...... 147
----------
195
----------
TOTAL COMMUNICATION SERVICES................................ 668
----------
DIVERSIFIED (2.8%)
(a)3,200 Apollo Group, Inc., Class A....................... 113
4,300 Corning, Inc...................................... 239
(a)3,100 DeVry, Inc........................................ 84
(a)1,800 GTECH Holdings Corp............................... 58
100 Hanover Compressor Co............................. 2
----------
496
----------
DRUGS (1.4%)
(a)400 Agouron Pharmaceuticals, Inc...................... 32
5,000 Applied Imaging Corp.............................. 31
(a)800 Dura Pharmaceuticals, Inc......................... 32
(a)300 Incyte Pharmaceuticals, Inc....................... 20
(a)1,500 SangStat Medical Corp............................. 35
(a)800 Vertex Pharmaceuticals, Inc....................... 31
(a)1,000 Vivus, Inc........................................ 24
(a)2,000 Zonagen, Inc...................................... 44
----------
249
----------
OTHER TECHNOLOGY (38.8%)
BUSINESS SERVICES (11.9%)
100 Aris Corp......................................... 2
2,000 Automatic Data Processing, Inc.................... 94
(a)5,000 BA Merchant Services, Inc. Class A................ 95
(a)4,750 BISYS Group, Inc.................................. 198
(a)4,000 Data Processing Resources Corp.................... 94
3,400 Home Side, Inc.................................... 74
(a)2,200 ONTRACK Data International, Inc................... 51
4,000 Paychex, Inc...................................... 152
(a)2,200 Robert Half International, Inc.................... 104
(a)4,400 Romac International, Inc.......................... 144
(a)5,570 Sterling Commerce, Inc............................ 183
(a)3,800 SunGard Data Systems, Inc......................... 177
6,900 TeleTech Holdings, Inc............................ 180
(a)8,900 USCS International, Inc........................... 291
(a)9,100 Whittman-Hart, Inc................................ 256
----------
2,095
----------
ELECTRONIC COMPUTERS (7.0%)
(a)700 Compaq Computer Corp.............................. 69
(a)1,700 Dell Computer Corp................................ 200
8,900 International Business Machines Corp.............. 803
(a)2,400 Sun Microsystems, Inc............................. 89
(a)3,000 Tandem Computers, Inc............................. 61
----------
1,222
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Technology Portfolio
91
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
PERSONAL SERVICE (1.5%)
(a)2,100 America Online, Inc............................... $ 117
(a)3,000 CUC International, Inc............................ 77
(a)2,600 Genzyme Corp. (General Division).................. 72
----------
266
----------
SEMICONDUCTORS & RELATED SERVICES (17.6%)
(a)4,700 Advanced Energy Industries, Inc................... 72
(a)1,700 Altera Corp....................................... 86
(a)4,500 Analog Devices, Inc............................... 119
(a)6,100 Applied Materials, Inc............................ 432
1,400 Fusion Systems Corp............................... 55
(a)6,100 KLA Instruments Corp.............................. 297
(a)4,900 Level One Communications, Inc..................... 188
13,317 Linear Technology Corp............................ 689
(a)6,000 Maxim Integrated Products, Inc.................... 341
(a)1,900 Semtech Corp...................................... 69
(a)3,500 Teradyne, Inc..................................... 137
900 Texas Instruments, Inc............................ 76
(a)9,900 Transwitch Corp................................... 85
1,500 Watkins-Johnson Co................................ 46
(a)8,200 Xilinx, Inc....................................... 402
----------
3,094
----------
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS (0.8%)
(a)900 Arqule, Inc....................................... 16
(a)1,000 Arterial Vascular Engineering, Inc................ 32
300 Medtronic, Inc.................................... 24
1,200 Mentor Corp....................................... 35
(a)2,100 Nitinol Medical Technologies, Inc................. 32
----------
139
----------
TOTAL OTHER TECHNOLOGY...................................... 6,816
----------
SOFTWARE (17.4%)
COMMUNICATIONS SOFTWARE (0.7%)
2,000 CyberMedia, Inc................................... 32
2,000 LHS Group, Inc.................................... 88
----------
120
----------
PREPACKAGED SOFTWARE (16.7%)
2,600 Autodesk, Inc..................................... 100
(a)5,400 Avant! Corp....................................... 174
(a)3,700 Citrix Systems, Inc............................... 162
(a)6,200 Compuware Corp.................................... 296
(a)4,300 Electronic Arts, Inc.............................. 145
(a)4,300 Gartner Group, Inc., Class A...................... 154
(a)3,500 Industri-matematik International Corp............. 57
(a)4,600 Microsoft Corp.................................... 582
(a)7,900 Oracle System Corp................................ 398
(a)5,800 Peoplesoft, Inc................................... 306
(a)5,200 Proginet Corp..................................... 18
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
1,000 SEEC, Inc......................................... $ 19
(a)2,600 Siebel Systems, Inc............................... 84
(a)6,200 Symantec Corp..................................... 121
(a)5,000 Transaction Systems Architects, Inc., Class A..... 173
(a)5,200 Vantive Corp...................................... 147
----------
2,936
----------
TOTAL SOFTWARE.............................................. 3,056
----------
TOYS (0.4%)
(a)3,500 Galoob Toys, Inc.................................. 66
----------
TOTAL COMMON STOCKS (Cost $15,521).......................... 17,150
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
CONTRACTS
<C> <S> <C>
- ----------
PURCHASED OPTIONS (0.1%)
25 Inso, expiring 8/16/97............................ 6
(a)3,500 TriQuint Semiconductor, Inc., expiring 7/19/97.... 2
(a)4,500 Western Digital, expiring 7/19/97................. 1
----------
TOTAL PURCHASED OPTIONS (Cost $17)............................ 9
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (97.8%)(Cost $15,538).................. 17,159
--------
OTHER ASSETS (10.9%)
Cash..................................... $ 470
Receivable for Investments Sold.......... 1,098
Receivable for Securities Sold Short..... 198
Receivable due from Broker............... 85
Receivable for Portfolio Shares Sold..... 6
Dividends Receivable..................... 2
Other Assets............................. 49 1,908
----------
LIABILITIES (-8.7%)
Securities Sold Short, at Value
(Proceeds $196).......................... (197)
Payable for Investments Purchased........ (1,236)
Investment Advisory Fees Payable......... (30)
Custodian Fees Payable................... (20)
Administrative Fees Payable.............. (2)
Distribution Fees Payable................ (1)
Other Liabilities........................ (33) (1,519)
---------- --------
NET ASSETS (100%)........................................ $ 17,548
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................. $ 14,619
Accumulated Net Investment Loss.................. (38)
Accumulated Net Realized Gain.................... 1,347
Unrealized Appreciation on Investments........... 1,620
--------
NET ASSETS......................................... $ 17,548
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Technology Portfolio
92
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ---------------------------------------------------
NET ASSETS......................................... $16,214
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,188,111 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $13.65
--------
--------
CLASS B:
- ---------------------------------------------------
NET ASSETS......................................... $1,334
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 98,002 outstanding $0.001 par value
shares (authorized 500,000,000 shares)........... $13.62
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
- ------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITIES SOLD SHORT (NOTE A-9)
<S> <C> <C>
VALUE
SHARES (000)
- ----------- -----
2,000 Adtran, Inc.............................. $ 50
1,000 Advanced Micro Devices, Inc.............. 36
2,700 Applied Magnetics Corp................... 61
1,000 QUALCOMM, Inc............................ 50
-----
(Total Proceeds $196)................................ $ 197
-----
-----
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Technology Portfolio
93
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Apartment 19.5%
Healthcare 9.6%
Land 2.2%
Lodging/Leisure 11.2%
Manufactured Home 6.6%
Office and
Industrial 23.0%
Retail 15.5%
Self Storage 1.5%
Other 11.1%
</TABLE>
PERFORMANCE COMPARED TO THE NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT
TRUSTS (NAREIT) EQUITY INDEX(1)
- -----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------
AVERAGE
ANNUAL SINCE
YTD ONE YEAR INCEPTION
---------- ---------- ------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A........... 11.46% 40.01% 30.94%
PORTFOLIO -- CLASS B........... 11.20 39.54 33.36
INDEX -- CLASS A............... 5.73 33.87 23.59
INDEX -- CLASS B............... 5.73 33.87 27.09
</TABLE>
1. The NAREIT Equity 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.
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 ("REITs").
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 11.46% and 40.01%, respectively, for the Class A shares; and
11.20% and 39.54%, respectively, for the Class B shares as compared to total
returns of 5.73% and 33.87%, respectively, for the National Association of Real
Estate Trusts (NAREIT) Equity Index (the "Index"). From inception on February
24, 1995 to June 30, 1997, the average annual total return of Class A was 30.94%
as compared to 23.59% for the Index. From inception on January 2, 1996 to June
30, 1997, the average annual total return of Class B was 33.36% as compared to
27.09% for the Index.
Valuations in the REIT market have gone through some interesting gyrations
during 1997. The Morgan Stanley REIT Index ("RMS") which measures the
performance of REITs on a continuous basis -- as opposed to the Index which
measures performance on a month-end basis -- rose approximately 4% through the
beginning of the year and climbed to a high on March 12. RMS proceeded to hit
its low on April 25 following a decline throughout the month. This represented a
decline of more than 8.5% from its mid-March peak. Since that low, RMS has
proceeded straight up, gaining 9.9% and achieving new highs through quarter-end.
The decline in the early part of the second quarter resulted from a combination
of the correction in the broad equity market as well as a significant amount of
new equity issuance. As we had warned in our last quarterly report, we did not
expect to see strong appreciation until this supply was absorbed. In fact, in
the face of declining valuations in the period from mid-March through April,
REITs continued to raise capital and raised in excess of $3.5 billion of equity
in 25 separate offerings.
Some observers were disappointed to see the REIT market fall along with the
broad equity market in March and April. Our reaction is that REITs have not lost
their defensive characteristics. However, REIT stocks can only retain their
defensive characteristics if their stock prices reflect the underlying value of
their real estate. In the fourth quarter of last year, a number of stocks,
particularly some of the larger cap
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
94
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO (CONT.)
names, had traded to levels that were at quite significant premiums to their
underlying asset values. These were the stocks that were most penalized during
the correction. We continue to believe that REITs should be viewed as a separate
asset class, distinct from stocks and bonds, providing diversification within a
portfolio. Clearly there is some correlation to other financial assets but as
demonstrated by on-going analysis provided by NAREIT the correlation continues
to wane. This research affirms our basic theory that real estate stocks will
move based on underlying real estate value.
As suggested above, new equity issuance in the REIT market continues at a torrid
pace. Through June 30, REITs had raised almost $10 billion in new equity. This
continues a theme of more real estate moving into the control of the public
markets. With a private institutional real estate market of approximately $1
trillion and equity capitalization at $110 billion, REITs continue to capture a
bigger share of the pie. We see continued equity issuance by existing REITs as
proceeds have primarily been used to pay for the acquisition of individual
properties, portfolios of properties and entire companies. One wildcard in the
growth potential of the assets held by public companies is the exchange of
property for shares by the institutional owners of real estate. In the second
quarter we saw a beginning of this trend as Meridian Industrial Trust entered
into transactions providing both an insurance company and a corporate pension
fund with shares in exchange for industrial properties.
After a dearth of initial public offerings over the course of the last two
years, there were 8 IPOs in the first two quarters raising in excess of $2
billion (this does not include two IPOs concluded immediately after the end of
June). The majority of capital raised was for office companies. We expect to see
a continuance of these IPOs as a result of the arbitrage between the private and
public real estate markets. The sectors that will feature the most new issuance
will be those in which it is not hard to assemble a meaningful collection of
assets combined with public market valuations that provide premium pricing.
At year-end we provided our investment strategy for overweighting and
underweighting asset classes and geographic regions and thought it would be
appropriate to look at year-to-date total returns in each sector according to
the Index. It is interesting to note that once again sector bets on the office
and hotel sectors contributed to excess performance, despite prognosticators
claiming that after 1996 REITs had moved to a stock picker's game. We have been
surprised by the continued strength in the strip center and regional mall
segments of retail and have continued to underweight the retail sector.
<TABLE>
<CAPTION>
TOTAL PERFORMANCE
SECTOR YEAR TO DATE 1997
- ------------------------------------------ ------------------
<S> <C>
Apartments................................ 6.2%
Manufactured Homes........................ 3.6%
Strip Centers............................. 7.5%
Regional Malls............................ 7.6%
Outlet Centers............................ -4.2%
Industrial................................ 1.7%
Office.................................... 5.4%
Self Storage.............................. -1.2%
Triple Net Lease.......................... 3.4%
Hotel..................................... 11.8%
Healthcare................................ 2.7%
Overall................................... 5.7%
</TABLE>
From the perspective of the Portfolio, approximately 65% of the outperformance
was as a result of stock selection and the remainder was from sector allocation.
The largest contributions from a sector allocation perspective were:
overweighting of hotels, under-
weighting of self storage, and underweighting of outlet centers. As we have
discussed previously, real estate cycles in the physical property markets tend
to last a long time, however, valuations in the public markets continue to
fluctuate and as a result we had some modest movements in the Portfolio. The
most significant top-down adjustments were increasing the weighting in the
multifamily sector since valuations were beaten down, and decreasing the
weighting in the office and industrial sectors as we took profits on some office
stocks and reduced industrial positions due to stock valuations continuing to
move far above underlying value.
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
95
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO (CONT.)
The following chart provides a summary of the largest contributors to the
performance of the Portfolio both from a top-down and bottom-up perspective,
along with the rationales for the positions.
<TABLE>
<CAPTION>
FUND POSITION SECTOR RATIONALE
- -------------------- ------------------- --------------------
<S> <C> <C>
Bottom-up
Essex Properties Apartments Attractive Pacific
markets
Chateau Communities Manufactured Home Favorable
risk-return
Urban Shopping
Centers Regional Malls High-end retail
continues to
improve
Pacific Gulf
Properties Industrial Small cap with
Pacific-focus
Meridian Industrial
Properties Industrial Small cap growth
story
Extended Stay of
America Hotels Momentum investors
exit
Top-down
Overweighting Hotels Lack of new supply
at upper-end
Underweighting Self storage Public market
premiums excessive
Underweighting Outlet centers Sector continues to
worsen
</TABLE>
Russell C. Platt
PORTFOLIO MANAGER
Theodore R. Bigman
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
96
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (86.9%)
APARTMENT (19.5%)
33,100 Amli Residential Properties Trust REIT............ $ 782
172,200 Associated Estates Realty Corp. REIT.............. 4,047
276,600 Avalon Properties, Inc. REIT...................... 7,918
256,100 Bay Apartment Communities, Inc. REIT.............. 9,476
14,900 Columbus Realty Trust REIT........................ 339
343,100 Essex Property Trust, Inc. REIT................... 11,022
165,000 Gables Residental Trust REIT...................... 4,166
240,400 Merry Land & Investment
Company, Inc. REIT.............................. 5,214
181,500 Oasis Residential, Inc. REIT...................... 4,265
243,900 Security Capital Atlantic, Inc. REIT.............. 5,838
35,100 Summit Properties, Inc. REIT...................... 724
(a)654,898 Wellsford Real Porperties, Inc.................... 7,204
----------
60,995
----------
HEALTHCARE (9.6%)
(a)92,000 Alexandria Real Estate Equities, Inc. REIT........ 2,018
(a)180,300 Assisted Living Concepts, Inc..................... 1,983
95,500 Health Care Property Investors, Inc. REIT......... 3,366
21,900 LTC Properties, Inc. REIT......................... 397
547,500 Nationwide Health Properties, Inc. REIT........... 12,045
309,000 Omega Healthcare Investors, Inc. REIT............. 10,101
----------
29,910
----------
LAND (1.9%)
(a)589,684 Atlantic Gulf Communities Corp.................... 3,759
(a)117,200 Catellus Development Corp......................... 2,124
----------
5,883
----------
LODGING/LEISURE (11.2%)
561,900 American General Hospitality Corp. REIT........... 13,907
(a)324,400 Extended Stay America, Inc........................ 5,109
(a)318,300 Host Marriott Corp................................ 5,670
(a)473,000 John Q Hammons Hotels, Inc........................ 4,375
(a)203,900 Servico, Inc...................................... 3,033
64,400 Starwood Lodging Trust REIT....................... 2,749
----------
34,843
----------
MANUFACTURED HOME (6.6%)
530,452 Chateau Communities, Inc. REIT.................... 15,184
232,700 Manufactured Home
Communities, Inc. REIT.......................... 5,367
----------
20,551
----------
OFFICE AND INDUSTRIAL (22.1%)
INDUSTRIAL (3.3%)
35,750 EastGroup Properties, Inc. REIT................... 720
112,872 Meridian Industrial Trust, Inc. REIT.............. 2,652
313,100 Pacific Gulf Properties, Inc. REIT................ 6,888
----------
10,260
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
OFFICE (17.4%)
244,900 Arden Realty Group, Inc........................... $ 6,367
185,700 Beacon Properties Corp. REIT...................... 6,198
504,954 Brandywine Realty Trust REIT...................... 10,226
(a)7,400 Brookfield Properties Corp........................ 86
(a)256,600 Brookfield Properties Corp. (Installment
Receipts-second installment: CAD6.50/Shr due on
2/13/98)........................................ 1,794
195,600 CarrAmerica Realty Corp. REIT..................... 5,624
134,400 Cornerstone Properties, Inc. REIT................. 2,066
610,000 Great Lakes, Inc. REIT............................ 10,027
79,500 Kilroy Realty Corp. REIT.......................... 2,007
136,100 Koger Equity, Inc. REIT........................... 2,484
344,318 Trizec Hahn Corp. REIT............................ 7,360
----------
54,239
----------
OFFICE AND INDUSTRIAL (1.4%)
82,400 Boston Properties, Inc. REIT...................... 2,266
79,700 Prentiss Properties Trust REIT.................... 2,042
----------
4,308
----------
TOTAL OFFICE AND INDUSTRIAL................................. 68,807
----------
RETAIL (14.5%)
REGIONAL MALL (9.8%)
566,100 First Union Real Estate REIT...................... 7,996
382,600 Taubman Centers, Inc. REIT........................ 5,069
330,500 Urban Shopping Centers, Inc. REIT................. 10,535
420,100 Westfield America, Inc. REIT...................... 7,089
----------
30,689
----------
SHOPPING CENTER (1.5%)
80,100 Federal Realty Investment Trust REIT.............. 2,163
34,300 IRT Property Co. REIT............................. 403
2,200 Ramco-Gershenson Properties Trust REIT............ 39
149,000 Western Investment Real Estate
Trust REIT...................................... 2,067
----------
4,672
----------
STRIP CENTER (3.2%)
143,200 Alexander Haagen Properties, Inc. REIT............ 2,327
515,900 Burnham Pacific Property Trust REIT............... 7,094
10,300 Price REIT, Inc................................... 375
----------
9,796
----------
TOTAL RETAIL................................................ 45,157
----------
SELF STORAGE (1.5%)
166,600 Shurgard Storage Centers, Inc.,
Series A, REIT.................................. 4,665
----------
TOTAL COMMON STOCKS (Cost $238,864)........................... 270,811
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
97
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS (0.8%)
SHOPPING CENTER (0.8%)
81,600 First Washington Realty Trust, Series A........... $ 2,489
(d)33,150 Great Lakes, Inc. REIT............................ --
----------
TOTAL PREFERRED STOCKS (Cost $2,285).......................... 2,489
----------
CONVERTIBLE PREFERRED STOCK (0.3%)
LAND (0.3%)
(a,d) Atlantic Gulf Communities Corp. (Cost $1,070)..... 1,070
107,021
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANTS (0.4%)
INDUSTRIAL (0.4%)
(a)184,843 Meridian Industrial Trust, Inc. REIT, expiring
2/23/99......................................... 1,305
----------
LAND (0.0%)
(a,d)62,000 Atlantic Gulf Communities Corp., Class A, expiring
6/23/04......................................... --
(a,d)62,000 Atlantic Gulf Communities Corp., Class B, expiring
6/23/04......................................... --
(a,d)62,000 Atlantic Gulf Communities Corp., Class C, expiring
6/23/04......................................... --
----------
--
----------
TOTAL WARRANTS (Cost $300).................................... 1,305
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
CORPORATE BOND (0.5%)
OFFICE (0.5%)
$ 2,934 Brookfield Properties Corp. 6.00%, 2/14/07
(Installment Receipts -- second installment:
CAD50.00 per debenture due at 2/13/98) (Cost
$1,130)......................................... 1,637
----------
SHORT-TERM INVESTMENT (4.8%)
REPURCHASE AGREEMENT (4.8%)
14,913 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $14,915,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $15,164 (Cost $14,913)... 14,913
----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (93.7%) (Cost $258,562)................ $ 292,225
-----------
OTHER ASSETS (7.2%)
Receivable for Portfolio Shares Sold....... $ 11,209
Receivable for Investments Sold............ 9,899
Dividends Receivable....................... 1,336
Interest Receivable........................ 3
Other...................................... 1 22,448
----------
LIABILITIES (-0.9%)
Payable for Investments Purchased.......... (1,774)
Investment Advisory Fees Payable........... (504)
Bank Overdraft............................. (347)
Payable for Portfolio Shares Redeemed...... (227)
Administrative Fees Payable................ (35)
Custodian Fees Payable..................... (31)
Distribution Fees Payable.................. (6)
Directors' Fees & Expenses Payable......... (6)
Dividends Payable.......................... (2)
Other Liabilities.......................... (54) (2,986)
---------- -----------
NET ASSETS (100%)........................................ $ 311,687
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $ 246,279
Undistributed Net Investment Income............... 2,255
Accumulated Net Realized Gain..................... 29,490
Unrealized Appreciation on Investments............ 33,663
-----------
NET ASSETS........................................ $ 311,687
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $299,436
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 18,741,365 outstanding $.001 par
value shares (authorized 500,000,000 shares).... $15.98
-----------
-----------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $12,251
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 768,835 outstanding $.001 par
value shares (authorized 500,000,000 shares).... $15.93
-----------
-----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- See note A-1 to financial statements.
CAD -- Canadian Dollar
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
98
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 1.1%
Banking 15.3%
Capital Goods 2.5%
Chemicals 2.4%
Communications 7.0%
Consumer-Durables 3.9%
Consumer-Retail 7.4%
Consumer-Staples 7.3%
Energy 10.0%
Financial-Diversified 3.0%
Health Care 3.5%
Industrial 2.7%
Insurance 7.2%
Metals 1.3%
Paper & Packaging 4.2%
Services 3.8%
Technology 4.6%
Transportation 3.5%
Utilities 7.4%
Other 1.9%
</TABLE>
PERFORMANCE COMPARED TO THE S&P 500 INDEX AND THE INDATA EQUITY-MEDIAN INDEX(1)
- -----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A... 13.49% 25.18% 17.24% 13.97%
PORTFOLIO -- CLASS B... 13.13 24.80 N/A 21.74
S&P 500 INDEX -- CLASS
A..................... 20.61 34.70 19.78 17.86
INDATA EQUITY-MEDIAN
INDEX -- CLASS A...... 15.44 27.86 17.91 16.06
S&P 500 INDEX -- CLASS
B..................... 20.61 34.70 N/A 29.55
INDATA EQUITY-MEDIAN
INDEX -- CLASS B...... 15.44 27.86 N/A 25.33
</TABLE>
1. The S&P 500 Stock Index and the Indata Equity-Median Index are unmanaged
indices of common stocks. The Indata Equity-Median Index includes an average
asset allocation of 7.6% cash and 92.4% equity based on $514 billion in
assets among 1,396 portfolios for the period ended June 30, 1997.
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.
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 six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 13.49% and 25.18%, respectively, for the Class A shares; and
13.13% and 24.80%, respectively, for the Class B shares as compared to total
returns of 20.61% and 34.70%, respectively, for the S&P 500 Index and 15.44% and
27.86%, respectively, for the Indata Equity-Median Index. For the five-year
period ended June 30, 1997 and for the period from inception on January 31, 1990
to June 30, 1997, the average annual total return for Class A was 17.24% and
13.97%, respectively, as compared to 19.78% and 17.86%, respectively, for the
S&P 500 Index and 17.91% and 16.06%, respectively, for the Indata Equity-Median
Index. From inception on January 2, 1996 to June 30, 1997, the average annual
total return of Class B was 21.74% as compared to 29.55% for the S&P 500 Index
and 25.33% 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 12.85% in the quarter ended June 30, 1997, while the average general equity
fund declined -1.98%, and 14.75% year-to-date.
- --------------------------------------------------------------------------------
Value Equity Portfolio
99
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO (CONT.)
The Portfolio holds undervalued companies with a wide valuation gap as compared
to the characteristics of the S&P 500:
<TABLE>
<CAPTION>
PRICE-
EARNINGS PRICE-TO-BOOK
------------ ----------------
<S> <C> <C>
Value Equity Portfolio.............. 15.8x 2.8x
S&P 500............................. 21.0x 5.1x
</TABLE>
After a volatile and progressively weaker first quarter, the market solidly
rebounded in the second quarter, resulting in an overall very strong first half.
The major market indices peaked during the first quarter, bottomed in April and
advanced to new highs through June. Escalating fears of interest rate increases
and a strong economy growing at 5.8% in the first quarter contrasted with
subsiding fears of rate increases and a moderating economy in the second
quarter. This change in sentiment produced the difference in performance of the
first and second quarters. While the Fed did raise interest rates at one of the
three meetings held in the first half, strong corporate profitability, benign
inflation and strong mutual fund inflows supported the market advance in the
second quarter.
Within this environment, large cap stocks continued to significantly outperform
small cap stocks. The larger cap Russell 1000 returned 18.62% for the first half
compared to a return of 10.20% for the smaller cap Russell 2000. Style effect
depended upon market cap size. In the large cap area, growth outperformed value
stocks. The Russell 1000 Growth Index increased 19.55% for the first half
compared to the Russell 1000 Value Index return of 17.68%. In the small cap
area, value significantly outperformed growth as small cap growth stocks
declined severely during the first half, although they managed to rebound before
quarter-end. The Russell 2000 Value Index increased 14.81% compared to the
Russell 2000 Growth Index return of 5.23%.
During the first half, the best performing sectors in the Portfolio were capital
goods, up 37%, health care, up 35%, consumer services, up 29%, and metals, up
27%. Underperforming sectors for the first half included electric utilities,
which were flat, paper and forest products, up 2%, consumer durables, up 3%, and
transportation, up 5%. The best performing stocks in the first half were Deere,
up 37%, Sallie Mae, also up 37%, Bausch & Lomb, up 36%, and Texas Instruments,
Sprint and St. Paul Cos., all up 32%. Stocks providing the biggest
disappointment included AT&T, down 14%, Texas Utilities, down 13%, Pinnacle
West, down 4%, Eastman Kodak, down 3%, and Rockwell, down 2%.
Changes made to the Portfolio in the first half included decreasing the exposure
to consumer staples by selling the final position in American Brands and paring
back on Philip Morris and RJR Nabisco. We adjusted the composition of the energy
sector by establishing positions in Occidental Petroleum and USX-Marathon and
paring back Exxon, which outperformed other integrated oil peers during the
first half. We pared back on GPU due to concerns about the cost and resolution
of their stranded assets. We increased exposure to the retail sector by
purchasing a full position in Wal-Mart. Wal-Mart began generating positive free
cash flow in 1996 and recently announced a 30% dividend increase and a stock
buyback program. We also added to the existing Woolworth position on price
weakness. We established a partial position in Olin, a chemical company that is
also restructuring its businesses, selling assets, paying down debt and
generating cash for additional value-added actions. Finally, we sold the
remaining position in Apple Computer as the company fundamentals continued to
deteriorate and showed no signs of improvement. Compared to the S&P 500 Index,
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
July 1997
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
100
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (98.1%)
AEROSPACE (1.1%)
13,000 United Technologies Corp.......................... $ 1,079
----------
BANKING (15.3%)
30,100 BankAmerica Corp.................................. 1,943
22,800 BankBoston Corp................................... 1,643
27,000 Bankers Trust (New York) Corp..................... 2,349
20,400 Chase Manhattan Corp.............................. 1,980
57,900 First of America Bank Corp........................ 2,649
57,800 Mellon Bank Corp.................................. 2,608
48,600 PNC Bank Corp..................................... 2,023
----------
15,195
----------
CAPITAL GOODS (2.5%)
44,800 Deere & Co........................................ 2,458
----------
CHEMICALS (2.4%)
32,075 Eastman Chemical Co............................... 2,037
9,600 Olin Corp......................................... 375
----------
2,412
----------
COMMUNICATIONS (7.0%)
73,600 AT&T Corp......................................... 2,581
42,500 Sprint Corp....................................... 2,237
56,000 U.S. WEST Communications Group.................... 2,110
----------
6,928
----------
CONSUMER-DURABLES (3.9%)
65,800 Chrysler Corp..................................... 2,159
30,400 General Motors Corp............................... 1,693
----------
3,852
----------
CONSUMER-RETAIL (7.4%)
49,200 J.C. Penney Co., Inc.............................. 2,568
60,400 Wal-Mart Stores, Inc.............................. 2,042
(a)116,000 Woolworth Corp.................................... 2,784
----------
7,394
----------
CONSUMER-STAPLES (7.3%)
118,700 Fleming Cos., Inc................................. 2,137
59,600 Philip Morris Cos., Inc........................... 2,645
74,300 RJR Nabisco Holdings Corp......................... 2,452
----------
7,234
----------
ENERGY (10.0%)
52,200 Ashland, Inc...................................... 2,421
40,000 Atlantic Richfield Co............................. 2,820
12,800 Exxon Corp........................................ 787
28,200 Mobil Corp........................................ 1,970
37,600 Occidental Petroleum Corp......................... 942
34,700 USX-Marathon Group................................ 1,002
----------
9,942
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FINANCIAL-DIVERSIFIED (3.0%)
23,250 Student Loan Marketing Association................ $ 2,953
----------
HEALTH CARE (3.5%)
56,000 Bausch & Lomb, Inc................................ 2,639
16,500 Baxter International, Inc......................... 862
----------
3,501
----------
INDUSTRIAL (2.7%)
13,362 Hanson plc ADR.................................... 334
39,900 Rockwell International Corp....................... 2,354
----------
2,688
----------
INSURANCE (7.2%)
46,200 American General Corp............................. 2,206
43,500 Lincoln National Corp............................. 2,800
28,000 St. Paul Cos., Inc................................ 2,135
----------
7,141
----------
METALS (1.3%)
15,400 Phelps Dodge Corp................................. 1,312
----------
PAPER & PACKAGING (4.2%)
97,200 Louisiana-Pacific Corp............................ 2,053
30,600 Willamette Industries, Inc........................ 2,142
----------
4,195
----------
SERVICES (3.8%)
11,200 Eastman Kodak Co.................................. 859
16,700 McGraw-Hill Cos., Inc............................. 982
88,400 Ogden Corp........................................ 1,923
----------
3,764
----------
TECHNOLOGY (4.6%)
33,900 Harris Corp....................................... 2,848
20,889 Texas Instruments, Inc............................ 1,756
----------
4,604
----------
TRANSPORTATION (3.5%)
(a)17,900 AMR Corp.......................................... 1,656
56,100 Ryder System, Inc................................. 1,851
----------
3,507
----------
UTILITIES (7.4%)
41,800 GPU, Inc.......................................... 1,500
53,100 NIPSCO Industries, Inc............................ 2,194
63,100 Pinnacle West Capital Corp........................ 1,897
52,700 Texas Utilities Co................................ 1,815
----------
7,406
----------
TOTAL COMMON STOCKS (Cost $76,870)............................ 97,565
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Value Equity Portfolio
101
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (0.4%)
REPURCHASE AGREEMENT (0.4%)
$ 366 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $366,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $375 (Cost $366)......... $ 366
----------
TOTAL INVESTMENTS (98.5%) (Cost $77,236)...................... 97,931
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.7%)
Receivable for Investments Sold............ $ 1,466
Dividends Receivable....................... 295
Other...................................... 5 1,766
----------
LIABILITIES (-0.2%)
Investment Advisory Fees Payable........... (108)
Payable for Fund Shares Redeemed........... (45)
Administrative Fees Payable................ (14)
Custodian Fees Payable..................... (14)
Directors' Fees & Expenses Payable......... (5)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (35) (222)
---------- --------
NET ASSETS (100%)........................................ $ 99,475
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 64,859
Undistributed Net Investment Income.... 607
Accumulated Net Realized Gain.......... 13,314
Unrealized Appreciation on
Investments.......................... 20,695
----------
NET ASSETS............................. $ 99,475
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $97,500
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 6,227,527 outstanding
$.001 par value shares (authorized
500,000,000 shares).................. $15.66
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $1,975
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 126,488 outstanding
$.001 par value shares (authorized
500,000,000 shares).................. $15.62
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Value Equity Portfolio
102
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 0.5%
Banking 7.1%
Capital Goods 1.1%
Chemicals 1.0%
Communications 3.2%
Consumer - Durables 2.0%
Consumer - Retail 3.7%
Consumer - Service & Growth 1.4%
Consumer - Staples 3.4%
Energy 5.4%
Financial - Diversified 1.4%
Health Care 1.6%
Industrial 1.6%
Insurance 3.2%
Metals 1.1%
Paper & Packaging 1.9%
Services 0.8%
Technology 2.3%
Transportation 1.2%
Utilities 3.8%
U.S. Treasury Notes 47.1%
Other 5.2%
</TABLE>
PERFORMANCE COMPARED TO INDATA
BALANCED-MEDIAN INDEX(1)
- -----------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS
A.................... 8.01% 15.30% 11.41% 10.82%
PORTFOLIO -- CLASS
B.................... 7.70 14.82 N/A 12.18
INDEX -- CLASS A..... 11.36 20.86 13.25 12.42
INDEX -- CLASS B..... 11.36 20.86 N/A 17.62
</TABLE>
1. The Indata Balanced-Median Index is an unmanaged index and includes an asset
allocation of 1.9% cash, 36.8% bonds and 61.3% equity based on $49 billion in
assets among 549 portfolios for the period ended June 30, 1997 (includes
dividends). The index returns are gross of management fees; the Portfolio
returns are net of management fees and other 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.
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 six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 8.01% and 15.30%, respectively, for the Class A shares; and
7.70% and 14.82%, respectively, for the Class B shares as compared to total
returns of 11.36% and 20.86%, respectively, for the Indata Balanced-Median Index
(the "Index"). For the five-year period ended June 30, 1997, the average annual
total return of Class A was 11.41% as compared to 13.25% for the Index. From
inception on February 20, 1990 to June 30, 1997, the average annual total return
of Class A was 10.82% as compared to 12.42% for the Index. From inception on
January 2, 1996 to June 30, 1997, the average annual total return of Class B was
12.18% as compared to 17.62% for the Index.
Our asset allocation, based on market value at June 30, 1997, is as follows:
<TABLE>
<S> <C>
Equities............................................. 48.0%
Fixed Income......................................... 47.3
Cash................................................. 4.7
---------
100%
---------
---------
</TABLE>
EQUITIES
For the quarter ended June 30, 1997, the equity component of the Balanced
Portfolio had a gross return of 11.39% and for six months ended June 30, 1997
returned 14.73%. The S&P 500 returned 17.46% for the quarter ended June 30, 1997
and 20.61% for the six months ended June 30, 1997.
After a volatile and progressively weaker first quarter, the market solidly
rebounded in the second quarter, resulting in an overall very strong first half.
The major market indices peaked during the first quarter, bottomed in April and
advanced to new highs through June. Escalating fears of interest rate increases
and a strong economy growing at 5.8% in the first quarter contrasted with
subsiding fears of rate increases and a moderating economy in the second
quarter. This change in sentiment produced the difference in
- --------------------------------------------------------------------------------
Balanced Portfolio
103
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
performance of the first and second quarters. While the Fed did raise interest
rates at one of the three meetings held in the first half, strong corporate
profitability, benign inflation and strong mutual fund inflows supported the
market advance in the second quarter.
Within this environment, large cap stocks continued to significantly outperform
small cap stocks. The larger cap Russell 1000 returned 18.62% for the first half
compared to a return of 10.20% for the smaller cap Russell 2000. Style effect
depended upon market cap size. In the large cap area, growth outperformed value
stocks. The Russell 1000 Growth Index increased 19.55% for the first half
compared to the Russell 1000 Value Index return of 17.68%. In the small cap
area, value significantly outperformed growth as small cap growth stocks
declined severely during the first half, although they managed to rebound before
second quarter-end. The Russell 2000 Value Index increased 14.81% compared to
the Russell 2000 Growth Index return of 5.23%.
The equity component of the Balanced Portfolio holds the same undervalued
companies that are held in the MSIF Value Equity Portfolio. The equity portion
of the Portfolio has a wide valuation gap as compared to the characteristics of
the S&P 500 Index.
<TABLE>
<CAPTION>
P/E P/B
---------- ----------
<S> <C> <C>
Portfolio-equity portion.................... 15.8x 2.8x
S&P 500..................................... 21.0x 5.1x
</TABLE>
During the first half, the best performing sectors in the equity portion of the
Portfolio were capital goods, up 37%, health care, up 35%, consumer services, up
29%, and metals, up 27%. Underperforming sectors for the first half included
electric utilities, which were flat, paper and forest products, up 2%, consumer
durables, up 3%, and transportation, up 5%. The best performing stocks in the
first half were Deere, up 37%, Sallie Mae, also up 37%, Bausch & Lomb, up 36%,
and Texas Instruments, Sprint and St. Paul Cos., all up 32%. Stocks providing
the biggest disappointment included AT&T, down 14%, Texas Utilities, down 13%,
Pinnacle West, down 4%, Eastman Kodak, down 3%, and Rockwell, down 2%.
Changes made to the equity portion of the Portfolio in the first half included
decreasing the exposure to consumer staples by selling the final position in
American Brands and paring back on Philip Morris and RJR Nabisco. We adjusted
the composition of the energy sector by establishing positions in Occidental
Petroleum and USX-Marathon and paring back Exxon, which outperformed other
integrated oil peers during the first half. We pared back on GPU due to concerns
about the cost and resolution of their stranded assets. We increased exposure to
the retail sector by purchasing a full position in Wal-Mart. Wal-Mart began
generating positive free cash flow in 1996 and recently announced a 30% dividend
increase and a stock buyback program. We also added to the existing Woolworth
position on price weakness. We established a partial position in Olin, a
chemical company that is also restructuring its businesses, selling assets,
paying down debt and generating cash for additional value-added actions.
Finally, we sold the remaining position in Apple Computer as the company
fundamentals continued to deteriorate and showed no signs of improvement.
Compared to the S&P 500 Index, we continue to overweight financial services and
utilities, and underweight technology and health care.
FIXED INCOME
The fixed income portion of the Balanced Portfolio continues to maintain 100%
exposure to intermediate-term U.S. Government securities. For the six months
ended June 30, 1997, the fixed income portion of the Portfolio had total return
of 2.74% compared to a return of 2.83% for the Lehman
Intermediate-Government/Corporate Index (MSAM/Chicago's fixed-income benchmark).
The Portfolio began the year at a weighted average maturity of 3.3 years. During
the first half of 1997, interest rates rose across all maturity spectrums, with
the largest increase occurring in the two, three and five year maturities. This
upward shift in the yield curve hurt the performance of the Portfolio. With the
continued strength in the economy, the increase in short-term Fed funds rate,
and the potential for further rate increases, we have allowed the weighted
average maturity and average duration of the fixed income portion of the
Portfolio to shorten. We are comfortable with our current position, which is
less than the benchmark.
Stephen C. Sexauer
PORTFOLIO MANAGER
Alford E. Zick, Jr.
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
104
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (47.7%)
AEROSPACE (0.5%)
450 United Technologies Corp.......................... $ 37
----------
BANKING (7.1%)
1,100 BankAmerica Corp.................................. 71
800 BankBoston Corp................................... 58
750 Bankers Trust (New York) Corp..................... 65
650 Chase Manhattan Corp.............................. 63
1,800 First of America Bank Corp........................ 82
1,600 Mellon Bank Corp.................................. 72
1,450 PNC Bank Corp..................................... 61
----------
472
----------
CAPITAL GOODS (1.1%)
1,300 Deere & Co........................................ 71
----------
CHEMICALS (1.0%)
825 Eastman Chemical Co............................... 52
400 Olin Corp......................................... 16
----------
68
----------
COMMUNICATIONS (3.2%)
2,500 AT&T Corp......................................... 88
1,050 Sprint Corp....................................... 55
1,800 U.S. West, Inc.................................... 68
----------
211
----------
CONSUMER-DURABLES (2.0%)
2,050 Chrysler Corp..................................... 67
1,150 General Motors Corp............................... 64
----------
131
----------
CONSUMER-RETAIL (3.7%)
1,550 J.C. Penney Co., Inc.............................. 81
2,000 Wal-Mart Stores, Inc.............................. 68
(a)4,000 Woolworth Corp.................................... 96
----------
245
----------
CONSUMER-SERVICE & GROWTH (1.4%)
400 Eastman Kodak Co.................................. 31
2,900 Ogden Corp........................................ 63
----------
94
----------
CONSUMER-STAPLES (3.4%)
3,500 Fleming Cos., Inc................................. 63
1,925 Philip Morris Cos., Inc........................... 85
2,500 RJR Nabisco Holdings Corp......................... 83
----------
231
----------
ENERGY (5.4%)
1,700 Ashland, Inc...................................... 79
1,200 Atlantic Richfield Co............................. 84
550 Exxon Corp........................................ 34
1,200 Mobil Corp........................................ 84
1,400 Occidental Petroleum Corp......................... 35
1,700 USX-Marathon Group................................ 49
----------
365
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FINANCIAL-DIVERSIFIED (1.4%)
750 Student Loan Marketing Association................ $ 95
----------
HEALTH CARE (1.6%)
1,650 Bausch & Lomb, Inc................................ 78
600 Baxter International, Inc......................... 31
----------
109
----------
INDUSTRIAL (1.6%)
556 Hanson plc ADR.................................... 14
1,550 Rockwell International Corp....................... 91
----------
105
----------
INSURANCE (3.2%)
1,050 American General Corp............................. 50
1,450 Lincoln National Corp............................. 93
900 St. Paul Cos., Inc................................ 69
----------
212
----------
METALS (1.1%)
850 Phelps Dodge Corp................................. 73
----------
PAPER & PACKAGING (1.9%)
3,100 Louisiana-Pacific Corp............................ 66
900 Willamette Industries, Inc........................ 63
----------
129
----------
SERVICES (0.8%)
900 McGraw-Hill Cos., Inc............................. 53
----------
TECHNOLOGY (2.3%)
1,125 Harris Corp....................................... 94
700 Texas Instruments, Inc............................ 59
----------
153
----------
TRANSPORTATION (1.2%)
(a)500 AMR Corp.......................................... 46
1,150 Ryder System, Inc................................. 38
----------
84
----------
UTILITIES (3.8%)
1,450 GPU, Inc.......................................... 52
1,700 NIPSCO Industries, Inc............................ 71
2,100 Pinnacle West Capital Corp........................ 63
1,950 Texas Utilities Co................................ 67
----------
253
----------
TOTAL COMMON STOCKS (Cost $2,425)............................. 3,191
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
FIXED INCOME SECURITY (47.1%)
US TREASURY NOTE (47.1%)
$ 3,203 U.S. Treasury Note 5.50%, 4/15/00 (Cost $3,129)... 3,146
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Balanced Portfolio
105
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (4.7%)
REPURCHASE AGREEMENT (4.7%)
$ 313 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $313,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $320 (Cost $313)......... $ 313
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.5%) (Cost $5,867).................. 6,650
--------
OTHER ASSETS (0.9%)
Cash....................................... $ 1
Interest Receivable........................ 37
Dividends Receivable....................... 9
Due from Adviser........................... 8
Receivable for Investments Sold............ 6 61
--
LIABILITIES (-0.4%)
Professional Fees Payable.................. (11)
Custodian Fees Payable..................... (7)
Administrative Fees Payable................ (1)
Directors' Fees & Expenses Payable......... (1)
Distribution Fees Payable.................. (1)
Other Liabilities.......................... (5) (26)
--
--------
NET ASSETS (100%)........................................ $ 6,685
--------
--------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 5,157
Undistributed Net Investment Income.... 67
Accumulated Net Realized Gain.......... 678
Unrealized Appreciation on
Investments.......................... 783
----------
NET ASSETS............................. $ 6,685
----------
----------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $5,439
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 621,766 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................. $8.75
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $1,246
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 142,899 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................. $8.72
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Balanced Portfolio
106
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 11.8%
Brazil 14.9%
Bulgaria 5.0%
Ecuador 2.4%
Ivory Coast 3.9%
Jamaica 5.0%
Mexico 20.1%
Morocco 3.6%
Panama 1.4%
Peru 2.6%
Russia 19.7%
South Africa 2.5%
Venezuela 12.5%
Other -5.4%
</TABLE>
PERFORMANCE COMPARED TO THE J.P. MORGAN EMERGING MARKETS BOND PLUS INDEX(1)
- ----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------
AVERAGE
ANNUAL
SINCE
YTD ONE YEAR INCEPTION
---------- ------------ ------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A......... 17.24% 49.05% 21.51%
PORTFOLIO -- CLASS B......... 17.13 48.77 44.89
INDEX -- CLASS A............. 10.27 33.04 14.37
INDEX -- CLASS B............. 10.27 33.04 32.32
</TABLE>
1. The J.P. Morgan Emerging Markets Bond Plus Index is a market weighted index
composed of all Brady bonds outstanding loans and Eurobonds, as well as U.S.
Dollar local market instruments of Argentina, Brazil, Bulgaria, Mexico,
Morocco, Russia, 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.
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 six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 17.24% and 49.05%, respectively, for the Class A shares; and
17.13% and 48.77%, respectively, for the Class B shares as compared to total
returns of 10.27% and 33.04%, respectively, for the J.P. Morgan Emerging Markets
Bond Plus Index (the "Index"). From inception on February 1, 1994 to June 30,
1997, the average annual total return of Class A was 21.51% as compared to
14.37% for the Index. From inception on January 2, 1996 to June 30, 1997, the
average annual total return of Class B was 44.89% as compared to 32.32% for the
Index. As of June 30, 1997, the Portfolio had a 30-day yield of 8.07% for the
Class A shares and 7.90% for the Class B shares.
For the first few weeks of the fiscal year the trend of an across the board
tightening of credit spreads continued unabated. Attractive relative valuations,
the stretch for incremental yield and easy global monetary conditions prompted
increases in allocations to emerging market assets. Federal Reserve Governor
Greenspan's comments on the state of credit markets, extended valuations and
mispricing of risk stopped the music suddenly. A correction in fixed income
markets started in late February and lasted for much of March.
The emerging markets didn't surprise by behaving differently during this market
correction. An increase in risk premiums affected all countries and all bonds. A
correction, precipitated by possible Fed action and deepened by redemptions and
a reduction in committed capital tends to affect the broad market. The weight of
money heading for the exits drowns the fundamentals for a while.
During the second quarter of 1997, the emerging debt markets recovered from
their late first quarter correction buoyed by falling U.S. interest rates and a
renewed investor appetite for yield. U.S. interest rates fell by 35 to 40 basis
points across the yield curve. This decline in rates was prompted by signs of
moderating economic growth and the lack of evidence of any inflationary
pressures in the system. These factors reassured investors that the Federal
Reserve would not increase interest rates anytime soon. In
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
107
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO (CONT.)
addition to the positive interest rate environment, a confluence of events both
fundamental and technical in nature bolstered the performance of emerging
markets debt. On the fundamental front, improving macro-economic outlooks and
rating upgrades by major U.S. ratings agencies in Argentina, Brazil, the
Philippines, Uruguay, and Venezuela provided support. While on the technical
front, a continuation of the trend of Brady bond retirement and debt buybacks as
well as a strong inflow of funds from non-dedicated or "crossover" investors
caused spreads on emerging markets debt to tighten back to levels not seen since
1993.
During the first half of the year, Bulgaria, Morocco, and Peru outperformed the
universe of emerging market debt, while the Philippines, Poland, and Nigeria
were the performance laggards. The Portfolio's overweight positions in Bulgaria
and Morocco as well as underweights in Nigeria, the Philippines and Poland
allowed the Portfolio to outperform the broad market benchmark.
Bulgarian bonds were the best performing in the emerging country universe during
the second quarter. The election of a reformist democratic government in April
assured investors that prudent macro-economic policy measures would be enacted.
The new government secured technical and financial help from the IMF and the
World Bank and adopted a policy framework to facilitate the July 1st
introduction of a currency board monetary system. As prices of Bulgarian Brady
bonds rose, we reduced our exposure to the credit but remained overweight. We
expect continued outperformance next quarter from our Bulgarian positions albeit
at a more gradual pace.
Morocco benefited from an economic recovery following 1995's drought. The
prospect of favorable ratings also buoyed prices. We used the rally to reduce
our allocation to Morocco in the spring and will consider increasing them again
once valuations reach attractive levels again and are consistent with our
expectations for a BB rating. The other outperforming credit, Peru, reacted to
the release of above-consensus GDP growth numbers of over 7% for the first six
months of the year.
Our value-oriented investment style steered us away from the debt of the
Philippines and Poland which both trade at fully valued levels. Both countries
suffered from their proximity to the turbulence of neighboring currency markets
and both were forced to keep local interest rates high in a defensive move
against possible speculative attacks on their own currencies. We will monitor
both situations closely and may increase our exposure should valuations become
more attractive.
Deteriorating political dynamics caused us to avoid Nigerian debt which suffered
form its failed involvement in the unrest in neighboring Sierra Leone. The
Nigerian's inability to install the former civilian government has undermined
political stability in Nigeria. Also, lack of progress on economic reforms has
reduced the prospect of a new IMF agreement and consequently, debt forgiveness.
Our outlook remains cautiously positive. The benign U.S. rate environment,
improving economic fundamentals in the emerging countries and growing investor
interest in the emerging debt asset class should cause risk premiums on emerging
markets debt to come down and prices to rise over the medium term. Over the
short-term, however, we will be watching for signs of fatigue as spreads are
near historic lows and we expect some profit taking. Additionally, some emerging
countries in Asia and eastern Europe are experiencing considerable local
currency volatility and we will be monitoring the potential contagion effects on
emerging debt.
Paul Ghaffari
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
108
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
DEBT INSTRUMENTS (97.3%)
ARGENTINA (11.8%)
BONDS (11.8%)
U.S.$ 2,900 Republic of Argentina Global Bond 11.00%,
10/09/06........................................ $ 3,226
(n)2,500 Republic of Argentina Par Bonds, Series L, 5.50%,
3/31/23......................................... 1,734
ARP (e)1,200 Republic of Argentina, 11.75%, 2/12/07............ 1,338
U.S.$ (s)13,968 Republic of Argentina, Series L, "Euro" (Floating
Rate) 6.75%, 3/31/05............................ 13,139
----------
19,437
----------
BRAZIL (10.4%)
BONDS (10.4%)
3,250 Federative Republic of Brazil, C Bond, PIK, 8.00%,
4/15/04......................................... 2,613
12,500 Federative Republic of Brazil Debt Conversion
Bond, Series Z-L, (Floating Rate) 6.938%,
4/15/12......................................... 10,344
4,395 Federative Republic of Brazil Global Bond,
10.125%, 5/15/27................................ 4,237
----------
17,194
----------
BULGARIA (5.0%)
BONDS (5.0%)
4,450 Republic of Bulgaria Discount Bond, Series A,
"Euro", (Floating Rate) 6.563%, 7/28/24......... 3,282
(n)7,750 Republic of Bulgaria Front Loaded Interest
Reduction Bond, Series A, 2.25%, 7/28/12........ 4,427
900 Republic of Bulgaria Interest Arrears PDI Bond,
(Floating Rate) 6.563%, 7/28/11................. 651
----------
8,360
----------
ECUADOR (2.4%)
BONDS (2.4%)
(e)1,500 Conecel, 14.00%, 5/01/02.......................... 1,594
3,300 Republic of Ecuador Discount Bond, (Floating Rate)
6.438%, 2/28/25................................. 2,359
----------
3,953
----------
IVORY COAST (3.9%)
LOAN AGREEMENTS (3.9%)
FRF (b)3,100 Republic of Ivory Coast Syndicated Loan, zero
coupon, 12/31/00................................ 5,088
DEM (b)2,295 Republic of Ivory Coast Syndicated Loan, zero
coupon, 12/31/00................................ 553
U.S.$ (b)1,800 Republic of Ivory Coast Syndicated Loan, zero
coupon, 12/31/00................................ 756
----------
6,397
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
JAMAICA (5.0%)
BONDS (5.0%)
U.S.$ 4,000 Government of Jamaica, Series Regs, 9.625%,
7/02/02......................................... $ 4,025
(e)4,000 Mechala Group, Jamaica, 12.75%, 12/30/99.......... 4,230
----------
8,255
----------
MEXICO (16.5%)
BONDS (16.5%)
5,900 Bancomext Global Bond, 7.25%, 2/02/04............. 5,509
(e)3,000 Bufete Industrial, 11.375%, 7/15/99............... 3,133
4,500 Empresas ICA Sociedad Controladora, Series Regs,
11.875%, 5/30/01................................ 4,916
3,100 Mexico Discount Note, Series A, 6.867%,
12/31/19........................................ 2,885
ZAR 8,000 Nacional Financiera SNC, 17.00%, 2/26/99.......... 1,763
U.S.$ 4,800 United Mexican States 6.25%, 12/31/19............. 3,711
3,700 United Mexican States Global Bond, 11.50%,
5/15/26......................................... 4,229
1,400 United Mexican States Par Bonds, Series B, 6.25%,
12/31/19........................................ 1,083
----------
27,229
----------
MOROCCO (3.6%)
LOAN AGREEMENTS (3.6%)
(e,l)6,500 Kingdom of Morocco Restructuring and Consolidation
Agreement, Tranche A, (Floating Rate) 6.813%,
1/01/09 (Participation: J.P. Morgan)............ 5,960
----------
PANAMA (1.4%)
BONDS (1.4%)
140 Republic of Panama Interest Reduction Bond,
(Floating Rate) 3.50%, 7/17/14.................. 108
(n)1,962 Republic of Panama Interest Reduction Bond, 3.50%,
7/17/14......................................... 1,516
710 Republic of Panama PDI Bond, (Floating Rate) PIK
6.563%, 7/17/16................................. 624
----------
2,248
----------
PERU (2.6%)
BONDS (2.6%)
(e,n)7,198 Republic of Peru Front Loaded Interest Reduction
Bond, Series US, 3.25%, 3/07/17................. 4,301
----------
RUSSIA (19.7%)
BONDS (10.1%)
7 Ministry of Finance Tranche IV, 3.00%, 5/14/03.... 5
4,500 Ministry of Finance Tranche IV, Euro, GDR, 3.00%,
5/14/03......................................... 3,019
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
109
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
RUSSIA (CONT.)
BONDS (CONT.)
<TABLE>
<C> <S> <C>
U.S.$ 16,625 Ministry of Finance Tranche IV, GDR, 3.00%,
5/14/03......................................... $ 11,155
4,500 Ministry of Finance Tranche VI, GDR, 3.00%,
5/14/06......................................... 2,443
101 Ministry of Finance Tranche IV, (Letter of
Entitlement) 3.00%, 5/14/03..................... 68
----------
16,690
----------
LOAN AGREEMENTS (3.9%)
(b,k)2,150 Bank for Foreign Economic Affairs, 12/31/99....... 1,973
DEM (l)6,200 International Bank for Economic Cooperation
12/31/00 (Participation: Salomon Brothers,
Inc.)........................................... 2,223
U.S.$ (l)3,600 International Bank for Economic Cooperation
12/31/00 (Participation: Salomon Brothers,
Inc.)........................................... 2,250
----------
6,446
----------
NOTES (5.7%)
(e,v)10,800 Russia Principal Notes, 12/29/49.................. 7,206
(e,v)2,800 Russian Interest Arrears Note, 12/29/49........... 2,139
----------
9,345
----------
32,481
----------
SOUTH AFRICA (2.5%)
BONDS (2.5%)
ZAR 20,800 Republic of South Africa, Series 150, 12.00%,
2/28/05......................................... 4,092
----------
VENEZUELA (12.5%)
BONDS (12.5%)
U.S.$ 11,750 Republic of Venezuela Debt Conversion Bond, Series
DL, (Floating Rate) 6.75%, 12/18/07............. 10,905
3,450 Republic of Venezula Discount Bonds, Series A,
(Floating Rate) 6.813%, 3/31/20................. 3,058
2,100 Republic of Venezuela Discount Bonds, Series B,
(Floating Rate) 6.813%, 3/31/20................. 1,861
(n)238 Republic of Venezuela Front Loaded Interest
Reduction Bonds, Series A, (Floating Rate)
6.75%, 3/31/07.................................. 221
5,000 Republic of Venezuela Front Loaded Interest
Reduction Bonds, Series B, (Floating Rate)
6.75%, 3/31/07.................................. 4,652
----------
20,697
----------
TOTAL DEBT INSTRUMENTS (Cost $153,002)............................. 160,604
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
STRUCTURED INVESTMENTS (8.1%)
BRAZIL (4.5%)
U.S.$ 7,500 Salomon Brothers Federative Republic of Brazil
Credit Linked Enhanced Note 9.00%, 1/05/99...... $ 7,428
----------
MEXICO (3.6%)
8,300 Chase Manhattan Bank United Mexican States
Stripped Discount Bond 6.375%, 9/09/97.......... 6,014
----------
TOTAL STRUCTURED INVESTMENTS (Cost $13,285)........................ 13,442
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ---------------
RIGHTS (0.0%)
MEXICO (0.0%)
(a)10,969 United Mexican States, expiring 6/30/03 (Cost
$0)............................................. --
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ---------------
WARRANTS (0.0%)
VENEZUELA (0.0%)
(a)52,125 Republic of Venezuela Oil, expiring 3/31/20 (Cost
$0)............................................. --
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------
SHORT-TERM INVESTMENTS (6.5%)
REPURCHASE AGREEMENT (6.2%)
U.S.$ 10,174 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $10,176,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $10,348.................. 10,174
----------
COMMERCIAL PAPER (0.3%)
ZAR 2,300 Eskom 15.50%, 8/12/97............................. 498
----------
TOTAL SHORT-TERM INVESTMENTS (Cost $10,681)........................ 10,672
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
110
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
- -------------------------------------------------------------------
<C> <S> <C>
TOTAL INVESTMENTS (111.9%) (Cost $176,968)............... $184,718
--------
OTHER ASSETS (18.7%)
Cash....................................... $ 270
Receivable for Investments Sold............ 27,314
Interest Receivable........................ 3,167
Receivable for Portfolio Shares Sold....... 187
Dividend Receivable........................ 6
Other...................................... 8 30,952
----------
LIABILITIES (-30.6%)
Payable for Investments Purchased.......... (39,107)
Payable for Reverse Repurchase Agreement... (7,054)
Payable for Closed Short Sales............. (2,979)
Interest Payable on Securities Sold Short.. (588)
Investment Advisory Fees Payable........... (395)
Payable for Closed Foreign Currency
Contracts................................ (263)
Custodian Fees Payable..................... (86)
Administrative Fees Payable................ (22)
Directors' Fees & Expenses Payable......... (7)
Distribution Fees Payable.................. (2)
Other Liabilities.......................... (35) (50,538)
---------- --------
NET ASSETS (100%)........................................ $165,132
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $123,054
Undistributed Net Investment Income............... 6,495
Accumulated Net Realized Gain..................... 27,869
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 7,714
--------
NET ASSETS........................................ $165,132
--------
--------
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $162,199
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 18,356,235 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $8.84
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $2,933
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 332,523 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $8.82
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(b) -- Non-income producing security-in default
(e) -- 144A Security -- certain conditions for public sale may exist.
(k) -- Under restructuring at June 30, 1997 -- 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 June 30, 1997. Maturity date disclosed is the
ultimate maturity date.
(s) -- Denotes all or a portion of securities subject to repurchase under
Reverse Repurchase Agreements as of June 30, 1997 -- See note A-4 to
Financial Statements.
(v) -- When-issued security -- See note A-7 to financial statements.
ARP -- Argentine Peso
DEM -- German Mark
FRF -- French Franc
GDR -- Global Depositary Receipt
PIK -- Payment-In-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.
PDI -- Past Due Interest
ZAR -- South African Rand
Floating Rate Security -- Interest rate changes on these instruments are based
on changes in a designated base rate. The rates shown are those in
effect at June 30, 1997.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
111
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Asset Backed Securities 14.7%
Corporate Bonds & Notes 17.8%
Foreign Government & Agency Obligations 4.3%
U.S. Government & Agency Obligations 51.6%
Other 11.6%
</TABLE>
PERFORMANCE COMPARED TO THE LEHMAN
AGGREGATE BOND INDEX(1)
- ----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS
A.................... 3.13% 8.89% 7.25% 8.19%
PORTFOLIO -- CLASS
B.................... 3.16 8.75 N/A 5.05
INDEX -- CLASS A..... 3.09 8.15 7.12 8.15
INDEX -- CLASS B..... 3.09 8.15 N/A 4.54
</TABLE>
1. The Lehman Aggregate Bond Index is an unmanaged index comprised 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.
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 six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 3.13% and 8.89%, respectively, for the Class A shares; and
3.16% and 8.75%, respectively, for the Class B shares as compared to total
returns of 3.09% and 8.15%, respectively, for the Lehman Aggregate Bond Index
(the "Index"). For the five-year period ended June 30, 1997, the average annual
total return of Class A was 7.25% as compared to 7.12% for the Index. From
inception on May 15, 1991 to June 30, 1997, the average annual total return of
Class A was 8.19% as compared to 8.15% for the Index. From inception on January
2, 1996 to June 30, 1997, the average annual total return of Class B was 5.05%
as compared to 4.54% for the Index. As of June 30, 1997, the Portfolio had an
SEC 30-day yield of 6.31% for the Class A shares and 6.15% for the Class B
shares.
The fixed income markets rebounded from a weak first quarter to turn in a solid
performance in the second quarter of 1997. With bond yields falling by roughly
35 basis points over the quarter, the Lehman Aggregate Bond Index returned 3.67%
and the Lehman Government Corporate Index returned 3.64% for the quarter. This
represents the best returns for these indices since the fourth quarter of 1995.
Two key factors drove bond market returns during the second quarter. First,
economic growth slowed markedly from the very rapid pace of the first quarter.
As a result, concerns that too rapid a pace of economic growth would force
further preemptive tightening of monetary policy by the Federal Reserve were at
least temporarily put aside. Perhaps more importantly, though, the major
inflation measures remained exceptionally well behaved. The year-over-year
change in the core Consumer Price Index has declined to its lowest level in more
than 30 years, while the Producer Price Index has registered five straight
monthly negative readings for the first time in 40 years. Concerns over rising
labor costs were also moderated by a favorable release of the Employment Cost
Index in late April. With an economy slowing to
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
112
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO (CONT.)
a more moderate growth pace and with no signs of inflation, the Federal Reserve
did not tighten monetary policy at either its May or July meetings.
The bond market, not surprisingly, responded quite favorably to these
developments, with interest rates falling between 30 and 40 basis points across
the yield curve. While the Fed remains watchful for signals of potential
inflation pressures, market participants, having previously believed that the
Fed would tighten in response to strong economic growth, have increasingly
concluded that given the exceptionally well behaved nature of inflation measures
to date, the Fed is unlikely to tighten further without a deterioration in these
measures.
From a sector standpoint, the non-Treasury sectors continued their trend of
strong relative performance. After widening further in April following some
softness in March, most corporate spreads recovered to close tighter on the
quarter as credit fundamentals remain broadly positive. The mortgage-backed
sector performed very well despite the market rally. Low volatility and a benign
prepayment environment have caused spreads on this sector to reach their
tightest levels in many years.
Relative to the U.S. bond market, foreign bond markets turned in a mixed
performance during the second quarter. Yields rose in Japan, for example, and
although they fell in Germany, they did not do so by a sufficient amount to
outperform the U.S. markets. Higher yielding European markets such as Italy and
Spain turned in the best performance.
SECOND QUARTER STRATEGY REVIEW
We made a number of adjustments to the Portfolio in the second quarter. First,
we extended our duration to roughly 0.4 years longer than our benchmark. Our
primary focus in determining an appropriate duration is market trend and market
valuation. While market valuation in terms of real interest rates had been at
attractive levels for some time, we were reluctant to add duration while the
interest rate trend was one of rising rates. When this trend changed in early
May, we viewed this as a favorable opportunity to add duration. We also reduced
our overweighted position in mortgage-backed securities during the quarter,
reflective of the rich historical valuations on the sector. Our remaining
holdings of mortgage pass-throughs are concentrated in those segments of the
market with more favorable convexity characteristics such as discount and
seasoned mortgage-backed securities. The Portfolio remains overweighted in
corporate bonds and changes to this sector during the quarter were relatively
minor.
THIRD QUARTER OUTLOOK
We begin the third quarter roughly 0.5 years longer in duration than our
benchmark. The falling interest rate trend and favorable market valuation
support this position. We would likely return to a neutral position if either of
these indicators becomes unfavorable. We anticipate maintaining an overweight
position in yield advantaged sectors primarily in the corporate and asset-backed
sectors and will continue to look for issue-specific opportunities in these
areas. We are less likely to increase our mortgage pass-through exposure absent
a change in valuation for this sector.
Warren Ackerman, III
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Fixed Income Portfolio
113
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FIXED INCOME SECURITIES (88.4%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (51.6%)
U.S. TREASURY BOND (5.4%)
$ 7,000 7.25%, 8/15/22.................................... $ 7,307
----------
U.S. TREASURY NOTES (30.4%)
6,000 6.25%, 5/31/00.................................... 6,003
15,000 7.25%, 8/15/04.................................... 15,638
20,000 6.50%, 8/15/05.................................... 19,944
----------
41,585
----------
48,892
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION (0.0%)
9 13.00%, 9/01/10................................... 11
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (15.8%)
4,404 6.00%, 9/01/10.................................... 4,276
5,365 6.00%, 2/01/11.................................... 5,190
3,730 6.00%, 5/01/11.................................... 3,609
8,850 6.50%, 4/01/24.................................... 8,532
----------
21,607
----------
TOTAL US GOVERNMENT AND AGENCY OBLIGATIONS.................. 70,510
----------
FOREIGN GOVERNMENT AND AGENCY OBLIGATION (4.3%)
6,000 Republic of Poland, "Euro", (Floating Rate),
6.9375%, 10/27/24............................... 5,886
----------
CORPORATE BONDS AND NOTES (17.8%)
BROADCAST-RADIO & TELEVISION (1.0%)
1,500 News America Holdings,
7.75%, 12/01/45................................. 1,404
----------
FINANCE (14.0%)
2,000 First Chicago, 7.75%, 12/01/26.................... 1,915
5,000 General Motors Acceptance Corp., 7.375%,
6/22/00......................................... 5,099
3,000 Goldman Sachs Group, 6.25%, 2/01/03............... 2,906
3,500 Lehman Brothers Holdings, Inc., 7.375%, 5/15/04... 3,521
1,500 Liberty Mutual, 7.875%, 10/15/26.................. 1,497
(e)1,500 Lumbermens Mutual Casualty Co., 9.15%, 7/01/26.... 1,646
2,500 USF&G Capital Corp., I, 8.50%, 12/15/45........... 2,558
----------
19,142
----------
INDUSTRIAL (2.8%)
2,500 American General Institutional Capital, Series A,
7.57%, 12/01/45................................. 2,347
1,500 Hyundai Semiconductor, 8.25%, 5/15/04............. 1,513
----------
3,860
----------
TOTAL CORPORATE BONDS AND NOTES............................. 24,406
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
ASSET BACKED SECURITIES (14.7%)
$ 2,500 BT Capital Trust, Series B1, 7.90%, 1/15/27....... $ 2,424
10 Federal National Mortgage Association, REMIC,
92-59F, (Floating Rate), 6.119%, 8/25/06........ 10
2,500 Florida Property & Casualty, Series A, 7.25%,
7/01/02......................................... 2,513
3,500 Ford Motor Credit Co., 7.20%, 6/15/07............. 3,519
1,500 FPLUS 1997-2 M 1, 7.60%, 4/10/23.................. 1,513
2,965 Resolution Trust Corp., Series 1991-M5, Class A,
9.00%, 3/25/17.................................. 2,991
4,000 Standard Credit Card Trust,
6.75%, 6/07/00.................................. 4,024
3,000 Team Fleet Financing Corp., 7.35%, 5/15/03........ 3,055
----------
TOTAL ASSET BACKED SECURITIES............................... 20,049
----------
TOTAL FIXED INCOME SECURITIES (Cost $120,349)................. 120,851
----------
SHORT-TERM INVESTMENT (8.1%)
REPURCHASE AGREEMENT (8.1%)
11,005 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $11,007,
collateralized by U.S. Treasury Notes, 5.625%
due 2/15/06, valued at $11,194 (Cost $11,005)... 11,005
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (96.5%) (Cost $131,354)................ 131,856
--------
OTHER ASSETS (3.7%)
Cash....................................... $ 3,083
Interest Receivable........................ 1,880
Receivable for Portfolio Shares Sold....... 40
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 8
Other...................................... 11 5,022
----------
LIABILITIES (-0.2%)
Payable for Portfolio Shares Redeemed.... (125)
Investment Advisory Fees Payable......... (73)
Administrative Fees Payable.............. (18)
Custodian Fees Payable................... (11)
Directors' Fees & Expenses Payable....... (6)
Distribution Fees Payable................ (1)
Other Liabilities........................ (22) (256)
---------- --------
NET ASSETS (100.0%)...................................... $136,622
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $139,312
Undistributed Net Investment Income............... 795
Accumulated Net Realized Loss..................... (3,995)
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 510
--------
NET ASSETS........................................ $136,622
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Fixed Income Portfolio
114
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
CLASS A:
- ---------------------------------------
NET ASSETS............................. $ 133,959
NET ASSET VALUE, OFFERING REDEMPTION
PRICE PER SHARE
Applicable to 12,586,128 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................. $10.64
----------
----------
CLASS B:
- ---------------------------------------
NET ASSETS............................. $2,663
NET ASSET VALUE, OFFER AND REDEMPTION
PRICE PER SHARE
Applicable to 250,020 outstanding
$0.001 par value shares (authorized
500,000,000 shares).................. $10.65
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
the Portfolio is obligated to deliver or is to receive 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 1,160 $ 669 9/17/97 U.S.$ 675 $ 675 $ 6
DEM 3,953 2,281 9/17/97 U.S.$ 2,303 2,303 22
U.S.$ 674 674 9/17/97 DEM 1,160 669 (5)
U.S.$2,296 2,296 9/17/97 DEM 3,953 2,281 (15)
------- ------- -----
$ 5,920 $ 5,928 $ 8
------- ------- -----
------- ------- -----
</TABLE>
- ------------------------------------------------------------
(e) -- 144A Security -- Certain conditions for public sale may exist.
Floating Rate Security -- Interest rate changes on these instruments are based
on changes in a designated base rate. The rates shown are
those in effect on June 30, 1997.
DEM -- German Mark
REMIC -- Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Fixed Income Portfolio
115
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australian Dollar 1.3%
British Pound 6.9%
Canadian Dollar 3.1%
Danish Krone 3.0%
Deutsche Mark 18.3%
Irish Punt 0.9%
Italian Lira 4.9%
Japanese Yen 13.9%
Spanish Peseta 3.1%
Swedish Krona 7.2%
United States Dollar 28.7%
Other 8.7%
</TABLE>
PERFORMANCE COMPARED TO THE J.P. MORGAN TRADED GLOBAL BOND INDEX(1)
- --------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS
A................... -1.07% 5.09% 6.38% 7.60%
PORTFOLIO -- CLASS
B................... -1.12 4.91 N/A 3.28
INDEX -- CLASS A.... -1.09 4.48 7.26 8.83
INDEX -- CLASS B.... -1.09 4.48 N/A 2.17
</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.
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. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Global Fixed Income Portfolio aims to produce an attractive real rate of
return by investing in fixed income securities issued by U.S. and foreign
issuers including governments, agencies, supranational entities and corporations
with varying maturities in various currencies.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of -1.07% and 5.09%, respectively, for the Class A shares; and
- -1.12% and 4.91%, respectively, for the Class B shares as compared to total
returns of -1.09% and 4.48%, respectively, for the J.P. Morgan Traded Global
Bond Index (the "Index"). For the five-year period ended June 30, 1997, the
average annual total return of Class A was 6.38% as compared to 7.26% for the
Index. From inception on May 1, 1991 to June 30, 1997, the average annual total
return of Class A was 7.60% as compared to 8.83% for the Index. From inception
on January 2, 1996 to June 30, 1997, the average annual total return of Class B
was 3.28% as compared to 2.17% for the Index. As of June 30, 1997, the Portfolio
had an SEC 30-day yield of 4.97% for the Class A shares and 4.82% for the Class
B shares.
Global fixed income markets rallied in every country except the United States
during the first half of the year. Ten-year bond yields fell the most in Italy,
about 70 basis points, while they rose fractionally in the United States. The
second quarter was particularly positive for bonds with yields falling
substantially in all countries except Japan. Rallies were lead by Australia
where 10-year yields fell 100 basis points. The continuation of relatively weak
growth triggered easings in central bank policy. U.S. rates fell about 40 basis
points as a pause in the U.S. economic recovery led markets to downgrade risks
of Fed tightening.
Differences in performance within Europe continued to depend on prospects for
European Monetary Union (EMU). The return of the Socialists to power in the
recent French elections increased the probability that Spain and Italy would be
included in the first stage of EMU, and ten-year yields in the high yielding
European countries fell 60-90 basis points. The increased prospects for a wide
EMU, however, also increased fears that the Euro would become a soft currency
and ten-year yields in core countries such as Germany only fell 20-30 basis
points. Japanese bond markets performed poorly in the second quarter
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
116
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO (CONT.)
as government officials talked up prospects for the economy and fears of central
bank tightening increased.
Reflecting these concerns over a soft Euro, the Deutschemark continued to weaken
in the second quarter, falling 4% against the U.S. dollar, raising its
cumulative loss to 11.6% for the year. By contrast, the Japanese yen rose 8% in
the second quarter, 1.4% year-to-date, completely reversing its earlier in the
year weakness, as the current account surplus. soared and government officials
jawboned. In the first half of the year, the yen is the only currency up versus
the U.S. dollar.
These developments combined for a -1.1% return in the first half of the year for
the JP Morgan Global Government Bond Index. Losses were solely attributable to
the rise in the U.S. dollar as all bond markets generated positive returns in
local currency. During the year the Portfolio benefited from its overweighting
of U.K. and Australian bonds and underweighting of U.S. bonds. An overweighting
of the U.S. dollar versus. the European currencies also contributed to returns.
These benefits were offset in part by a small underweighting of the Japanese yen
and a small overweighting of the Australian dollar.
During the second quarter several changes were made to the Portfolio in response
to the shifts in interest and exchange rates. We drew down U.S. cash holdings to
fund an investment in Japanese bonds following a sharp sell-off in the Japanese
market. We also reduced our holdings of U.K. bonds as their surge immediately
after the granting of independence to the Bank of England eliminated much of the
remaining value in that market. Portfolio duration increased by 0.3 years,
reflecting the Japanese bond purchases. Currency adjustments consisted of a
partial hedging of Japanese yen exposures following its sharp appreciation to
year-high levels and a shift in European currency exposure from the Spanish
peseta to the Deutschemark after the former currency appreciated to well above
its ERM central parity.
Looking forward, we would expect many of the developments driving global fixed
income markets to continue. Increasingly, however, we do not believe that the
potential rewards are worth taking significant risks. Although European Monetary
Union including Spain and Italy is now probable, this possibility is now almost
fully priced in by the markets. Increasingly, traditional convergence trades
offer prospects of small additional gain offset by a small but significant
possibility of sizable loss should EMU not take place. Similarly, we expect the
U.S. dollar and U.K. currency to be supported by continued economic strength,
but are concerned that these currencies have already appreciated to levels where
sizable exposures would entail significant risks. Even duration trades now face
conflicting considerations. Although real interest rates are still at attractive
levels, U.S. and Continental European markets have now priced in little or no
monetary tightening over the next two years -- a situation that we find
worrisome given the tightness of the U.S. labor market and the growing signs of
economic recovery in Europe.
On balance, we now view most bond markets to be offering U.S. fair value with
the important exceptions of Sweden -- where we remain attracted by high real
interest rates -- and Japan -- where very low real interest rates continue to
suggest that a defensive stance is appropriate. The recent sell-off in the
United Kingdom has also resulted in it having one of the highest real interest
rates in the world and we are starting to shift interest rate exposure in that
direction. We are also partially hedging Japanese yen and European currencies,
resulting in about a 6% overweighting of dollar bloc currencies.
J. David Germany
PORTFOLIO MANAGER
Michael B. Kushma
PORTFOLIO MANAGER
Paul F. O'Brien
PORTFOLIO MANAGER
Robert M. Smith
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
117
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
FIXED INCOME SECURITIES (91.3%)
AUSTRALIAN DOLLAR (1.3%)
GOVERNMENT BONDS (1.3%)
AUD 1,300 Government of Australia 9.75%, 3/15/02........... $ 1,113
--------
BRITISH POUND (6.9%)
EUROBONDS (0.9%)
GBP 370 Conversion 9.00%, 7/12/11........................ 716
--------
GOVERNMENT BONDS (6.0%)
900 United Kingdom Treasury Gilt
7.00%, 11/06/01................................ 1,495
930 United Kingdom Treasury Gilt
8.50%, 12/07/05................................ 1,686
1,100 United Kingdom Treasury Gilt
8.50%, 7/16/07................................. 2,010
--------
5,191
--------
5,907
--------
CANADIAN DOLLAR (3.1%)
GOVERNMENT BONDS (3.1%)
CAD 2,700 Government of Canada 7.50%, 3/01/01.............. 2,083
600 Government of Canada 9.75%, 6/01/21.............. 580
--------
2,663
--------
DANISH KRONE (3.0%)
GOVERNMENT BONDS (3.0%)
DKK 15,400 Kingdom of Denmark 8.00%, 5/15/03................ 2,626
--------
GERMAN MARK (18.3%)
EUROBONDS (5.0%)
DEM 1,300 KFW International Finance, Inc.
7.50%, 1/24/00................................. 810
5,600 Landeskreditbank Baden-Wuerttemberg Financial
6.625%, 8/20/03................................ 3,460
--------
4,270
--------
GOVERNMENT BONDS (13.3%)
9,000 Bundesobligation, Series 113,
7.00%, 1/13/00................................. 5,563
5,150 German Unity Bond 8.00%, 1/21/02................. 3,367
600 Government of Germany 6.25%, 1/04/24............. 335
3,400 Treuhandanstalt 7.50%, 9/09/04................... 2,205
--------
11,470
--------
15,740
--------
IRISH PUNT (0.9%)
GOVERNMENT BONDS (0.9%)
IEP 480 Irish Government 8.00%, 8/18/06.................. 797
--------
ITALIAN LIRA (4.9%)
GOVERNMENT BONDS (4.9%)
ITL 3,000,000 BTPS 10.50%, 7/15/00............................. 1,973
700,000 BTPS 10.00%, 8/01/03............................. 481
1,450,000 BTPS 9.50%, 1/01/05.............................. 983
1,200,000 BTPS 9.50%, 2/01/06.............................. 825
--------
4,262
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
JAPANESE YEN (13.9%)
EUROBONDS (13.9%)
JPY 100,000 European Investment Bank
6.625%, 3/15/00................................ $ 997
180,000 Export Import Bank of Japan
4.375%, 10/01/03............................... 1,773
290,000 International Bank for Reconstruction &
Development 4.50%, 6/20/00..................... 2,767
100,000 International Bank for Reconstruction &
Development 4.75%, 12/20/04.................... 1,021
150,000 Japan Development Bank 5.00%, 10/01/99........... 1,421
145,000 Republic of Austria 6.25%, 10/16/03.............. 1,567
240,000 Republic of Austria 4.50%, 9/28/05............... 2,419
--------
11,965
--------
SPANISH PESETA (3.1%)
GOVERNMENT BOND (3.1%)
ESP 380,000 Spanish Government 8.30%, 12/15/98............... 2,693
--------
SWEDISH KRONA (7.2%)
GOVERNMENT BONDS (7.2%)
SEK 19,300 Swedish Government 13.00%, 6/15/01............... 3,147
4,000 Swedish Government 10.25%, 5/05/03............... 624
19,500 Swedish Government 6.00%, 2/09/05................ 2,470
--------
6,241
--------
UNITED STATES DOLLAR (28.7%)
CORPORATE BONDS AND NOTES (8.0%)
U.S.$ (e)750 Asset Securitization Corp., CMO, 7.21%,
10/13/26....................................... 762
978 Asset Securitization Corp., CMO, 7.10%,
8/13/29........................................ 986
500 BankAmerica 7.70%, 12/31/26...................... 485
(e)150 First Chicago 7.75%, 12/01/26.................... 143
500 First Chicago 7.95%, 12/01/26.................... 487
(e)385 Goldman Sachs Group 6.25%, 2/01/03............... 373
866 LB Commercial Conduit Mortgage Trust (Floating
Rate), CMO,
7.14%, 8/25/04................................. 875
(e)400 Liberty Mutual 7.875%, 10/15/26.................. 399
(e)300 Lumbermens Mutual Casualty Co., Series AI, 9.15%,
7/01/26........................................ 329
2,000 UCFC, CMO, Series 1995-C1,
Class A3, 6.775%, 9/10/17...................... 2,001
--------
6,840
--------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (19.2%)
U.S. TREASURY BONDS (6.6%)
4,345 8.125%, 8/15/19.................................. 4,955
800 6.25%, 8/15/23................................... 740
--------
5,695
--------
U.S. TREASURY NOTES (12.6%)
1,080 5.125%, 11/30/98................................. 1,068
6,360 6.375%, 3/31/01.................................. 6,372
3,290 7.25%, 5/15/04................................... 3,429
--------
10,869
--------
16,564
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
118
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
YANKEE BONDS (1.5%)
U.S.$ 765 Hydro-Quebec 7.50%, 4/01/16...................... $ 763
540 Industrial Finance Corp. 6.875%, 4/01/03......... 528
--------
1,291
--------
24,695
--------
TOTAL FIXED INCOME SECURITIES (91.3%) (Cost $79,635)............... 78,702
--------
SHORT-TERM INVESTMENT (5.1%)
REPURCHASE AGREEMENT (5.1%)
4,373 Chase Securities, Inc. 5.70% dated 6/30/97, due
7/01/97, to be repurchased at $4,374,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $4,448 (Cost $4,373).... 4,373
--------
FOREIGN CURRENCY (0.1%)
DEM 3 German Mark...................................... 2
JPY 8,909 Japanese Yen..................................... 78
ESP 624 Spanish Peseta................................... 4
--------
TOTAL FOREIGN CURRENCY (Cost $83).................................. 84
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (96.5%) (Cost $84,091)................. 83,159
--------
OTHER ASSETS (3.7%)
Interest Receivable........................ $ 1,837
Receivable for Investments Sold............ 1,318
Foreign Withholding Tax Reclaim
Receivable............................... 16
Other...................................... 7 3,178
----------
LIABILITIES (-0.2%)
Net Unrealized Loss on Foreign Currency
Exchange Contracts....................... (59)
Investment Advisory Fees Payable........... (38)
Dividends Payable.......................... (21)
Custodian Fees Payable..................... (15)
Administrative Fees Payable................ (12)
Directors' Fees & Expenses Payable......... (4)
Other Liabilities.......................... (23) (172)
---------- --------
NET ASSETS (100%)........................................ $ 86,165
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................... $ 91,872
Undistributed Net Investment Income................ 1,758
Accumulated Net Realized Loss...................... (6,465)
Unrealized Depreciation on Investments and Foreign
Currency Translations............................ (1,000)
--------
NET ASSETS......................................... $ 86,165
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ---------------------------------------------------
NET ASSETS......................................... $ 85,760
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 7,788,862 outstanding $0.001 par
value shares (authorized 500,000,000 shares)...... $11.01
--------
--------
CLASS B:
- ---------------------------------------------------
NET ASSETS......................................... $405
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 36,828 outstanding $0.001 par value
shares (authorized 500,000,000 shares)............ $11.00
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1997,
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 5,912 $ 3,394 7/11/97 U.S.$ 3,421 $ 3,421 $ 27
ITL 560,000 329 7/11/97 U.S.$ 330 330 1
JPY 104,800 916 7/11/97 U.S.$ 948 948 32
JPY 402,896 3,523 7/11/97 U.S.$ 3,500 3,500 (23)
U.S.$ 1,154 1,154 7/11/97 JPY 130,540 1,141 (13)
U.S.$ 332 332 7/11/97 ITL 560,000 329 (3)
U.S.$ 3,500 3,500 7/11/97 DEM 5,912 3,394 (106)
DEM 3,225 1,852 7/18/97 U.S.$ 1,864 1,864 12
DEM 306 176 7/18/97 ITL 300,000 176 --
GBP 650 1,082 7/18/97 U.S.$ 1,080 1,080 (2)
ITL 465,300 274 7/18/97 U.S.$ 274 274 --
ITL 300,000 176 7/18/97 DEM 307 176 --
SEK 14,500 1,876 7/18/97 DEM 3,243 1,863 (13)
U.S.$ 276 276 7/18/97 ITL 465,300 274 (2)
U.S.$ 777 777 7/18/97 GBP 475 790 13
IEP 540 817 7/25/97 U.S.$ 819 819 2
SEK 20,600 2,667 7/25/97 U.S.$ 2,683 2,683 16
-------- -------- --------
$ 23,121 $ 23,062 $ (59)
--------
-------- -------- --------
-------- --------
</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 June 30, 1997.
- ------------------------------------------------------------
SUMMARY OF FIXED INCOME SECURITES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
SECTOR DIVERSIFICATION (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Finance................................ $ 25,082 29.1%
Foreign Government and Agency
Obligations.......................... 37,056 43.0
U.S. Government and Agency
Obligations.......................... 16,564 19.2
-------- ---
$ 78,702 91.3%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
119
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace & Defense 1.8%
Automotive 0.6%
Banking 1.2%
Broadcast - Radio & Television 7.5%
Building Materials & Components 0.6%
Chemicals 2.3%
Communications 0.8%
Computers 2.1%
Consumer Staples 1.3%
Electrical Equipment 0.1%
Energy 5.3%
Entertainment & Leisure 3.5%
Environmental Controls 2.2%
Financial Services 10.1%
Food Services & Lodging 1.4%
Forest Products & Paper 1.0%
Gaming & Lodging 3.6%
Health Care Supplies & Services 1.2%
Insurance 1.0%
Materials 2.7%
Metals 1.7%
Multi-Industry 1.5%
Packaging & Container 2.8%
Real Estate 1.1%
Retail - General 4.1%
Telecommunications 18.8%
Utilities 2.0%
Foreign Government Bonds & Loan Agreement 3.8%
Other 13.9%
</TABLE>
PERFORMANCE COMPARED TO THE CS FIRST BOSTON HIGH YIELD INDEX(1)
- ----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------
AVERAGE
ANNUAL SINCE
YTD ONE YEAR INCEPTION
---------- ---------- ------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A........... 7.55% 18.40% 13.21%
PORTFOLIO -- CLASS B........... 7.32 18.15 14.71
INDEX -- CLASS A............... 5.88 14.66 11.38
INDEX -- CLASS B............... 5.88 14.66 12.28
</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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
INVESTING IN HIGH YIELD FIXED INCOME SECURITIES, OTHERWISE KNOWN AS "JUNK
BONDS", IS SPECULATIVE AND INVOLVES GREATER RISK OF LOSS OF PRINCIPAL AND
INTEREST. 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 high yield fixed income securities that offer a yield
above that generally available on debt securities in the four highest rating
categories.
For the six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 7.55% and 18.40%, respectively, for the Class A shares; and
7.32% and 18.15%, respectively, for the Class B shares as compared to total
returns of 5.88% and 14.66%, respectively, for the CS First Boston High Yield
Index (the "Index"). From inception on September 28, 1992 to June 30, 1997, the
average annual total return of Class A was 13.21% as compared to 11.38% for the
Index. From inception on January 2, 1996 to June 30, 1997, the average annual
total return of Class B was 14.71% as compared to 12.28% for the Index. As of
June 30, 1997, the Portfolio had an SEC 30-day yield of 8.20% for the Class A
shares and 7.95% for the Class B shares.
We have continued to emphasize the communications industry in our high yield
portfolio. We believe exceptional growth opportunities exist in the newly
deregulated local exchange sector, as well as in selected companies in the
wireless and long distance sectors. Securities which performed strongly included
Nextel Communications, Qwest Communications, and Occel, a cellular company based
in the Republic of Columbia. Microsoft's strategic investment in Comcast led to
strong gains for our holdings in the cable and telecommunications sectors,
particularly Telecommunications, Inc. and Cablevision Systems Corp. In the
emerging markets arena, our investments in U.S. dollar-dominated sovereign and
corporate bonds continued to outperform. We reduced both the cable and emerging
market sectors on strength in the second quarter.
Our overall portfolio structure continues to feature higher average credit
quality compared to market benchmarks. In terms of interest-rate sensitivity, we
have taken steps to reduce our exposure to no longer than that of market
benchmark. We believe that there
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
120
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
is fair value in the U.S. bond market, and that historically narrow high-yield
credit spreads are supported by strong fundamentals.
Robert Angevine
PORTFOLIO MANAGER
Thomas L. Bennett
PORTFOLIO MANAGER
Stephen F. Esser
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
High Yield Portfolio
121
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
CORPORATE BONDS AND NOTES (64.1%)
AUTOMOTIVE (0.6%)
$ (e)650 EES Coke Battery Co., Inc.,
9.382%, 4/15/07................................ $ 666
---------
BANKING (0.9%)
500 First Nationwide Holdings, Inc.,
9.125%, 1/15/03................................ 517
450 First Nationwide Holdings, Inc., 10.625%,
10/01/03....................................... 494
---------
1,011
---------
BROADCAST-RADIO & TELEVISION (7.5%)
2,370 Cablevision Systems Corp., 9.875%, 5/15/06....... 2,524
1,850 Paramount Communications, Inc., 8.25%, 8/01/22... 1,771
990 Rogers Cablesystems Ltd., Series B, 10.00%,
3/15/05........................................ 1,072
(e)645 TV Azteca S.A., 10.50%, 2/15/07.................. 662
2,880 Viacom, Inc., 8.00%, 7/07/06..................... 2,801
---------
8,830
---------
BUILDING MATERIALS AND COMPONENTS (0.6%)
(e)700 Outdoor Systems, Inc., 8.875%, 6/15/07........... 679
---------
CHEMICALS (2.3%)
2,670 ISP Holdings, Inc., Series B,
9.00%, 10/15/03................................ 2,760
---------
COMMUNICATIONS (0.8%)
(e)900 Comcast Cellular Corp., 9.50%, 5/01/07........... 911
---------
COMPUTERS (2.1%)
1,600 Advanced Micro Devices, Inc., 11.00%, 8/01/03.... 1,784
650 Digital Equipment Corp., 8.625%, 11/01/12........ 647
---------
2,431
---------
CONSUMER STAPLES (1.3%)
1,490 RJR Nabisco, Inc., 8.75%, 4/15/04................ 1,520
---------
ENERGY (5.3%)
1,200 Nuevo Energy Co., 9.50%, 4/15/06................. 1,254
1,250 Quezon Power Ltd., 8.86%, 6/15/17................ 1,250
1,325 Snyder Oil Corp., 8.75%, 6/15/07................. 1,318
(e,n)675 Transamerican Energy, 0.00%, 6/15/02............. 485
1,950 Vintage Petroleum, Inc., 8.625%, 2/01/09......... 1,943
---------
6,250
---------
ENVIRONMENTAL CONTROLS (2.2%)
(n)2,300 Norcal Waste Systems, Inc., Series B, 13.00%,
11/15/05....................................... 2,611
---------
FINANCIAL SERVICES (0.3%)
(e)415 Navistar Financial Corp., 9.00%, 6/01/02......... 425
---------
FOOD SERVICE & LODGING (1.4%)
1,475 Courtyard by Marriott, Series B, 10.75%,
2/01/08........................................ 1,597
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
FOREST PRODUCTS & PAPER (1.0%)
$ 1,170 Asia Pulp & Paper, 12.00%, 12/29/49.............. $ 1,196
---------
GAMING & LODGING (3.6%)
1,740 Grand Casinos, Inc., 10.125%, 12/01/03........... 1,818
(e)450 Horseshoe Gaming, L.L.C.,
9.375%, 6/15/07................................ 456
496 Louisiana Casino Cruises,
11.50%, 12/01/98............................... 501
(e)1,440 Station Casinos, Inc., 10.125%, 3/15/06.......... 1,454
---------
4,229
---------
HEALTH CARE SUPPLIES & SERVICES (1.2%)
1,380 Tenet Healthcare Corp., 8.625%, 1/15/07.......... 1,407
---------
INSURANCE (1.0%)
(e)1,150 Anthem Insurance Cos., Inc.,
9.00%, 4/01/27................................. 1,184
---------
MATERIALS (2.7%)
(n)3,445 Brooks Fiber Properties, Inc.,
0.00%, 3/01/06................................. 2,347
(n)1,175 Brooks Fiber Properties, Inc.,
0.00%, 11/01/06................................ 765
---------
3,112
---------
MULTI-INDUSTRY (1.5%)
1,575 TLC Beatrice International Holdings, Inc.,
11.50%, 10/01/05............................... 1,770
---------
PACKAGING & CONTAINER (2.8%)
1,800 Gaylord Container Corp., 11.50%, 5/15/01......... 1,894
1,245 SD Warren Co., 12.00%, 12/15/04.................. 1,394
---------
3,288
---------
REAL ESTATE (1.1%)
1,250 HMC Acquisition Properties,
9.00%, 12/15/07................................ 1,270
---------
RETAIL-GENERAL (4.1%)
1,900 Host Marriott Travel Plaza, Series B, 9.50%,
5/15/05........................................ 1,983
650 Kmart Corp., 7.75%, 10/01/12..................... 596
2,710 Southland Corp., 5.00%, 12/15/03................. 2,303
---------
4,882
---------
TELECOMMUNICATIONS (17.8%)
(n)3,225 Dial Call Communications, 0.00%, 4/15/04......... 2,640
(n)290 Dial Call Communications, Series B, 0.00%,
12/15/05....................................... 228
(n)960 EchoStar Satellite Broadcasting, 0.00%,
3/15/04........................................ 684
(e)2,080 Globalstar, LP, 11.375%, 2/15/04................. 2,083
1,780 IXC Communications, Inc., Series B, 12.50%,
10/01/05....................................... 2,036
(n)2,385 Nextel Communications, Inc., 0.00%, 8/15/04...... 1,825
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
122
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
TELECOMMUNICATIONS (CONT.)
<TABLE>
<C> <S> <C>
$ (e,n)1,075 Occidente y Caribe, 0.00%, 3/15/04 (Columbia).... $ 797
(e)1,430 Qwest Communications International, 10.875%,
4/01/07........................................ 1,553
690 Rogers Communications, Inc., 9.125%, 1/15/06..... 697
(e,n)3,000 TCI Satellite, 0.00%, 2/15/07.................... 1,785
3,175 Telecommunications, Inc., 9.25%, 1/15/23......... 3,306
(n)4,525 Teleport Communications Group, Inc., 0.00%,
7/01/07........................................ 3,269
---------
20,903
---------
UTILITIES (2.0%)
60 Cleveland Electric Illuminating Co., Series B,
8.375%, 12/01/11............................... 61
188 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02................................ 201
1,288 Midland Funding Corp. I, Series C-94, 10.33%,
7/23/02........................................ 1,378
650 Midland Funding II, Series A, 11.75%, 7/23/05.... 753
---------
2,393
---------
TOTAL CORPORATE BONDS AND NOTES (Cost $73,727).................... 75,325
---------
ASSET BACKED SECURITIES (12.4%)
AEROSPACE & DEFENSE (1.8%)
1,945 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1 P1, Class D, 12.75%, 6/15/06..... 2,097
---------
BANKING (0.3%)
344 PNC Mortgage Securities Corp.,
Series 1995-2, Class B4, REMIC,
7.50%, 9/25/25................................. 302
---------
FINANCIAL SERVICES (8.6%)
(e)993 CA FM Lease Trust, 8.50%, 7/15/17................ 1,018
931 DR Securitized Lease Trust, Series 1993-K1, Class
A1, 6.66%, 8/15/10............................. 812
2,621 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07............................. 2,464
1,175 DR Securitized Lease Trust, Series 1994-K1, Class
A2, 8.375%, 8/15/15............................ 1,093
(e)900 FMAC Series 1996-B, Class C, 7.929%, 11/01/18.... 796
(e)308 GE Capital Mortgage Services, Inc., Series
1995-12, Class B3, REMIC, 7.911%, 8/25/25...... 278
(e)1,014 Long Beach Auto, 1997-1, Class B, 14.22%,
10/26/03....................................... 1,028
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
$ 875 Prudential Home Mortgage Securities, Inc., Series
1996-A, Class B1, REMIC, 7.963%, 4/15/25....... $ 702
(e)1,900 Riggs Capital Trust II, 8.875%, 3/15/27.......... 1,933
---------
10,124
---------
METALS (1.7%)
(e)525 Jet Equipment Trust, Series 95-D, 11.44%,
11/01/14....................................... 654
(e)1,050 Jet Equipment Trust, Series C1, 11.79%,
6/15/13........................................ 1,310
---------
1,964
---------
TOTAL ASSET BACKED SECURITIES (Cost $12,528)...................... 14,487
---------
FOREIGN GOVERNMENT BONDS (3.3%)
BONDS (3.3%)
1,225 Federative Republic of Brazil, Series L, 4.50%,
4/15/09........................................ 960
(n)1,025 Republic of Argentina Par, Series L, "Euro",
5.50%, 3/31/23................................. 711
1,455 Republic of Argentina, Series L, "Euro",
(Floating Rate), 6.75%, 3/31/05................ 1,369
400 Republic of Colombia, 8.70%, 2/15/16............. 407
625 United Mexican States, Series A, 6.25%,
12/31/19....................................... 483
---------
TOTAL FOREIGN GOVERNMENT BONDS (Cost $3,357)...................... 3,930
---------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- -------------
COMMON STOCKS (0.0%)
FINANCIAL SERVICES (0.0%)
(a)1,268 WestFed Holdings, Inc., Class B.................. --
---------
FOOD SERVICE & LODGING (0.0%)
(a,e)1,300 Motels of America, Inc........................... 14
---------
TOTAL COMMON STOCKS (Cost $85).................................... 14
---------
PREFERRED STOCKS (4.7%)
ENTERTAINMENT & LEISURE (3.5%)
3,722 Time Warner Inc., Series M, 10.25%, 7/01/16...... 4,085
---------
FINANCIAL SERVICES (1.2%)
(e)13,500 Sinclair Capital, 11.625%, 3/15/09............... 1,431
3,239 WestFed Holdings, Inc., Series A, PIK, Zero
Coupon, 1/01/01................................ --
---------
1,431
---------
TOTAL PREFERRED STOCKS (Cost $5,155).............................. 5,516
---------
CONVERTIBLE PREFERRED STOCKS (1.0%)
TELECOMMUNICATIONS (1.0%)
10,940 TCI Pacific Communications, 5.00%, 7/31/06 (Cost
$1,010)........................................ 1,132
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
123
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
<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)625,000 United Mexican States, 6.25%, 12/31/19........... --
---------
TOTAL RIGHTS (Cost $133).......................................... --
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- -------------
WARRANTS (0.1%)
AEROSPACE & DEFENSE (0.0%)
(a)500 Sabreliner Corp., expiring 4/15/03............... --
---------
ELECTRICAL EQUIPMENT (0.1%)
(a)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...... 7
---------
INSURANCE (0.0%)
(a)500 Horace Mann Educators Corp., expiring 4/03/99.... 7
---------
PACKAGING & CONTAINER (0.0%)
(a)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)........................................ 182
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -------------
FOREIGN LOAN AGREEMENTS (0.5%)
LOAN AGREEMENTS (0.5%)
$ 775 Russian Interest Arrears Note, Zero Coupon,
12/31/99 (Cost $556)........................... $ 592
---------
SHORT-TERM INVESTMENT (13.5%)
REPURCHASE AGREEMENT (13.5%)
15,827 Chase Securities, Inc. 5.70%, dated 6/30/97, due
7/01/97, to be repurchased at $15,830,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $16,096 (Cost
$15,827)....................................... 15,827
---------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<C> <S> <C>
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%) (Cost $112,532)......................... $ 117,005
---------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (4.6%)
Cash............................................ $ 553
Receivable for Investments Sold................. 2,886
Interest Receivable............................. 1,778
Dividends Receivable............................ 90
Other........................................... 72 5,379
----------
LIABILITIES (-4.2%)
Payable for Investments Purchased............... (4,554)
Payable for Portfolio Shares Redeemed........... (203)
Investment Advisory Fees Payable................ (143)
Administrative Fees Payable..................... (15)
Custodian Fees Payable.......................... (10)
Dividends Payable............................... (6)
Directors' Fees & Expenses Payable.............. (4)
Distribution Fees Payable....................... (3)
Other Liabilities............................... (30) (4,968)
---------- --------
NET ASSETS (100%)............................................... $117,416
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSISTS OF:
Paid in Capital................................... $114,928
Undistributed Net Investment Income............... 1,097
Accumulated Net Realized Loss..................... (3,082)
Unrealized Appreciation on Investments............ 4,473
--------
NET ASSETS........................................ $117,416
--------
--------
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $111,679
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,857,954 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $11.33
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $5,737
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 507,117 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $11.31
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(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 June 30, 1997. Maturity date disclosed is the
ultimate maturity date.
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 June 30, 1997.
At June 30, 1997, approximately 94% 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
124
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Daily Variable Rate Bonds 3.9%
Fixed Rate Instruments 94.2%
Other 1.9%
</TABLE>
PERFORMANCE COMPARED TO THE LEHMAN
7-YEAR MUNICIPAL BOND INDEX(1)
- ----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 2.42% 6.28% 6.07%
INDEX................... 2.63 7.03 7.73
</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.
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 six months and one year periods ended June 30, 1997, the Portfolio had
total returns of 2.42% and 6.28%, respectively, for the Class A shares; as
compared to total returns of 2.63% and 7.03%, respectively, for the Lehman
7-Year Municipal Bond Index (the "Index"). From inception on January 18, 1995 to
June 30, 1997, the average annual total return of Class A was 6.07% as compared
to 7.73% for the Index. As of June 30, 1997, the Portfolio had an SEC 30-day
yield of 4.45% for the Class A shares.
The U.S. fixed income markets started off the year contemplating if, and when,
the Federal Reserve might decide a tightening of monetary policy would be
necessary. The answer came at the March 25th FOMC meeting when the Fed voted to
increase the Federal Funds rate by 25 basis points to 5.50%. Following the
Federal Reserve move, the bond market seemed to gain comfort in the current
economic climate and managed to turn in a solid performance in the second
quarter of 1997. Two key factors drove bond market returns during the second
quarter. First, economic growth slowed markedly from the very rapid pace of the
first quarter. As a result, concerns that too rapid a pace of economic growth
would force further preemptive tightening of monetary policy by the Federal
Reserve were at least temporarily put aside. Perhaps more importantly, though,
the major inflation measures remained exceptionally well behaved. The
year-over-year change in the core Consumer Price Index has declined to its
lowest level in more than thirty years, while the Producer Price Index has
registered five straight monthly negative readings for the first time in forty
years. With an economy slowing to a more moderate growth pace and with no signs
of inflation, the Federal Reserve did not tighten monetary policy at either its
May or July meetings. The bond market, not surprisingly, responded quite
favorably to these developments, with interest rates falling between 30 and 40
basis points across the yield curve.
Year-to-date, the municipal bond market has done a commendable job of keeping up
with the U.S. Treasury market. Municipals, historically known to lag the
Treasury market during market surges, were able
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
125
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO (CONT.)
to put in a strong showing during the 2nd quarter due to a number of confluent
factors. An active but manageable new issue supply flow was met with strong
seasonal demand due to the large number of June and July bond redemptions and
coupon payments. Property and casualty insurance companies' healthy appetite
continued to fuel the new issue fire, with deals being underwritten at very
aggressive levels. Individual investors remained selectively active, buying on
the longer end of the yield curve during market weakness and sticking to the
shorter end when absolute yield levels did not look as enticing. As the quarter
came to a close, credit quality spreads became non-existent, with AAA, AA and
Insured paper virtually trading on top of each other versus a fifteen basis
point plus spread at the beginning of the year. Municipals, which earlier in the
year had been trading at very expensive levels relative to U.S. Treasuries,
ended the quarter slightly below their recent expensive ratios.
While the Fed remains watchful for signals of potential inflationary pressures,
market participants have increasingly concluded that given the exceptionally
well behaved nature of inflation measures to date, the Fed is unlikely to
tighten further without a deterioration in these measures. If interest rates
stay at or near their current levels, a steady stream of advanced refundings of
higher coupon outstanding bonds should keep supply and demand well balanced
during the third quarter. In this market environment, we have been focusing on
the high end of the quality spectrum, and carefully selecting those credits we
feel will differentiate themselves when quality spreads return to more normal
levels. During the quarter, our bond purchases were concentrated on premium
coupon AAA and AA-rated 15 year bonds trading to 5 and 6 year call dates. These
bonds were trading at attractive spreads to bullet maturities, and provide the
Portfolio with a high level of current income. The Portfolio remains heavily
weighted in premium coupon noncallable bonds, which have continued to perform
well. During the quarter, the average maturity of the Portfolio continued to
closely track the benchmark Lehman 7-Year Municipal Bond Index.
Lori A. Cohane
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
126
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (98.1%)
DAILY VARIABLE RATE BONDS (3.9%)
$ 300 New York City, New York, General Obligation
Bonds, Sub-Series B-2, 5.50%, 8/15/18.......... $ 300
300 New York City, New York, General Obligation
Bonds, Series B, 5.50%, 10/01/20............... 300
800 New York City, New York, Municipal Water Finance
Authority, Water & Sewer Systems, Revenue
Bonds, Series A, 5.50%, 6/15/25................ 800
400 Ohio State Air Quality Development Authority
Revenue Bonds, Series 95-B, 5.50%, 12/01/15.... 400
300 Saint Lucie County, Florida, Pollution Control
Revenue Bonds, Florida Power & Light Co.,
3.90%, 1/01/26................................. 300
--------
TOTAL DAILY VARIABLE RATE BONDS (Cost $2,100)............... 2,100
--------
FIXED RATE INSTRUMENTS (94.2%)
825 Albuquerque, New Mexico, General Obligation
Bonds, Series B, 4.70%, 7/01/98................ 832
1,500 Baltimore County, Maryland, Consolidated Public
Improvement, General Obligation Bonds, 6.00%,
7/01/05........................................ 1,611
1,000 California State, Department of Water Revenue
Bonds, Series Q, 6.00%, 12/01/10............... 1,094
1,920 City of Dallas, Texas, General Obligation Bonds,
6.00%, 2/15/06................................. 2,089
100 Connecticut State, General Obligation Bonds,
Series A, 4.75%, 11/15/01...................... 101
250 Connecticut State, General Obligation Bonds,
Series A, 9.875%, 3/01/01...................... 295
250 Connecticut State, General Obligation Bonds,
Series C, 5.50%, 3/15/03....................... 262
175 Connecticut State, General Obligation Bonds,
Series C, 6.15%, 11/15/03...................... 189
1,500 Connecticut State, General Obligation Bonds,
Series E, 6.00%, 3/15/12....................... 1,625
1,000 Connecticut State, Special Obligation, Tax
Revenue Bonds, Transportation, 6.50%, 7/01/09,
Prerefunded 7/01/99 at 102..................... 1,063
1,000 De Kalb County, Georgia, Water & Sewer Revenue
Bonds, 7.00%, 10/01/06......................... 1,027
1,000 Delaware Transportation Authority, Transportation
System Revenue Bonds, 6.50%, 7/01/11,
Prerefunded 7/01/01 at 102..................... 1,095
1,000 Fairfax County, Virginia, Water Authority Revenue
Bonds, 6.00%, 4/01/22.......................... 1,041
1,500 Florida State Board of Education, Capital Outlay,
Public Education, General Obligation Bonds,
6.40%, 6/01/19................................. 1,600
1,325 Fort Worth, Texas, Water & Sewer Revenue Bonds,
Series B, 5.875%, 2/15/00...................... 1,377
1,000 Georgia State, General Obligation Bonds, Series
A, 5.80%, 3/01/02.............................. 1,058
500 Georgia State, General Obligation Bonds, Series
F, 6.50%, 12/01/06............................. 567
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
$ 1,000 Gwinnett County, Georgia, General Obligation
Bonds, 6.00%, 1/01/11.......................... $ 1,057
1,000 Hawaii State, General Obligation Bonds, Series
CJ, 6.20%, 1/01/12, Prerefunded 1/01/05 at
100............................................ 1,091
1,500 Intermountain Power Agency, Utah, Power Supply
Revenue Bonds, Series D, 8.375%, 7/01/12,
Prerefunded 7/01/97 at 102..................... 1,530
1,000 Kentucky State Housing Corp., Revenue Bonds,
Series A, 6.00%, 7/01/10....................... 1,025
1,000 Maryland State Department of Transportation,
Construction Revenue Bonds, Second Issue,
6.60%, 11/01/00................................ 1,059
1,155 Maryland State Department of Transportation,
Construction Revenue Bonds, Second Issue,
6.80%, 11/01/05, Prerefunded 11/01/99 at 102... 1,244
1,000 Massachusetts State Consolidated Loan, Series A,
7.50%, 3/01/03 Prerefunded at 3/01/00 at 102... 1,098
500 Massachusetts State Consolidated Loan, Series A,
7.625%, 6/01/08 Prerefunded 6/01/01 at 102..... 566
1,625 Michigan State Housing Development Authority,
Revenue Bonds, Series A, 6.75%, 12/01/14....... 1,711
1,590 Minnesota State Infrastructure Development,
General Obligation Bonds, 6.80%, 8/01/03,
Prerefunded at 8/01/00 at 100.................. 1,706
1,400 Mississippi State, General Obligation Bonds,
6.00%, 2/01/09, Prerefunded 2/01/05 at 100..... 1,510
1,475 Montana State, General Obligation Bonds, Long
Range Building Program, Series C, 6.00%,
8/01/13........................................ 1,545
2,000 Municipal Assistance Corp. for City of New York,
NY, Revenue Bonds, 6.00%, 7/01/04.............. 2,149
1,000 New Castle County, Delaware, General Obligation
Bonds, 6.25%, 10/15/01......................... 1,073
1,000 New Jersey State, General Obligation Bonds,
Series E, 5.50%, 7/15/02....................... 1,049
1,475 Ohio State, General Obligation Bonds, 6.65%,
8/01/05........................................ 1,668
1,000 Ohio State, Housing Finance Agency, Residential
Mortgage Revenue Bonds, Series A-1, 6.20%,
9/01/14........................................ 1,038
1,000 Orlando, Florida, Utilities Commission Water &
Electric, Revenue Bonds,
Series D, 6.75%, 10/01/17...................... 1,165
300 Puerto Rico Commonwealth Highway & Transportation
Authority, Revenue Bonds, Series T, 6.50%,
7/01/22, Prerefunded 7/01/02 at 101.50......... 333
1,000 Reedy Creek Improvement District, Florida,
Utility, Revenue Bonds, Series 91-1, 6.50%,
10/01/16, Prerefunded 10/01/01 at 101.......... 1,091
600 Salt Lake City, Utah, General Obligation Bonds,
6.375%, 6/15/11................................ 631
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
127
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FIXED RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 1,350 San Antonio, Texas, General Obligation Bonds,
6.50%, 8/01/14, Prerefunded 8/01/04 at 100..... $ 1,497
1,000 Shelby County, Tennessee, General Obligation
Bonds, Series A, 5.50%, 3/01/08................ 1,050
1,250 Texas A & M University, Revenue Bonds, Series B,
6.00%, 7/01/11................................. 1,291
1,000 Virginia Beach, Virginia, General Obligation
Bonds, 6.00%, 9/01/10.......................... 1,061
500 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds, Series B,
6.60%, 1/01/12................................. 533
1,000 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds, Series B,
6.65%, 1/01/13................................. 1,066
1,000 Washington State, General Obligation Bonds,
Series B, 6.40%, 6/01/17....................... 1,120
500 Washington Suburban Sanitary District, General
Obligation Revenue Bonds, 6.50%, 11/01/05,
Prerefunded 11/01/01 at 102.................... 550
--------
TOTAL FIXED RATE INSTRUMENTS (Cost $49,280)................. 50,433
--------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $51,380)................. 52,533
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.1%) (Cost $51,380)................. 52,533
--------
OTHER ASSETS (2.0%)
Cash....................................... $ 85
Interest Receivable........................ 993 1,078
-----
LIABILITIES (-0.1%)
Investment Advisory Fees Payable........... (20)
Administrative Fees Payable................ (7)
Payable for Portfolio Shares Redeemed...... (6)
Custodian Fees Payable..................... (3)
Directors' Fees & Expenses Payable......... (2)
Other Liabilities.......................... (19) (57)
----- --------
NET ASSETS (100%)........................................ $ 53,554
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................... $ 52,206
Undistributed Net Investment Income................ 197
Accumulated Net Realized Loss...................... (2)
Unrealized Appreciation on Investments............. 1,153
--------
NET ASSETS......................................... $ 53,554
--------
--------
CLASS A:
- ---------------------------------------------------
NET ASSETS......................................... $ 53,554
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 5,193,787 outstanding $0.001 par
value shares (authorized 500,000,000 shares)..... $10.31
--------
--------
</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 and are secured by a letter of credit or other support agreements.
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 U.S. Treasury escrow.
- ------------------------------------------------------------
SUMMARY OF TAX-EXEMPT INSTRUMENTS BY STATE CLASSIFICATION
<TABLE>
<CAPTION>
AMORTIZED COST PERCENT OF
STATE (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------------
California............................. $ 1,094 2.0%
Connecticut............................ 3,536 6.6
Delaware............................... 2,167 4.1
Florida................................ 4,156 7.8
Georgia................................ 3,709 6.9
Hawaii................................. 1,091 2.0
Kentucky............................... 1,025 1.9
Maryland............................... 3,914 7.3
Massachusetts.......................... 1,664 3.1
Minnesota.............................. 1,711 3.2
Michigan............................... 1,706 3.2
Mississippi............................ 1,510 2.8
Montana................................ 1,545 2.9
New Jersey............................. 1,049 2.0
New Mexico............................. 832 1.6
New York............................... 3,549 6.6
Ohio................................... 3,106 5.8
Puerto Rico............................ 333 0.6
Tennessee.............................. 1,050 2.0
Texas.................................. 6,254 11.7
Utah................................... 2,161 4.0
Virginia............................... 3,701 6.9
Washington............................. 1,670 3.1
------- ---
$ 52,533 98.1%
------- ---
------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
128
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Commercial Paper 49.6%
Corporate Floating Rate Notes 0.7%
Certificates of Deposit 15.7%
U.S. Government Agency Discount Notes 4.6%
U.S. Government Agency Floating Rate
Notes 11.7%
Other 17.7%
</TABLE>
COMPARATIVE MONTHLY AVERAGE YIELDS
- --------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
IBC Money Fund Money Market Portfolio
Comparable Yields 30-Day Yields
Jan. 4.84% 4.95%
Feb. 4.82% 4.94%
Mar. 4.84% 4.95%
Apr. 4.94% 5.05%
May 4.98% 5.09%
Jun. 5.02% 5.11%
</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 June 30, 1997 were 5.11% and 5.24%, respectively. As with all
money market portfolios, the seven day yields are not necessarily indicative of
future performance.
After 14 months of steady policy, the Federal Reserve increased the target for
the Federal Funds rate the last week of the first quarter. The increase of 25
basis points to a 5.50% Fed Funds target was expected and in fact was priced
into the market. Federal Reserve Chairman Alan Greenspan presented his view on
the economy during scheduled testimony to Congress earlier in the month of
March. Clearly at that time, he felt that the economy was continuing to
accelerate at a rapid pace and that a preemptive increase in the funds rate was
necessary to stave off inflation.
In the second quarter, interest rates reversed the trend of the first quarter by
declining 25 to 40 basis points across the yield curve. Following the March
increase in the funds rate, the market began to adjust to expectations of a
slower rate of growth in the economy. When the May FOMC meeting passed with no
change in rates, the market took it as a sign that further rate increases would
not be necessary, and the economy seemed to be slowing on its own.
We increased the weighted average maturity of the Portfolio in April when rates
were higher. We then took the opportunity to reduce the overall maturity later
in the second quarter when rates fell. The Portfolio has been positioned
defensively since this change and ended the first half of 1997 with a weighted
average maturity of 37 days.
With no protection against possible Federal Reserve tightening now built into
the front of the yield curve,
- --------------------------------------------------------------------------------
Money Market Portfolio
129
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO (CONT.)
we find less value than we did earlier in the year. While we agree that the
economy is growing more slowly, the unemployment rate is low and factory
utilization high. We remain concerned that tight labor markets could push
inflation higher and the economy could reaccelerate, either of which would
prompt further action from the Federal Reserve. Finally, anchored by a 5.50%
funds rate, the entire curve has flattened, offering less opportunity to enhance
returns by rolling down the curve.
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
Ellen D. Harvey
PORTFOLIO MANAGER
Christian G. Roth
PORTFOLIO MANAGER
Scott F. Richard
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
130
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (82.3%)
US GOVERNMENT & AGENCY OBLIGATIONS (16.3%)
AGENCY DISCOUNT NOTES (4.6%)
Federal Home Loan Mortgage Corp
$ 19,000 5.58%, 7/11/97................................. $ 18,971
15,000 5.99%, 4/08/98................................. 14,973
Federal National Mortgage Association
18,910 5.40%, 7/10/97................................. 18,885
5,920 5.39%, 7/24/97................................. 5,900
-----------
58,729
-----------
AGENCY FLOATING RATE NOTES (11.7%)
25,500 FCC National Bank 5.51%, 7/07/97................. 25,500
Federal National Mortgage Association
65,000 5.36%, 9/02/97................................. 65,000
13,000 5.38%, 7/26/99................................. 12,971
46,000 Student Loan Marketing Association 5.37%,
10/30/97....................................... 46,025
-----------
149,496
-----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost
$208,225)................................................... 208,225
-----------
COMMERCIAL PAPER (49.5%)
AUTOMOTIVE (2.7%)
15,000 Daimler Benz 5.41%, 7/21/97...................... 14,956
20,000 Daimler Benz 5.54%, 8/04/97...................... 19,897
-----------
34,853
-----------
CHEMICALS (3.3%)
42,000 Monsanto Company 5.69%, 7/09/97.................. 41,948
-----------
CONSUMER STAPLES (2.3%)
30,000 Colgate Palmolive 5.68%, 8/12/97................. 29,804
-----------
FINANCE (41.2%)
50,000 AIG Funding 6.25%, 7/01/97....................... 50,000
50,000 American Express, Inc. 5.57%, 7/25/97............ 49,816
25,000 Asset Backed Capital 5.62%, 7/08/97.............. 24,973
12,000 Asset Securitization Corp. 5.71%, 7/01/97........ 12,000
25,000 Atlantic Asset 5.61%, 7/14/97.................... 24,950
25,000 Atlantic Asset 5.60%, 7/15/97.................... 24,946
12,375 Case Equipment Loan Trust 5.61%, 7/23/97......... 12,333
25,000 CIT Group Holdings 5.68%, 8/14/97................ 24,829
45,000 Ford Motor Credit Corp. 5.69%, 8/18/97........... 44,664
10,000 General Electric Capital Corp. 5.50%, 7/08/97.... 9,989
35,000 General Electric Capital Corp. 5.68%, 8/20/97.... 34,728
50,000 Greenwich Funding 5.60%, 7/15/97................. 49,891
50,000 International Lease Finance 5.66%, 8/27/97....... 49,559
17,000 John Deere Capital 5.66%, 7/03/97................ 16,995
46,000 Private Export Funding Corp. 5.68%, 8/08/97...... 45,728
50,000 UBS Finance, Inc. 6.20%, 7/01/97................. 50,000
-----------
525,401
-----------
TOTAL COMMERCIAL PAPER (Cost $632,006)...................... 632,006
-----------
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
CORPORATE FLOATING RATE NOTES (0.7%)
BANK
$ 9,000 Societe Generale Bank (Yankee) 5.65%, 1/15/98
(Cost $8,998).................................. $ 8,998
-----------
CERTIFICATES OF DEPOSIT (15.8%)
12,000 ABN-AMRO Bank, New York 5.85%, 10/24/97.......... 12,000
23,000 ABN-AMRO Bank, New York (Yankee) 6.13%,
7/14/97........................................ 23,000
12,000 ANZ Inc. 5.86%, 10/28/97......................... 12,001
30,000 Canadian Imperial Bank (Yankee) 5.47%, 8/29/97... 30,000
30,000 Deutsche Bank (Yankee) 5.42%, 8/25/97............ 30,000
20,000 Deutsche Bank (Yankee) 5.88%, 3/13/98............ 19,996
12,000 National Westminster Bank (Yankee) 5.86%,
10/02/97....................................... 12,001
32,000 Societe Generale Bank (Yankee) 6.18%, 9/08/97.... 31,999
12,000 Suntrust Banks, Inc. 5.85%, 10/22/97............. 12,000
18,000 Swiss Bank 6.25%, 4/08/98........................ 18,000
-----------
TOTAL CERTIFICATES OF DEPOSIT (Cost $200,997)................. 200,997
-----------
TOTAL MONEY MARKETS INSTRUMENTS (Cost $1,050,226)............. 1,050,226
-----------
SHORT-TERM INVESTMENTS (17.4%)
REPURCHASE AGREEMENTS (17.4%)
121,619 Goldman Sachs & Co. 5.82%, dated 6/30/97, due
7/01/97, to be repurchased at $121,639,
collateralized by U.S. Treasury Notes, 5.875%,
due 8/15/98, valued at $124,517................ 121,619
100,000 J.P. Morgan & Co. 5.90%, dated 6/30/97, due
7/01/97, to be repurchased at $100,016,
collateralized by various U.S. Government
Obligations, due 2/15/15-5/15/16, valued at
$117,868....................................... 100,000
-----------
TOTAL REPURCHASE AGREEMENTS (Cost $221,619)................... 221,619
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.7%) (Cost $1,271,845).............. 1,271,845
--------
OTHER ASSETS (0.6%)
Interest Receivable........................ $ 7,353
Other...................................... 47 7,400
----------
LIABILITIES (-0.3%)
Dividends Payable.......................... (2,517)
Investment Advisory Fees Payable........... (921)
Administrative Fees Payable................ (165)
Directors' Fees & Expenses Payable......... (60)
Custodian Fees Payable..................... (59)
Other Liabilities.......................... (248) (3,970)
---------- --------
NET ASSETS (100%)........................................ $1,275,275
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Money Market Portfolio
131
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C>
- ---------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital........................ $1,275,685
Accumulated Net Realized Loss.......... (410)
----------
NET ASSETS (100%)...................... $1,275,275
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 1,275,689,254
outstanding $0.001 par value shares
(authorized 4,000,000,000 shares).... $1.00
----------
----------
</TABLE>
- ------------------------------------------------------------
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
at June 30, 1997.
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 Commerical Paper and Agency Discount Notes
represent effective yields at June 30, 1997.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Money Market Portfolio
132
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Fixed Rate Instruments 37.4%
U.S. Government & Agency Obligations 5.4%
Variable/Floating Rate Instruments 57.3%
Other -0.1%
</TABLE>
COMPARATIVE MONTHLY AVERAGE YIELDS
- --------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
IBC MUNICIPAL MONEY MUNICIPAL MONEY MARKET
FUND COMPARABLE 30-DAY YIELDS PORTFOLIO YIELDS
<S> <C> <C>
Jan. 2.90% 2.92%
Feb. 2.87% 2.88%
Mar. 2.76% 2.70%
Apr. 3.12% 3.14%
May 3.37% 3.31%
Jun. 3.28% 3.36%
</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 June 30, 1997 were 3.67% and 3.74%, respectively. The seven day
yield and the seven day taxable equivalent effective yield for Municipal Money
Market Portfolio at June 30, 1997, assuming the Federal income tax rate of 39.6%
(maximum rate) were 6.08% and 6.19%, respectively. The seven day yields are not
necessarily indicative of future performance.
The municipal money market curve was very flat throughout much of the first half
of 1997. In general rates were much less volatile than is normally the case. The
municipal money market curve did not experience the curve steeping and
subsequent flattening that characterized the taxable money market sector. In
fact, except for a couple of dips and spikes in March and April, respectively,
rates fluctuated very little. The market's stability has been due to "crossover"
buyers which are primarily corporations that move their investments between the
taxable and tax-exempt sectors depending on relative value. Each time rates
declined due to decreased supply, the crossover buyers moved out of the
tax-exempt sector. This created a dramatic increase in supply forcing dealers to
increase rates which in turn brought the crossover buyers back into the
tax-exempt sector.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
133
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
The asset size of the Municipal Money Market Portfolio remained stable in the
first half of 1997 finishing June with assets of $712 million. Overall the asset
allocation throughout the first half of the year remained consistent with
commercial paper ranging from 30-40%, tax-exempt notes ranged from 3-6%, 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 first
half ranging from 15 to 40 days.
Gerald P. Barth
PORTFOLIO MANAGER
Abigail Jones Feder
PORTFOLIO MANAGER
July 1997
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
134
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (94.7%)
FIXED RATE INSTRUMENTS (37.4%)
NOTES (5.2%)
$ 9,800 Michigan State Municipal Bond Authority Revenue,
Series A, 4.50%, 7/03/97....................... $ 9,800
1,140 Maryland State Department Transportation, Revenue
Bonds, 5.60%, 10/01/97......................... 1,146
3,000 Palm Beach County, Florida School District,
4.50%, 9/26/97................................. 3,005
1,000 South Carolina State, General Obligation Bonds,
Series A, 5.00%, 7/01/97....................... 1,000
20,200 Texas State, 4.75%, 8/29/97, TRANS............... 20,228
2,000 York County, South Carolina, Pollution Control
Revenue Bonds, Saluda River, Series E2, 3.50%,
8/15/97........................................ 2,000
----------
37,179
----------
COMMERCIAL PAPER (32.2%)
10,000 Baltimore County, Maryland, Series 95, 3.70%,
8/05/97........................................ 10,000
2,500 Burlington, Kansas, Pollution Control Revenue
Bonds, Series 87 A, 3.80%, 7/10/97............. 2,500
City of Honolulu, Hawaii,
1,000 3.95%, 8/01/97................................. 1,000
1,000 3.75%, 8/14/97................................. 1,000
2,500 City of Lincoln, Nebraska, 3.65%, 7/23/97........ 2,500
Connecticut State, Health & Education,
10,000 3.75%, 7/17/97................................. 10,000
2,700 3.80%, 7/18/97................................. 2,700
1,200 Converse County, Wyoming, 3.70%, 8/13/97......... 1,200
2,400 Delta County, Michigan, Mead Paper, 3.75%,
7/22/97........................................ 2,400
2,525 Gainsville, Florida, Series C, 3.80%, 8/12/97.... 2,525
4,100 Gillette Campbell, Wyoming, 3.80%, 7/17/97....... 4,100
2,148 Harris County, Texas, 3.85%, 7/18/97............. 2,148
2,500 Health & Educational Facilities, Vanderbilt
University, Tennessee, Series 89A, 3.80%,
8/15/97........................................ 2,500
Houston, Texas,
8,000 3.80%, 8/11/97, Series A....................... 8,000
10,100 3.75%, 8/14/97, Series A....................... 10,100
4,000 3.70%, 7/16/97, Series B....................... 4,000
1,500 3.80%, 7/16/97, Series B....................... 1,500
Illinois Health & Educational Facilities,
2,100 3.60%, 7/09/97................................. 2,100
9,000 3.90%, 7/30/97................................. 9,000
4,750 Independence, Missouri, Water Utility Revenue,
3.75%, 7/21/97................................. 4,750
Jacksonville, Florida, Electric Authority,
3,100 3.70%, 8/13/97, Series C....................... 3,100
5,000 3.75%, 8/08/97, Series D....................... 5,000
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
Louisiana Public Facilities,
$ 3,000 3.60%, 8/11/97................................. $ 3,000
5,500 3.95%, 8/15/97, Series 90...................... 5,500
300 Louisiana State, General Obligation Bonds, 3.85%,
7/09/97........................................ 300
5,750 Louisiana State, Series 91A, 3.65%, 7/09/97...... 5,750
6,600 Massachusetts Health & Education Facilities
Authority, Harvard University, Series L, 3.50%,
9/19/97........................................ 6,600
5,000 Massachusetts Port Authority, 3.90%, 7/10/97..... 5,000
3,000 Massachusetts State Water Resource Authority,
3.75%, 9/18/97................................. 3,000
5,900 Michigan State University, 3.90%, 7/14/97........ 5,900
Montgomery County, Alabama, Industrial
Development Board, General Electric Series,
2,000 3.70%, 8/01/97................................. 2,000
6,380 3.75%, 9/18/97................................. 6,380
New York City, New York, Water Finance Authority,
5,900 3.60%, 7/15/97................................. 5,900
1,700 3.80%, 10/16/97................................ 1,700
4,200 3.65%, 9/12/97, Series 1....................... 4,200
10,000 3.65%, 9/16/97, Series 5B...................... 10,000
2,990 Omaha, Nebraska, Public Power District, 3.55%,
9/19/97........................................ 2,990
1,000 Pennsylvania Port Authority, Virginia, 3.75%,
8/08/97........................................ 1,000
4,000 Petersburg, Indiana, Indiana Power & Light,
Series 91, 3.55%, 9/19/97...................... 4,000
7,700 Platte River Authority, Colorado, 3.60%,
7/24/97........................................ 7,700
Rochester, Minnesota, Health Facilities, Mayo
Clinic,
1,000 3.80%, 7/22/97, Series B....................... 1,000
1,565 3.90%, 8/21/97, Series B....................... 1,565
6,000 3.85%, 8/21/97, Series C....................... 6,000
1,500 3.65%, 7/09/97, Series F....................... 1,500
1,500 3.80%, 8/21/97, Series 92A..................... 1,500
Salt River, Arizona,
2,800 3.65%, 8/06/97................................. 2,800
11,006 3.75%, 8/18/97................................. 11,006
6,600 Salt River, Arizona, Agricultural and Power,
District Revenue Bonds, 3.70%, 8/15/97......... 6,600
San Antonio, Texas
1,500 3.65%, 7/14/97................................. 1,500
5,100 3.75%, 8/12/97, Series A....................... 5,100
Sunshine State, Florida, Government Finance
Authority,
3,750 3.90%, 7/17/97................................. 3,750
1,000 3.65%, 8/06/97................................. 1,000
4,470 3.85%, 8/13/97................................. 4,470
2,000 3.80%, 8/12/97, Series 86...................... 2,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
135
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FIXED RATE INSTRUMENTS (CONT.)
COMMERCIAL PAPER (CONT.)
<TABLE>
<C> <S> <C>
$ 1,000 Texas State, Public Finance, Series B, 3.85%,
8/04/97........................................ $ 1,000
5,000 Wisconsin State, Series A, 3.70%, 7/11/97........ 5,000
----------
228,834
----------
TOTAL FIXED RATE INSTRUMENTS.............................. 266,013
----------
VARIABLE/FLOATING RATE INSTRUMENTS (57.3%)
DAILY VARIABLE RATE BONDS (30.7%)
1,500 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Shell Oil, 4.05%, 9/01/23....... 1,500
1,900 Birmingham, Alabama, Medical Clinic Board Revenue
Bonds, University of Alabama Hospital Services
Fund, Series 91, 4.15%, 12/01/26............... 1,900
Burke County, Georgia, Pollution Control Revenue
Bonds,
1,000 4.05%, 7/01/24................................. 1,000
3,200 4.05%, 4/01/25................................. 3,200
4,000 Chattanooga-Hamilton County, Tennessee, Hospital
Authority Revenue Bonds, Erlanger Medical
Center, 4.15%, 10/01/17........................ 4,000
Chicago, Illinois, O'Hare International Airport
Special Facilities Revenue Bonds, American
Airlines Inc.,
4,200 4.15%, 12/01/17, Series A...................... 4,200
3,750 4.15%, 12/01/17, Series B...................... 3,750
3,500 4.15%, 12/01/17, Series C...................... 3,500
4,200 4.15%, 12/01/17, Series D...................... 4,200
4,500 City of Forsyth, Montana, Pollution Control
Revenue Bonds, 5.45%, 1/01/18.................. 4,500
2,800 Delaware County, Pennsylvania, Industrial
Development Authority, Series 95, 4.15%,
12/01/09....................................... 2,800
5,100 East Baton Rouge Parish, Louisiana, Pollution
Control Revenue Bonds, Exxon Project, 4.05%,
3/01/22........................................ 5,100
3,200 Farmington, New Mexico, Pollution Control Revenue
Bonds, Series A, 4.05%, 5/01/24................ 3,200
5,200 Geisinger Authority, Pennsylvania Health System,
Series B, 4.05%, 7/01/22....................... 5,200
2,200 Gulf Coast Waste Disposal Authority, Texas,
Pollution Control Revenue Bonds, Exxon Project,
4.00%, 6/01/20................................. 2,200
4,900 Hapeville, Georgia, Industrial Development
Authority, Series 85, 4.15%, 11/01/15.......... 4,900
18,300 Harris County, Texas, Health Facilities
Development Corp., Methodist Hospital, Series
94, 4.15%, 12/01/25............................ 18,300
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 3,800 Harris County, Texas, Health Facilities
Development Corp., St. Lukes Episcopal, Series
85B, 4.15%, 2/15/16............................ $ 3,800
8,100 Harris County, Texas, Health Facilities
Development Corp., Methodist Hospital, 4.15%,
12/01/26....................................... 8,100
Harris County, Texas, Industrial Development,
Pollution Control Revenue Bonds, Exxon Project,
2,600 4.05%, 3/01/24, Series 84A..................... 2,600
2,600 4.05%, 3/01/24, Series 84B..................... 2,600
5,700 Hurley, New Mexico, Pollution Control Revenue
Bonds, Series 85, 4.10%, 12/01/15............ 5,700
900 Kansas City, Kansas, Industrial Development
Authority, Revenue Bonds, PQ Corp., 4.20%,
8/01/15........................................ 900
2,000 Lake Charles, Louisiana, Harbor & Terminal
District Port Facilities, Series 84, 4.10%,
11/01/11....................................... 2,000
Lincoln County, Wyoming, Pollution Control
Revenue Bonds, Exxon Project,
1,200 4.10%, 11/01/14, Series 84C.................... 1,200
2,500 4.10%, 11/01/14, Series 84D.................... 2,500
2,920 Louisiana Public Facilities Authority, Industrial
Development, Kenner Hotel, Series 85, 4.15%,
12/01/15....................................... 2,920
1,500 Martin County, Florida, Pollution Control Revenue
Bonds, Florida Power & Light Co., 3.90%,
9/01/24........................................ 1,500
1,700 Maricopa County, Arizona, Pollution Control
Revenue Bonds, Arizona Public Service Co.,
Series E, 5.50%, 5/01/29....................... 1,700
1,000 Marshall County, West Virginia, Pollution Control
Revenue Bonds, Mountaineer Carbon Co., 4.15%,
12/01/20....................................... 1,000
Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington
University,
2,000 4.10%, 9/01/30, Series A....................... 2,000
3,500 4.10%, 9/01/30, Series B....................... 3,500
1,100 Mobile, Alabama, Industrial Development Board,
Pollution Control Board, Alabama Power Co.,
4.05%, 6/01/15................................. 1,100
Monroe County, Georgia, Pollution Control Revenue
Bonds, Gulf Power Co.
1,850 5.45%, 9/01/24, Series 2....................... 1,850
1,000 5.45%, 7/01/25, Series 95...................... 1,000
4,100 New York City, New York, Cultural Resources,
Revenue Bonds, Series B, 4.00%, 12/01/15....... 4,100
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
136
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
DAILY VARIABLE RATE BONDS (CONT.)
<TABLE>
<C> <S> <C>
New York City, New York, General Obligation Bonds
$ 2,500 4.15%, 8/15/03, Series B, SubSeries B-2........ $ 2,500
2,300 4.15%, 8/15/04, Series B, SubSeries B3......... 2,300
400 3.90%, 8/01/98, Series C, SubSeries C4......... 400
3,400 3.90%, 8/01/22, SubSeries A4................... 3,400
2,950 3.90%, 8/01/23, SubSeries A4................... 2,950
1,500 4.15%, 8/01/15, SubSeries A5................... 1,500
1,000 5.50%, 8/01/16, Sub-Series A-10................ 1,000
5,700 New York City, New York, Municipal Water Finance
Authority, Water & Sewer Systems, Revenue
Bonds, 5.50%, 6/15/25.......................... 5,700
3,700 New York State Energy Research & Development
Authority, Pollution Control Revenue Bonds,
Niagara, 5.45%, 7/01/15........................ 3,700
2,100 New York State, Dormitory Authority Revenue
Bonds, Cornell University, Series B, 4.00%,
7/01/25........................................ 2,100
900 New York State, Electric & Gas Revenue Bonds,
Series 94D, 5.40%, 10/01/29.................... 900
2,700 Nueces River Authority, Texas, Pollution Control
Revenue Bonds, Series 85, 4.20%, 12/01/99...... 2,700
Ohio State Air Quality Development Authority
Revenue Bonds, Cincinnati Gas and Electric,
4,000 5.50%, 12/01/15, Series 85A.................... 4,000
4,100 4.00%, 9/01/30, Series 95B..................... 4,100
2,800 Parrish, Alabama, Industrial Development Board,
Pollution Control Revenue Bonds, Alabama Power
Co., 4.05%, 6/01/15............................ 2,800
2,400 Peninsula Port Authority, Virginia, Coal Revenue
Bonds, 4.10%, 7/01/16.......................... 2,400
Pennsylvania Higher Education Authority Revenue
Bonds, Carnegie Mellon University,
5,000 4.15%, 11/01/25, Series 95A.................... 5,000
3,500 4.15%, 11/01/27, Series 95B.................... 3,500
1,500 4.15%, 11/01/29, Series 95C.................... 1,500
2,600 4.15%, 11/01/30, Series 95D.................... 2,600
3,400 Pennsylvania State Higher Educational Facilities
Authority, Colleges & Universities Revenue
Bonds, 4.05%, 10/01/09......................... 3,400
6,700 Philadelphia, Pennsylvania, Childrens Hospital,
Series 96A, 4.05%, 3/01/27..................... 6,700
Platte County, Wyoming, Pollution Control Revenue
Bonds,
3,800 4.20%, 7/01/14, Series A....................... 3,800
1,000 4.20%, 7/01/14, Series B....................... 1,000
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 4,400 Port Authority of New York & New Jersey, Revenue
Bonds, 4.10%, 6/01/20.......................... $ 4,400
2,000 Port Authority of New York & New Jersey, Special
Obligation 3.95%, 8/01/24...................... 2,000
Port of Saint Helens, Oregon, Pollution Control
Revenue Bonds, Portland General Electric Co.,
2,000 4.00%, 4/01/10, Series A....................... 2,000
1,600 4.05%, 6/01/10, Series B....................... 1,600
Raleigh-Durham, North Carolina, Airport
Authority,
3,200 4.10%, 11/01/15, Series A...................... 3,200
600 4.10%, 11/01/15, Series B...................... 600
1,400 Saint Charles Parish, Louisiana, Pollution
Control Revenue Bonds, Shell Oil, Series 92B,
4.00%, 10/01/22................................ 1,400
1,600 Saint Lucie County, Florida, Pollution Control
Revenue Bonds, Florida Power & Light Co.,
3.90%, 1/01/26................................. 1,600
700 Sweetwater County, Wyoming, Pacificorp, Series
88B, 5.45%, 1/01/14............................ 700
4,300 Texas State, Water Development Board Revenue
Bonds, Series A, 4.15%, 3/01/15................ 4,300
3,000 West Side Calhoun County, Texas, Pollution
Control Revenue Bonds, 4.15%, 12/01/15......... 3,000
----------
218,270
----------
WEEKLY VARIABLE RATE BONDS (26.6%)
2,100 Alberquerque, New Mexico, Revenue Bonds, Series
91A, 4.20%, 7/01/22............................ 2,100
2,700 Allegheny County, Pennsylvania, Hospital
Development Authority, Series 95B, 4.15%,
9/01/20........................................ 2,700
2,300 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Borden, Inc., 3.80%, 12/01/09... 2,300
Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light,
1,000 4.05%, 8/01/20, Series A....................... 1,000
1,000 4.05%, 8/01/09, Series B....................... 1,000
9,200 Burke County, Georgia, Development Authority,
Oglethorpe, Series 93A, 4.15%, 1/01/16......... 9,200
2,700 California Statewide Communities, Revenue Bonds,
Series A1 3.90%, 5/15/25....................... 2,700
5,700 Charlotte, North Carolina, Airport, Series 93A,
4.15%, 7/01/16................................. 5,700
1,000 City of Baltimore, Maryland, Pollution Control
Revenue Bonds, General Motors Corp., 3.60%,
2/01/00........................................ 1,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
137
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
WEEKLY VARIABLE RATE BONDS (CONT.)
<TABLE>
<C> <S> <C>
$ 2,500 City of Columbia, Missouri, Special Revenue
Bonds, Series 88A, 4.20%, 6/01/08.............. $ 2,500
1,500 City of Columbia, Missouri, Water & Electric
Revenue Bonds, Series 85B, 4.20%, 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., 4.25%, 12/01/09........... 2,600
1,000 City of Minnetonka, Minnesota, Multifamily,
Cliffs Ridgedale, 4.20%, 9/15/25............... 1,000
1,500 City of San Antonio, Texas, Higher Education
Authority, Trinity University, 4.20%,
4/01/04........................................ 1,500
1,900 City of Seattle, Washington, Municipal Light &
Power, Revenue Bonds, 4.15%, 6/01/21........... 1,900
Clark County, Nevada, Airport Revenue Bonds,
17,700 4.15%, 7/01/12, Series 93A..................... 17,700
2,600 4.15%, 7/01/25, Series 95-A1................... 2,600
4,000 Clark County, Nevada, Industrial Development
Revenue Bond, Nevada Power Co., Series C,
4.20%, 10/01/30................................ 4,000
3,000 Clarksville, Tennessee, Public Building
Authority, Revenue Bonds, 4.15%, 12/01/00...... 3,000
55 Clear Creek County, Colorado, Revenue Bonds,
Colorado Finance Pool Program, Series 88,
4.20%, 6/01/98................................. 55
600 Colorado Student Obligation Bond Authority,
Student Loan Revenue Bonds, Series 91-C1,
4.15%, 8/01/00................................. 600
5,000 Connecticut State, Revenue Bonds, Series B,
4.00%, 5/15/14................................. 5,000
5,500 Connecticut State, Special Tax Obligation Revenue
Bonds, Series 1, 4.10%, 12/01/10............... 5,500
2,600 Cook County, Illinois, General Obligation Ltd.,
4.15%, 12/01/01................................ 2,600
1,800 Dade County, Florida, Health Facilities Authority
Revenue Bonds, Miami Childrens Hospital, 4.15%,
9/01/25........................................ 1,800
16,700 Dade County, Florida, Water & Sewer Revenue
Bonds, Series 94, 4.15%, 10/05/22.............. 16,700
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 800 First Florida Government Fin Committee, Revenue
Bonds, 4.15%, 12/01/00......................... $ 800
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, 3.00%,
6/01/16........................................ 2,000
2,500 Glynn, Georgia, Brunswick Memorial Hospital,
Series 96, 4.15%, 8/01/16...................... 2,500
Harris County, Texas, Toll Road Revenue Bonds,
900 4.05%, 8/01/15, Series 94D..................... 900
5,000 4.05%, 8/01/20, Series 94G..................... 5,000
5,000 4.05%, 8/01/20, Series 94H..................... 5,000
2,200 Huntsville, Alabama, Healthcare Facilities
Authority, Series B, 3.65%, 6/01/24............ 2,200
Illinois Development Finance Authority, Revenue
Bonds,
5,000 4.15%, 2/01/29................................. 5,000
3,500 4.15%, 6/01/31................................. 3,500
300 Illinois Development Finance Authority, A.E.
Staley Manufacturing, Series 85, 4.15%,
12/01/05....................................... 300
5,000 Illinois Development Finance Authority, Series
93A, 4.15%, 3/01/09............................ 5,000
3,000 Illinois State Toll Highway Authority, Series B,
4.15%, 1/01/10................................. 3,000
4,000 Jefferson Parish, Louisiana, Hospital Service
District No. 001 Revenue Bonds, West Jefferson
Medical Center, 4.25%, 1/01/26................. 4,000
900 Lehigh County, Pennsylvania, Allegheny Electric
Cooperative, 4.00%, 12/01/15................... 900
1,100 Louisiana Public Facilities Authority, Hospital
Revenue Bonds, Series 85, 4.15%, 12/01/00...... 1,100
2,000 Maryland Health & Higher Education Facilities,
Series A, 4.00%, 7/01/27....................... 2,000
1,000 Massachusetts Health & Education Facilities
Authority, Series G-1, 3.75%, 1/01/19.......... 1,000
2,000 Massachusetts Health & Education Facilities
Authority, Revenue Bonds, 4.00%, 2/01/16....... 2,000
2,600 Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington
University, 4.15%, 9/01/09..................... 2,600
3,000 Municipal Electric Authority, Georgia, Revenue
Bonds, Series 85C, 4.15%, 3/01/20.............. 3,000
2,900 New York State Local Government Assistance Corp.,
Series D, 4.05%, 4/01/25....................... 2,900
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
138
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
WEEKLY VARIABLE RATE BONDS (CONT.)
<TABLE>
<C> <S> <C>
$ 3,900 Nueces County, Texas, Health Facilities, Driscoll
Childrens' Foundation, 4.20%, 7/01/15.......... $ 3,900
1,500 Person County, North Carolina, Carolina Power &
Light, 4.30%, 11/01/19......................... 1,500
Pinellas County, Florida, Health Facilities,
Bayfront Medical Center,
235 4.15%, 6/01/98................................. 235
1,000 4.15%, 6/01/09................................. 1,000
300 Polk County, Iowa, Hospital Equipment &
Improvement Authority, 4.15%, 12/01/05......... 300
2,400 Port of Corpus Christi, Texas, Industrial
Development, Revenue Bonds, 4.20%, 6/01/27..... 2,400
1,500 Port of Corpus Christi, Texas, Marine Terminal,
R.J. Reynolds Metals Series, 4.00%, 9/01/14.... 1,500
600 Putnam County, Florida, Development Authority,
Seminole Electric, Series 84-H1, 4.20%,
3/15/14........................................ 600
1,000 Rapides Parish, Louisiana, Industrial Development
Revenue Bonds, Central Louisiana Electric Co.,
4.15%, 7/01/18................................. 1,000
700 Sheboygan, Wisconsin, Wisconsin Power & Light
Co., 4.00%, 8/01/14............................ 700
4,430 Texas State, General Obligation Bonds, Veterans
Housing Assistance-Fund I, 4.15%, 12/01/16..... 4,430
University of Alabama,
1,500 3.95%, 10/01/07, Series A...................... 1,500
2,000 3.95%, 10/01/07, Series B...................... 2,000
1,100 University of North Carolina, Chapel Hill Fund
Inc., Certificates of Participation, 4.10%,
10/01/09....................................... 1,100
5,000 Washington State, General Obligation Bonds,
Series VR 96B, 4.10%, 6/01/20.................. 5,000
Washington State, Public Power Supply Revenue
Bonds,
2,000 4.00%, 7/01/17, Series 93-1A3.................. 2,000
3,300 4.10%, 7/01/17, Series 1A-2.................... 3,300
----------
189,420
----------
TOTAL VARIABLE/FLOATING RATE INSTRUMENTS.................. 407,690
----------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $673,703)................ 673,703
----------
TAXABLE INSTRUMENTS (5.4%)
U.S. GOVERNMENT & AGENCY OBLIGATIONS (5.4%)
Federal Home Loan Bank Discount Notes
6,075 5.50%, 7/01/97................................. 6,075
32,745 5.40%, 7/14/97................................. 32,681
----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $38,756)............................................ 38,756
----------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED
COST
(000)
<S> <C> <C>
- ---------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%) (Cost $712,459)............... $ 712,459
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
----------
OTHER ASSETS (0.6%)
Cash....................................... $ 62
Interest Receivable........................ 4,205
Other...................................... 50 4,317
----------
LIABILITIES (-0.7%)
Payable for Investments Purchased.......... (3,500)
Dividends Payable.......................... (831)
Investment Advisory Fees Payable........... (478)
Administrative Fees Payable................ (84)
Custodian Fees Payable..................... (45)
Directors' Fees & Expenses Payable......... (32)
Other Liabilities.......................... (150) (5,120 )
---------- ----------
NET ASSETS (100%)........................................ $ 711,656
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 711,687
Accumulated Net Realized Loss.......... (31)
----------
NET ASSETS............................. $ 711,656
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 711,661,737 outstanding
$0.001 par value shares (authorized
4,000,000,000 shares)................ $1.00
----------
----------
</TABLE>
- ------------------------------------------------------------
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 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 U.S. 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 seven days or less.
Interest rates disclosed for U.S. Government & Agency Obligations represent
effective yields at June 30, 1997.
At June 30, 1997, approximately 18% of the net assets were invested in Texas
municipal securities. Economic changes affecting the state and certain of its
public bodies and municipalities may affect the ability of issuers to pay the
required principal and interest payments of the municipal securities.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
139
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
SUMMARY OF TAX-EXEMPT INSTRUMENTS BY STATE CLASSIFICATION
<TABLE>
<CAPTION>
AMORTIZED
COST PERCENT OF
STATE (000) NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Alabama................................ $ 17,880 2.5%
Arizona................................ 22,106 3.1
California............................. 5,700 0.8
Colorado............................... 8,355 1.2
Connecticut............................ 23,200 3.3
Florida................................ 49,085 6.9
Georgia................................ 26,650 3.7
Hawaii................................. 2,000 0.3
Illinois............................... 46,150 6.5
Indiana................................ 4,000 0.6
Iowa................................... 300 --
Kansas................................. 3,400 0.5
Louisiana.............................. 35,870 5.0
Maryland............................... 14,146 2.0
Massachusetts.......................... 17,600 2.5
Michigan............................... 18,100 2.5
Minnnesota............................. 12,565 1.8
Missouri............................... 16,850 2.4
Montana................................ 5,500 0.8
Nebraska............................... 5,490 0.8
Nevada................................. 24,300 3.4
New Mexico............................. 11,000 1.6
New York............................... 61,650 8.7
North Carolina......................... 12,100 1.7
Ohio................................... 10,100 1.4
Oregon................................. 3,600 0.5
Pennsylvania........................... 36,300 5.1
South Carolina......................... 3,000 0.4
Tennessee.............................. 9,500 1.3
Texas.................................. 130,406 18.3
Washington............................. 12,200 1.7
West Virginia.......................... 1,000 0.1
Wisconsin.............................. 5,700 0.8
Wyoming................................ 14,500 2.0
Virginia............................... 3,400 0.5
---------- ---
$ 673,703 94.7%
---------- ---
---------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
140
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE
COUNTRY ASIAN EMERGING EUROPEAN GLOBAL
ALLOCATION EQUITY MARKETS EQUITY EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 2,628 $ 3,070 $ 16,460 $ 5,275 $ 1,368
Interest 240 403 1,984 264 43
Less: Foreign Taxes Withheld (323) (325) (1,018) (723) (127)
----------- ---------- --------- --------- ----------
Total Income 2,545 3,148 17,426 4,816 1,284
----------- ---------- --------- --------- ----------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 607 1,373 9,855 879 355
Less: Fees Waived (208) (282) -- (134) (61)
----------- ---------- --------- --------- ----------
Investment Advisory Fees --
Net 399 1,091 9,855 745 294
Administrative Fees 167 272 1,222 176 73
Sub-Administrative Fees -- -- 79 -- --
Custodian Fees 108 245 1,965 70 24
Filing and Registration Fees 20 44 59 64 20
Insurance 4 9 26 3 2
Directors' Fees and Expenses 5 9 27 5 3
Professional Fees 20 28 55 18 20
Shareholder Reports 24 17 61 10 6
Foreign Tax Expense 7 90 288 -- --
Distribution Fees on Class B
Shares -- 8 16 4 5
Other Expenses 4 73 27 7 2
----------- ---------- --------- --------- ----------
Total Expenses 758 1,886 13,680 1,102 449
----------- ---------- --------- --------- ----------
NET INVESTMENT INCOME 1,787 1,262 3,746 3,714 835
----------- ---------- --------- --------- ----------
NET REALIZED GAIN (LOSS):
Investments Sold 11,281 (6,046) 112,333 4,663 3,028
Foreign Currency Transactions 5,910 (279) (1,448) 13 449
----------- ---------- --------- --------- ----------
Total Net Realized Gain
(Loss) 17,191 (6,325) 110,885 4,676 3,477
----------- ---------- --------- --------- ----------
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION):
Investments 6,085* 11,487** 243,615*** 23,285 9,640
Foreign Currency Translations (570) 83 (540) (42) 370
----------- ---------- --------- --------- ----------
Total Net Change in
Unrealized Appreciation
(Depreciation) 5,515 11,570 243,075 23,243 10,010
----------- ---------- --------- --------- ----------
TOTAL NET REALIZED GAIN (LOSS)
AND CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION) 22,706 5,245 353,960 27,919 13,487
----------- ---------- --------- --------- ----------
Net Increase in Net Assets
Resulting from Operations $ 24,493 $ 6,507 $ 357,706 $ 31,633 $ 14,322
----------- ---------- --------- --------- ----------
----------- ---------- --------- --------- ----------
</TABLE>
- ---------------
* Net of foreign taxes of $4,000 on unrealized appreciation.
** Net of foreign taxes of $94,000 on unrealized appreciation.
*** Net of foreign taxes of $6,023,000 on unrealized appreciation.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
141
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL INTERNATIONAL JAPANESE LATIN
GOLD EQUITY MAGNUM SMALL CAP EQUITY AMERICAN
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 236 $ 43,537 $ 2,055 $ 3,869 $ 751 $ 633
Interest 77 4,516 332 197 130 43
Less: Foreign Taxes Withheld (10) (5,624) (262) (451) (113) --
---------- -------------- ------- ------- --------- ---------
Total Income 303 42,429 2,125 3,615 768 676
---------- -------------- ------- ------- --------- ---------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 94 9,927 544 1,146 629 318
Basic Fees -- Sub Adviser 62 -- -- -- -- --
Less: Fees Waived -- Adviser (34) (177) (179) (82) (67) (45)
Less: Fees Waived -- Sub
Adviser (23) -- -- -- -- --
---------- -------------- ------- ------- --------- ---------
Investment Advisory Fees -- Net 99 9,750 365 1,064 562 273
Administrative Fees 27 1,921 116 191 127 48
Sub-Administrative Fees -- -- -- -- -- 11
Custodian Fees 9 382 82 66 19 102
Filing and Registration Fees 20 84 56 15 39 25
Insurance 1 40 1 5 5 3
Directors' Fees and Expenses 2 46 3 6 5 2
Foreign Tax Expense -- -- -- -- -- 33
Professional Fees 15 51 26 24 18 22
Shareholder Reports 19 102 25 12 8 5
Distribution Fees on Class B
Shares 2 4 31 -- 3 3
Other Expenses 7 31 3 5 81 1
---------- -------------- ------- ------- --------- ---------
Total Expenses 201 12,411 708 1,388 867 528
---------- -------------- ------- ------- --------- ---------
NET INVESTMENT INCOME (LOSS) 102 30,018 1,417 2,227 (99) 148
---------- -------------- ------- ------- --------- ---------
NET REALIZED GAIN (LOSS):
Investments Sold (3,881) 119,544 358 7,644 (9,760) 10,124
Foreign Currency Transactions (50) 13,869 3,611 (981) 14,719 (6)
---------- -------------- ------- ------- --------- ---------
Total Net Realized Gain (Loss) (3,931) 133,413 3,969 6,663 4,959 10,118
---------- -------------- ------- ------- --------- ---------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments (6,386) 202,159 17,188 8,616 34,614 10,226*
Foreign Currency Translations 7 11,366 (308) 1,500 (6,332) 1
---------- -------------- ------- ------- --------- ---------
Total Net Change in Unrealized
Appreciation (Depreciation) (6,379) 213,525 16,880 10,116 28,282 10,227
---------- -------------- ------- ------- --------- ---------
TOTAL NET REALIZED GAIN (LOSS) AND
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) (10,310) 346,938 20,849 16,779 33,241 20,345
---------- -------------- ------- ------- --------- ---------
Net Increase (Decrease) in Net
Assets Resulting from
Operations $ (10,208) $ 376,956 $ 22,266 $ 19,006 $ 33,142 $ 20,493
---------- -------------- ------- ------- --------- ---------
---------- -------------- ------- ------- --------- ---------
</TABLE>
- ---------------
* Net of foreign tax of $13,000 on unrealized appreciation.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
142
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP
AGGRESSIVE EMERGING EQUITY VALUE U.S. REAL VALUE
EQUITY GROWTH GROWTH EQUITY TECHNOLOGY ESTATE EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 546 $ 34 $ 2,153 $ 309 $ 6 $ 4,303 $ 1,611 $ 54
Interest 191 75 667 24 12 453 48 114
Less: Foreign Taxes Withheld -- -- -- -- -- (6) -- --
----------- --------- --------- --------- --------- --------- --------- ---------
Total Income 737 109 2,820 333 18 4,750 1,659 168
----------- --------- --------- --------- --------- --------- --------- ---------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 491 296 1,353 122 45 1,015 266 18
Less: Fees Waived (47) (16) (88) (49) (45) (74) (62) (18)
----------- --------- --------- --------- --------- --------- --------- ---------
Investment Advisory Fees -- Net 444 280 1,265 73 -- 941 204 --
Administrative Fees 95 48 349 25 9 197 84 8
Custodian Fees 23 11 44 5 30 40 16 8
Filing and Registration Fees 24 12 87 14 53 32 18 13
Insurance 1 2 4 1 -- 2 2 --
Directors' Fees and Expenses 3 3 7 2 1 5 3 1
Professional Fees 12 12 16 10 21 13 12 10
Shareholder Reports 7 4 24 10 19 30 30 5
Distribution Fees on Class B
Shares 13 2 7 2 2 11 2 2
Other Expenses 4 6 6 3 2 5 6 1
Expenses Reimbursed by Adviser -- -- -- -- (81) -- -- (21)
----------- --------- --------- --------- --------- --------- --------- ---------
Total Expenses 626 380 1,809 145 56 1,276 377 27
----------- --------- --------- --------- --------- --------- --------- ---------
NET INVESTMENT INCOME (LOSS) 111 (271) 1,011 188 (38) 3,474 1,282 141
----------- --------- --------- --------- --------- --------- --------- ---------
NET REALIZED GAIN (LOSS):
Investments Sold 4,753 13,145 23,636 5,230 1,358 23,896 8,888 463
Written Options -- -- -- -- 11 -- -- --
Securities Sold Short -- -- -- -- (10) -- -- --
----------- --------- --------- --------- --------- --------- --------- ---------
Total Net Realized Gain 4,753 13,145 23,636 5,230 1,359 23,896 8,888 463
----------- --------- --------- --------- --------- --------- --------- ---------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 10,286 (12,825) 32,704 (1,039) 1,324 1,309 3,470 (51)
Short Sales (416) -- -- -- -- -- -- --
----------- --------- --------- --------- --------- --------- --------- ---------
Total Net Change in Unrealized
Appreciation (Depreciation) 9,870 (12,825) 32,704 (1,039) 1,324 1,309 3,470 (51)
----------- --------- --------- --------- --------- --------- --------- ---------
TOTAL NET REALIZED GAIN AND CHANGE
IN UNREALIZED APPRECIATION
(DEPRECIATION) 14,623 320 56,340 4,191 2,683 25,205 12,358 412
----------- --------- --------- --------- --------- --------- --------- ---------
Net Increase in Net Assets
Resulting from Operations $ 14,734 $ 49 $ 57,351 $ 4,379 $ 2,645 $ 28,679 $ 13,640 $ 553
----------- --------- --------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
143
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING GLOBAL MUNICIPAL
MARKETS FIXED FIXED HIGH MUNICIPAL MONEY MONEY
DEBT INCOME INCOME YIELD BOND MARKET MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 8 $ 16 $ -- $ 174 $ -- $ -- $ --
Interest 7,868 4,390 2,813 5,413 1,220 34,416 12,149
Less: Foreign Taxes Withheld -- -- (11) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total Income 7,876 4,406 2,802 5,587 1,220 34,416 12,149
--------- --------- --------- --------- --------- --------- ---------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 777 229 199 288 85 1,864 1,022
Less: Fees Waived -- (96) (105) (18) (54) -- --
--------- --------- --------- --------- --------- --------- ---------
Investment Advisory Fees -- Net 777 133 94 270 31 1,864 1,022
Administrative Fees 123 104 81 92 40 963 543
Custodian Fees 109 13 23 12 3 68 50
Filing and Registration Fees 19 16 21 30 16 78 87
Insurance 4 3 2 2 1 34 --
Interest Expense 218 -- -- -- -- -- --
Directors' Fees and Expenses 5 4 3 3 2 37 18
Professional Fees 28 12 16 14 10 45 15
Shareholder Reports 7 6 5 6 4 -- 2
Distribution Fees on Class B
shares 3 1 1 6 -- -- --
Other Expenses 12 4 6 3 2 37 14
--------- --------- --------- --------- --------- --------- ---------
Total Expenses 1,305 296 252 438 109 3,126 1,751
--------- --------- --------- --------- --------- --------- ---------
NET INVESTMENT INCOME 6,571 4,110 2,550 5,149 1,111 31,290 10,398
--------- --------- --------- --------- --------- --------- ---------
NET REALIZED GAIN (LOSS):
Investments Sold 17,578 1,282 274 958 4 72 --
Foreign Currency Transactions (583) 375 (2,001) -- -- -- --
Securities Sold Short (392) -- -- -- -- -- --
Written Options 35 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total Net Realized Gain (Loss) 16,638 1,657 (1,727) 958 4 72 --
--------- --------- --------- --------- --------- --------- ---------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 1,210 (1,337) (3,157) 1,804 204 -- --
Foreign Currency Translations 7 (95) 174 -- -- -- --
Short Sales 355 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total Net Change in Unrealized
Appreciation (Depreciation) 1,572 (1,432) (2,983) 1,804 204 -- --
--------- --------- --------- --------- --------- --------- ---------
TOTAL NET REALIZED GAIN (LOSS) AND
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 18,210 225 (4,710) 2,762 208 72 --
--------- --------- --------- --------- --------- --------- ---------
Net Increase (Decrease) in Net
Assets Resulting from
Operations $ 24,781 $ 4,335 $ (2,160) $ 7,911 $ 1,319 $ 31,362 $ 10,398
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
144
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE
COUNTRY ALLOCATION ASIAN
EQUITY
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,787 $ 2,195 $ 1,262 $ 3,107
Net Realized Gain (Loss) 17,191 26,210 (6,325) 27,596
Change in Unrealized Appreciation
(Depreciation) 5,515 (11,503) 11,570 (23,998)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 24,493 16,902 6,507 6,705
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (11,942) -- (2,757)
In Excess of Net Investment Income -- (307) -- (5)
Net Realized Gain -- (6,994) -- (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) -- (26,964)
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:(1)
CLASS A:
Subscribed 28,922 63,687 122,307 319,487
Distributions Reinvested -- 15,163 -- 22,963
Redeemed (94,374) (63,918) (173,315) (274,658)
CLASS B+:
Subscribed 52 1,042 1,106 19,937
Distributions Reinvested -- 76 -- 728
Redeemed (653) (471) (7,377) (8,582)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital
Share Transactions (66,053) 15,579 (57,279) 79,875
- ---------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net
Assets (41,560) 13,163 (50,772) 59,616
NET ASSETS:
Beginning of Period 183,826 170,663 374,500 314,884
- ---------------------------------------------------------------------------------------------------------------------
End of Period $ 142,266 $ 183,826 $ 323,728 $ 374,500
- ---------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net
investment income included in end of
period net assets $ 1,479 $ (308) $ 1,258 $ (4)
- ---------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 2,491 5,277 6,679 15,774
Shares Issued on Distributions
Reinvested -- 1,321 -- 1,221
Shares Redeemed (7,549) (5,262) (9,448) (13,753)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A
Shares Outstanding (5,058) 1,336 (2,769) 3,242
- ---------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 5 87 60 979
Shares Issued on Distributions
Reinvested -- 7 -- 39
Shares Redeemed (58) (39) (392) (431)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B
Shares Outstanding (53) 55 (332) 587
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
145
<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> <C>
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 3,746 $ 8,495 $ 3,714 $ 2,360
Net Realized Gain 110,885 19,598 4,676 1,760
Change in Unrealized Appreciation
(Depreciation) 243,075 80,354 23,243 22,277
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 357,706 108,447 31,633 26,397
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (7,165) -- (2,463)
In Excess of Net Investment Income -- (197) -- (220)
Net Realized Gain -- -- -- (364)
CLASS B+:
Net Investment Income -- (51) -- (36)
In Excess of Net Investment Income -- (1) -- (3)
Net Realized Gain -- -- -- (6)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions -- (7,414) -- (3,092)
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 287,337 550,412 77,949 128,948
Distributions Reinvested -- 5,513 -- 2,886
Redeemed (137,485) (229,242) (47,553) (46,075)
CLASS B+:
Subscribed 6,858 18,152 2,561 3,819
Distributions Reinvested -- 43 -- 39
Redeemed (9,712) (4,283) (1,517) (1,495)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share
Transactions 146,998 340,595 31,440 88,122
- ---------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 504,704 441,628 63,073 111,427
NET ASSETS:
Beginning of Period 1,318,219 876,591 181,010 69,583
- ---------------------------------------------------------------------------------------------------------------------
End of Period $ 1,822,923 $ 1,318,219 $ 244,083 $ 181,010
- ---------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net
investment income included in end of
period net assets $ 3,548 $ (198) $ 3,491 $ (223)
- ---------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 17,500 37,330 4,543 8,473
Shares Issued on Distributions
Reinvested -- 367 -- 177
Shares Redeemed (8,340) (15,483) (2,712) (2,969)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares
Outstanding 9,160 22,214 1,831 5,681
- ---------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 412 1,254 143 254
Shares Issued on Distributions
Reinvested -- 3 -- 2
Shares Redeemed (594) (288) (87) (97)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B
Shares Outstanding (182) 969 56 159
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
146
<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>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 835 $ 1,086 $ 102 $ 153
Net Realized Gain (Loss) 3,477 7,313 (3,931) 493
Change in Unrealized Appreciation
(Depreciation) 10,010 7,828 (6,379) (4,498)
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 14,322 16,227 (10,208) (3,852)
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (1,075) (78) (135)
In Excess of Net Investment Income -- -- -- (29)
Net Realized Gain -- (5,024) -- --
In Excess of Net Realized Gain -- -- -- (1,681)
CLASS B+:
Net Investment Income -- (45) (2) (4)
In Excess of Net Investment Income -- -- -- (1)
Net Realized Gain -- (223) -- --
In Excess of Net Realized Gain -- -- -- (89)
- --------------------------------------------------------------------------------------------------------------------
Total Distributions -- (6,367) (80) (1,939)
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 7,637 15,476 14,021 52,836
Distributions Reinvested -- 5,960 66 1,522
Redeemed (5,588) (42,500) (7,829) (28,491)
CLASS B+:
Subscribed 2,763 3,900 562 2,457
Distributions Reinvested -- 268 1 38
Redeemed (2,240) (414) (414) (800)
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital
Share Transactions 2,572 (17,310) 6,407 27,562
- --------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net
Assets 16,894 (7,450) (3,881) 21,771
NET ASSETS:
Beginning of Period 84,225 91,675 29,180 7,409
- --------------------------------------------------------------------------------------------------------------------
End of Period $ 101,119 $ 84,225 $ 25,299 $ 29,180
- --------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net
investment income included in end of
period net assets $ 854 $ 19 $ (8) $ (30)
- --------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 451 974 1,632 4,551
Shares Issued on Distributions
Reinvested -- 370 8 162
Shares Redeemed (331) (2,808) (966) (2,591)
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A
Shares Outstanding 120 (1,464) 674 2,122
- --------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 161 252 69 216
Shares Issued on Distributions
Reinvested -- 17 -- 4
Shares Redeemed (135) (27) (47) (72)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares
Outstanding 26 242 22 148
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
147
<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> <C>
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM
MARCH 15,
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED 1996* TO
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 30,018 $ 32,405 $ 1,417 $ 455
Net Realized Gain 133,413 123,116 3,969 1,365
Change in Unrealized Appreciation
(Depreciation) 213,525 200,317 16,880 3,643
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 376,956 355,838 22,266 5,463
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (45,368) -- (1,037)
In Excess of Net Investment Income -- -- -- (169)
Net Realized Gain -- (101,435) -- (87)
CLASS B+:
Net Investment Income -- (97) -- (273)
In Excess of Net Investment Income -- -- -- (44)
Net Realized Gain -- (239) -- (23)
- --------------------------------------------------------------------------------------------------------------------
Total Distributions -- (147,139) -- (1,633)
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 280,618 508,163 40,308 82,326
Distributions Reinvested -- 131,405 -- 1,117
Redeemed (80,965) (181,971) (3,445) (1,247)
CLASS B+:
Subscribed 755 5,025 8,057 22,789
Distributions Reinvested -- 305 -- 311
Redeemed (3,484) (339) (4,866) (637)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share
Transactions 196,924 462,588 40,054 104,659
- --------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 573,880 671,287 62,320 108,489
NET ASSETS:
Beginning of Period 2,269,817 1,598,530 108,489 --
- --------------------------------------------------------------------------------------------------------------------
End of Period $ 2,843,697 $ 2,269,817 $ 170,809 $ 108,489
- --------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net
investment income included in end of
period net assets $ 29,745 $ (273) $ 1,204 $ (213)
- --------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 15,945 31,209 3,649 8,015
Shares Issued on Distributions
Reinvested -- 7,837 -- 106
Shares Redeemed (4,532) (10,975) (295) (117)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares
Outstanding 11,413 28,071 3,354 8,004
- --------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 43 321 723 2,211
Shares Issued on Distributions
Reinvested -- 18 -- 29
Shares Redeemed (208) (20) (441) (60)
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B
Shares Outstanding (165) 319 282 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.
- --------------------------------------------------------------------------------
148
<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>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 2,227 $ 2,830 $ (99) $ (98)
Net Realized Gain 6,663 6,819 4,959 11,861
Change in Unrealized Appreciation (Depreciation) 10,116 23,041 28,282 (17,205)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 19,006 32,690 33,142 (5,442)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (3,001) -- (11,178)
In Excess of Net Investment Income -- -- -- (8,826)
Net Realized Gain -- (5,327) -- --
CLASS B+:
Net Investment Income -- -- -- (277)
In Excess of Net Investment Income -- -- -- (218)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions -- (8,328) -- (20,499)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 24,248 40,108 68,145 154,108
Distributions Reinvested -- 7,416 -- 16,337
Redeemed (11,470) (35,812) (80,924) (112,210)
CLASS B+:
Subscribed -- -- 1,127 7,701
Distributions Reinvested -- -- -- 435
Redeemed -- -- (2,601) (4,048)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 12,778 11,712 (14,253) 62,323
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 31,784 36,074 18,889 36,382
NET ASSETS:
Beginning of Period 234,743 198,669 155,660 119,278
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 266,527 $ 234,743 $ 174,549 $ 155,660
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net investment
income/ accumulated net investment loss
included in end of period net assets $ 2,550 $ 323 $ (9,142) $ (9,043)
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,361 2,406 8,555 16,432
Shares Issued on Distributions Reinvested -- 444 -- 2,042
Shares Redeemed (669) (2,199) (10,142) (12,218)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 692 651 (1,587) 6,256
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed -- -- 138 812
Shares Issued on Distributions Reinvested -- -- -- 55
Shares Redeemed -- -- (323) (435)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding -- -- (185) 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.
- --------------------------------------------------------------------------------
149
<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>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 148 $ 313 $ 111 $ 614
Net Realized Gain 10,118 6,257 4,753 15,730
Change in Unrealized Appreciation
(Depreciation) 10,227 2,592 9,870 4
- --------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 20,493 9,162 14,734 16,348
- --------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (273) (110) (549)
In Excess of Net Realized Income -- (5) -- --
Net Realized Gain -- (4,475) -- (9,877)
CLASS B+:
Net Investment Income -- (8) (4) (62)
Net Realized Gain -- (164) -- (1,265)
- --------------------------------------------------------------------------------------------------------------
Total Distributions -- (4,925) (114) (11,753)
- --------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 41,581 18,267 75,591 40,946
Distributions Reinvested -- 4,324 97 9,531
Redeemed (15,887) (11,766) (23,634) (14,822)
CLASS B+:
Subscribed 3,338 1,308 10,458 9,581
Distributions Reinvested -- 147 4 1,315
Redeemed (2,127) (151) (6,122) (2,409)
- --------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share
Transactions 26,905 12,129 56,394 44,142
- --------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 47,398 16,366 71,014 48,737
NET ASSETS:
Beginning of Period 31,742 15,376 77,285 28,548
- --------------------------------------------------------------------------------------------------------------
End of Period $ 79,140 $ 31,742 $ 148,299 $ 77,285
- --------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net
investment income included in end
of period net assets $ 143 $ (5) $ 29 $ 32
- --------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 3,120 1,557 4,941 2,748
Shares Issued on Distributions
Reinvested -- 384 7 665
Shares Redeemed (1,161) (953) (1,531) (1,012)
- --------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares
Outstanding 1,959 988 3,417 2,401
- --------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 246 118 674 672
Shares Issued on Distributions
Reinvested -- 13 -- 92
Shares Redeemed (156) (13) (406) (153)
- --------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares
Outstanding 90 118 268 611
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
150
<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>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (271) $ (904) $ 1,011 $ 2,212
Net Realized Gain 13,145 36,369 23,636 40,528
Change in Unrealized Appreciation
(Depreciation) (12,825) (31,141) 32,704 10,734
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 49 4,324 57,351 53,474
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- -- (584) (2,164)
Net Realized Gain -- (24,810) -- (42,560)
CLASS B+:
Net Investment Income -- -- (3) (46)
Net Realized Gain -- (1,588) -- (1,031)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions -- (26,398) (587) (45,801)
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 19,762 26,575 155,730 223,237
Distributions Reinvested -- 24,750 534 41,770
Redeemed (23,970) (87,418) (64,124) (78,208)
CLASS B+:
Subscribed 253 5,462 5,993 6,515
Distributions Reinvested -- 1,540 2 993
Redeemed (3,191) (1,423) (3,843) (1,891)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital
Share Transactions (7,146) (30,514) 94,292 192,416
- ---------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net
Assets (7,097) (52,588) 151,056 200,089
NET ASSETS:
Beginning of Period 66,790 119,378 358,201 158,112
- ---------------------------------------------------------------------------------------------------------------------
End of Period $ 59,693 $ 66,790 $ 509,257 $ 358,201
- ---------------------------------------------------------------------------------------------------------------------
Undistributed net investment
income/accumulated net investment
loss included in end of period net
assets $ (274) $ (3) $ 426 $ 2
- ---------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,529 1,202 9,882 14,718
Shares Issued on Distributions
Reinvested -- 1,845 36 2,776
Shares Redeemed (1,869) (3,952) (4,009) (5,067)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A
Shares Outstanding (340) (905) 5,909 12,427
- ---------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 20 246 377 418
Shares Issued on Distributions
Reinvested -- 115 -- 66
Shares Redeemed (236) (64) (247) (116)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B
Shares Outstanding (216) 297 130 368
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
151
<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> <C>
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM
SEPTEMBER 16,
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED 1996* TO
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 188 $ 888 $ (38) $ (11)
Net Realized Gain (Loss) 5,230 6,620 1,359 (11)
Change in Unrealized Appreciation
(Depreciation) (1,039) (902) 1,324 296
- -------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 4,379 6,606 2,645 274
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (125) (851) -- --
Net Realized Gain -- (5,696) -- --
CLASS B+:
Net Investment Income (5) (34) -- --
Net Realized Gain -- (413) -- --
- -------------------------------------------------------------------------------------------------------------------------
Total Distributions (130) (6,994) -- --
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 10,442 14,319 11,969 3,375
Distributions Reinvested 116 5,982 -- --
Redeemed (11,377) (48,028) (1,644) --
CLASS B+:
Subscribed 2,951 1,899 150 1,485
Distributions Reinvested 4 376 -- --
Redeemed (828) (420) (654) (52)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital
Share Transactions 1,308 (25,872) 9,821 4,808
- -------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net
Assets 5,557 (26,260) 12,466 5,082
NET ASSETS:
Beginning of Period 25,659 51,919 5,082 --
- -------------------------------------------------------------------------------------------------------------------------
End of Period $ 31,216 $ 25,659 $ 17,548 $5,082
- -------------------------------------------------------------------------------------------------------------------------
Undistributed net investment
income/accumulated net investment
loss included in end of period net
assets $ 61 $ 3 $ (38) $ --
- -------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 926 1,157 994 336
Shares Issued on Distributions
Reinvested 10 537 -- --
Shares Redeemed (984) (3,850) (141) --
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A
Shares Outstanding (48) (2,156) 853 336
- -------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 242 153 12 144
Shares Issued on Distributions
Reinvested 1 34 -- --
Shares Redeemed (75) (32) (53) (5)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B
Shares Outstanding 168 155 (41) 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.
- --------------------------------------------------------------------------------
152
<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>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 3,474 $ 3,916 $ 1,282 $ 3,431
Net Realized Gain 23,896 17,097 8,888 15,759
Change in Unrealized Appreciation (Depreciation) 1,309 28,458 3,470 2,404
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 28,679 49,471 13,640 21,594
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (1,187) (3,888) (672) (3,374)
In Excess of Net Investment Income -- (2) -- --
Net Realized Gain -- (12,504) -- (17,256)
CLASS B+:
Net Investment Income (30) (148) (10) (58)
Net Realized Gain -- (559) -- (357)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1,217) (17,101) (682) (21,045)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 136,202 119,585 12,870 38,132
Distributions Reinvested 771 14,340 570 19,004
Redeemed (74,167) (24,190) (34,796) (99,013)
CLASS B+:
Subscribed 9,260 8,149 1,084 2,992
Distributions Reinvested 19 514 10 401
Redeemed (6,962) (1,175) (1,904) (747)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 65,123 117,223 (22,166) (39,231)
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 92,585 149,593 (9,208) (38,682)
NET ASSETS:
Beginning of Period 219,102 69,509 108,683 147,365
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 311,687 $ 219,102 $ 99,475 $ 108,683
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net investment
income included in end of period net assets $ 2,255 $ (2) $ 607 $ 7
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 9,053 9,313 899 2,649
Shares Issued on Distributions Reinvested 52 1,047 41 1,340
Shares Redeemed (4,961) (1,849) (2,351) (6,919)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 4,144 8,511 (1,411) (2,930)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 624 662 74 207
Shares Issued on Distributions Reinvested 1 37 1 28
Shares Redeemed (463) (92) (132) (51)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding 162 607 (57) 184
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B Shares on January 2, 1996.
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>
EMERGING
BALANCED MARKETS DEBT
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 141 $ 584 $ 6,571 $ 21,910
Net Realized Gain 463 1,846 16,638 57,165
Change in Unrealized Appreciation (Depreciation) (51) (1,083) 1,572 309
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 553 1,347 24,781 79,384
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (61) (477) -- (14,104)
In Excess of Net Investment Income -- (1) -- (74)
Net Realized Gain -- (1,690) -- (51,244)
CLASS B+:
Net Investment Income (12) (108) -- (381)
In Excess of Net Investment Income -- -- -- (2)
Net Realized Gain -- (548) -- (1,391)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (73) (2,824) -- (67,196)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 984 1,205 45,330 79,712
Distributions Reinvested 45 1,898 -- 51,784
Redeemed (1,965) (18,709) (59,614) (173,915)
CLASS B+:
Subscribed -- 3,269 1,399 4,437
Distributions Reinvested 12 607 -- 1,522
Redeemed (1,060) (1,246) (3,159) (1,211)
- ------------------------------------------------------------------------------------------------------------------------------
Net Decrease in Capital Share Transactions (1,984) (12,976) (16,044) (37,671)
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (1,504) (14,453) 8,737 (25,483)
NET ASSETS:
Beginning of Period 8,189 22,642 156,395 181,878
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 6,685 $ 8,189 $ 165,132 $ 156,395
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net investment
income included in end of period net assets $ 67 $ (1) $ 6,495 $ (76)
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 118 121 5,628 8,356
Shares Issued on Distributions Reinvested 5 215 -- 6,805
Shares Redeemed (233) (1,872) (7,464) (16,141)
- ------------------------------------------------------------------------------------------------------------------------------
Net Decrease in Class A Shares Outstanding (110) (1,536) (1,836) (980)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed -- 327 172 467
Shares Issued on Distributions Reinvested 1 71 -- 201
Shares Redeemed (127) (129) (404) (103)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) Class B Shares
Outstanding (126) 269 (232) 565
</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>
FIXED GLOBAL
INCOME FIXED INCOME
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 4,110 $ 10,061 $ 2,550 $ 6,007
Net Realized Gain (Loss) 1,657 3,047 (1,727) 2,742
Change in Unrealized Appreciation (Depreciation) (1,432) (6,343) (2,983) (1,546)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 4,335 6,765 (2,160) 7,203
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (3,267) (10,366) (1,395) (5,986)
In Excess of Net Investment Income -- (14) -- --
CLASS B+:
Net Investment Income (34) (73) (9) (88)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (3,301) (10,453) (1,404) (6,074)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 30,562 43,737 14,253 53,391
Distributions Reinvested 2,806 8,559 1,139 5,288
Redeemed (31,153) (83,396) (38,992) (49,742)
CLASS B+:
Subscribed 2,317 2,038 257 2,353
Distributions Reinvested 19 64 8 78
Redeemed (1,158) (646) (1,383) (902)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 3,393 (29,644) (24,718) 10,466
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 4,427 (33,332) (28,282) 11,595
NET ASSETS:
Beginning of Period 132,195 165,527 114,447 102,852
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 136,622 $ 132,195 $ 86,165 $ 114,447
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net investment
income included in end of period net assets $ 795 $ (14) $ 1,758 $ 612
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 2,904 4,156 1,295 4,846
Shares Issued on Distributions Reinvested 267 812 106 480
Shares Redeemed (2,946) (7,913) (3,599) (4,503)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 225 (2,945) (2,198) 823
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 220 194 23 213
Shares Issued on Distributions Reinvested 2 6 1 7
Shares Redeemed (110) (62) (125) (82)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding 112 138 (101) 138
</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>
HIGH MUNICIPAL
YIELD BOND
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 5,149 $ 8,522 $ 1,111 $ 1,840
Net Realized Gain (Loss) 958 687 4 (6)
Change in Unrealized Appreciation (Depreciation) 1,804 3,436 204 (686)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 7,911 12,645 1,319 1,148
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (3,891) (8,340) (898) (1,821)
In Excess of Net Investment Income -- (4) -- (16)
Net Realized Gain -- -- -- --
CLASS B+:
Net Investment Income (157) (333) -- (4)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (4,048) (8,677) (898) (1,841)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 42,457 48,672 22,597 18,758
Distributions Reinvested 3,074 6,490 873 1,724
Redeemed (33,184) (25,529) (10,564) (25,432)
CLASS B+:
Subscribed 3,460 6,981 -- 171
Distributions Reinvested 115 244 -- 4
Redeemed (3,697) (1,743) (69) (105)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 12,225 35,115 12,837 (4,880)
- ------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 16,088 39,083 13,258 (5,573)
NET ASSETS:
Beginning of Period 101,328 62,245 40,296 45,869
- ------------------------------------------------------------------------------------------------------------------------------
End of Period $ 117,416 $ 101,328 $ 53,554 $ 40,296
- ------------------------------------------------------------------------------------------------------------------------------
Undistributed (Overdistributed) net investment
income included in end of period net assets $ 1,097 $ (4) $ 197 $ (16)
- ------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 3,832 4,604 2,215 1,830
Shares Issued on Distributions Reinvested 279 610 86 169
Shares Redeemed (3,018) (2,400) (1,032) (2,496)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 1,093 2,814 1,269 (497)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 312 662 -- 17
Shares Issued on Distributions Reinvested 10 23 -- --
Shares Redeemed (335) (165) (7) (10)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding (13) 520 (7) 7
</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>
MONEY MUNICIPAL
MARKET MONEY MARKET
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 31,290 $ 54,883 $ 10,398 $ 19,261
Net Realized Gain (Loss) 72 (469) -- (22)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 31,362 54,414 10,398 19,239
- ----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income (31,290) (54,883) (10,398) (19,261)
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 6,381,357 13,167,615 2,668,803 5,869,663
Distributions Reinvested 28,800 51,181 10,449 18,242
Redeemed (6,419,587) (12,770,387) (2,689,006) (5,617,992)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions (9,430) 448,409 (9,754) 269,913
- ----------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (9,358) 447,940 (9,754) 269,891
NET ASSETS:
Beginning of Period 1,284,633 836,693 721,410 451,519
- ----------------------------------------------------------------------------------------------------------------------
End of Period $ 1,275,275 $ 1,284,633 $ 711,656 $ 721,410
- ----------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 6,381,357 13,167,615 2,668,803 5,869,663
Shares Issued on Distributions Reinvested 28,800 51,181 10,449 18,242
Shares Redeemed (6,419,587) (12,770,387) (2,689,006) (5,617,992)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding (9,430) 448,409 (9,754) 269,913
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
157
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------
SIX MONTHS TWO MONTHS PERIOD FROM
ENDED ENDED JANUARY 17,
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER 1992* TO
1997++ --------------------------------------------- 31, OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 11.44 $ 11.63 $ 11.65 $ 12.21 $ 9.59 $ 9.37 $ 10.00
------ --------- --------- --------- --------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.11 0.24 0.17 0.19 0.13 0.02 0.11
Net Realized and Unrealized
Gain (Loss) on Investments 1.44 0.88 1.00 (0.25) 2.75 0.20 (0.74)
------ --------- --------- --------- --------- ----------- -----------
Total from Investment
Operations 1.55 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 $ 12.99 $ 11.44 $ 11.63 $ 11.65 $ 12.21 $ 9.59 $ 9.37
------ --------- --------- --------- --------- ----------- -----------
------ --------- --------- --------- --------- ----------- -----------
TOTAL RETURN 13.55% 9.71% 10.57% (0.52)% 30.72% 2.35% (6.30)%
------ --------- --------- --------- --------- ----------- -----------
------ --------- --------- --------- --------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $142,237 $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% 0.80%** 0.88%**
Ratio of Net Investment Income
to Average Net Assets (1) 1.91%** 1.22% 1.26% 1.43% 1.29% 1.22%** 2.32%**
Portfolio Turnover Rate %32 65% 72% 51% 53% % 2 %62
Average Commission Rate:#
Per Share $0.0080 $0.0028 N/A N/A N/A N/A N/A
As a Percentage of Trade
Amount 0.08% 0.11% 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 $0.03 $0.05 $0.03 $0.05 $0.01 $0.03
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.07%** 1.09% 1.18% 1.00% 1.33% 1.70%** 1.58%**
Net Investment Income to
Average Net Assets 1.69%** 0.94% 0.88% 1.23% 0.76% 0.32%** 1.62%**
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997++ DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ---------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.44 $ 11.66
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.04 0.06
Net Realized and Unrealized Gain on
Investments 1.49 1.00
------ ------
Total from Investment Operations 1.53 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 $ 12.97 $ 11.44
------ ------
------ ------
TOTAL RETURN 13.37% 9.22%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 29 $ 633
Ratio of Expenses to Average Net Assets
(2) 1.05%** 1.05%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.79%** 1.09%**
Portfolio Turnover Rate 32% 65%
Average Commission Rate:
Per Share $0.0080 $0.0028
As a Percentage of Trade Amount 0.08% 0.11%
- -----------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.01 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.34%** 1.33%**
Net Investment Income to Average
Net Assets 0.52%** 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.
++ Per share amounts for the period ended June 30, 1997 are based on
average shares outstanding.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
158
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
TWO
SIX MONTHS MONTHS YEAR
ENDED ENDED ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER OCTOBER
1997 ----------------------------------------------- 31, 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 18.73 $ 19.48 $ 21.54 $ 26.20 $ 13.11 $ 13.63 $ 9.67
------ ----------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.08 0.17 0.18 0.11 0.10 0.01 0.14
Net Realized and Unrealized
Gain (Loss) on Investments 0.35 0.50 1.11 (4.15) 13.38 (0.53) 3.86
------ ----------- --------- --------- --------- --------- ---------
Total from Investment
Operations 0.43 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 $ 19.16 $ 18.73 $ 19.48 $ 21.54 $ 26.20 $ 13.11 $ 13.63
------ ----------- --------- --------- --------- --------- ---------
------ ----------- --------- --------- --------- --------- ---------
TOTAL RETURN 2.30% 3.49% 6.87% (15.81)% 105.71% (3.82)% 41.50%
------ ----------- --------- --------- --------- --------- ---------
------ ----------- --------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $318,844 $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%** 1.00%
Ratio of Net Investment Income
to Average Net Assets (1) 0.74%** 0.74% 0.97% 0.52% 0.83% 0.61%** 1.53%
Portfolio Turnover Rate %48 %69 42% 47% 18% 10% 33%
Average Commission Rate:#
Per Share $0.0111 $0.0111 N/A N/A N/A N/A N/A
As a Percentage of Trade
Amount 0.50% 0.52% 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 $0.02 $0.05 $0.03 $0.04 $0.05 $0.02 $0.06
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.25%** 1.25% 1.18% 1.20% 1.38% 2.02%** 1.63%
Net Investment Income
(Loss) to Average Net
Assets 0.58%** 0.54% 0.79% 0.32% 0.45% (0.41)%** 0.90%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ---------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.74 $ 19.55
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.04 0.11
Net Realized and Unrealized Gain on
Investments 0.37 0.46
------ ------
Total from Investment Operations 0.41 0.57
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.11)
Net Realized Gain -- (1.27)
------ ------
Total Distributions -- (1.38)
------ ------
NET ASSET VALUE, END OF PERIOD $ 19.15 $ 18.74
------ ------
------ ------
TOTAL RETURN 2.19% 2.92%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $4,884 $11,002
Ratio of Expenses to Average Net Assets
(2) 1.25%** 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.41%** 0.58%**
Portfolio Turnover Rate 48% 69%
Average Commission Rate:
Per Share $0.0111 $0.0111
As a Percentage of Trade Amount 0.50% 0.52%
- -----------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.02 $0.04
Ratios before expense limitation:
Expenses to Average Net Assets 1.51%** 1.52%**
Net Investment Income to Average
Net Assets 0.24%** 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.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
159
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------------
PERIOD FROM
SIX MONTHS TWO MONTHS SEPTEMBER
ENDED ENDED 25,
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER 1992* TO
1997 ------------------------------------------------- 31, OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 14.66 $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11 $ 10.00
------ ----------- --------- ---------- ---------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (Loss)
(1) 0.04 0.09 0.08 (0.04) (0.01) -- --
Net Realized and Unrealized
Gain (Loss) on Investments 3.74 1.51 (2.05) (1.69) 8.79 0.11 0.11
------ ----------- --------- ---------- ---------- ----------- -----------
Total from Investment
Operations 3.78 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 $ 18.44 $ 14.66 $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11
------ ----------- --------- ---------- ---------- ----------- -----------
------ ----------- --------- ---------- ---------- ----------- -----------
TOTAL RETURN 25.78% 12.19% (12.77)% (9.63)% 85.91% 1.09% 1.10%
------ ----------- --------- ---------- ---------- ----------- -----------
------ ----------- --------- ---------- ---------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $1,808,434 $1,304,006 $876,591 $929,638 $735,352 $74,219 $28,806
Ratio of Expenses to Average
Net Assets (1) 1.69%** 1.74% 1.72% 1.75% 1.75% 1.75%** 1.75%**
Ratio of Net Investment Income
(Loss) to Average Net Assets
(1) 0.48%** 0.69% 0.60% (0.26)% (0.06)% (0.33)%** (0.53)%**
Portfolio Turnover Rate %40 55% 54% 32% 52% % 2 % 0
Average Commission Rate:#
Per Share $0.0013 $0.0006 N/A N/A N/A N/A N/A
As a Percentage of Trade
Amount 0.39% 0.42% 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 N/A $0.01 $0.00 $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets N/A 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 N/A (0.10)% (1.06)%** (3.60)%**
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.66 $ 13.25
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.01 0.04
Net Realized and Unrealized Gain on
Investments 3.75 1.42
------ ------
Total from Investment Operations 3.76 1.46
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.05)
------ ------
Total Distributions -- (0.05)
------ ------
NET ASSET VALUE, END OF PERIOD $ 18.42 $ 14.66
------ ------
------ ------
TOTAL RETURN 25.65% 11.04%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $14,489 $14,213
Ratio of Expenses to Average Net Assets 1.94%** 1.99%**
Ratio of Net Investment Income to
Average Net Assets 0.16%** 0.33%**
Portfolio Turnover Rate 40% 55%
Average Commission Rate:
Per Share $0.0013 $0.0006
As a Percentage of Trade Amount 0.39% 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.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
160
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------
PERIOD FROM
SIX MONTHS APRIL 2,
ENDED YEAR ENDED DECEMBER 31, 1993* TO
JUNE 30, 1997 --------------------------------------------- DECEMBER 31,
(UNAUDITED) 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.70 $ 13.92 $ 13.94 $ 12.91 $ 10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.30 0.24 0.14 0.08 0.08
Net Realized and Unrealized
Gain on Investments 2.18 2.85 1.37 1.29 2.83
------ ------ ------ ------ ------
Total from Investment
Operations 2.48 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 $ 19.18 $ 16.70 $ 13.92 $ 13.94 $ 12.91
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN 14.85% 22.29% 11.85% 10.88% 29.10%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $239,958 $178,356 $69,583 $27,634 $12,681
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) 3.38%** 1.83% 1.37% 0.87% 1.23%**
Portfolio Turnover Rate 14% 24% 13% 79% 15%
Average Commission Rate:#
Per Share $0.0201 $0.0212 N/A N/A N/A
As a Percentage of Trade
Amount 0.18% 0.23% N/A N/A N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.02 $0.03 $0.06 $0.09
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.12%** 1.16% 1.25% 1.62% 2.43%**
Net Investment Income
(Loss) to Average Net
Assets 3.26%** 1.67% 1.12% 0.25% (0.21)%**
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------
PERIOD FROM
SIX MONTHS JANUARY 2,
ENDED 1996*** TO
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.67 $ 14.05
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.24 0.18
Net Realized and Unrealized Gain on
Investments 2.23 2.73
------ ------
Total from Investment Operations 2.47 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 $ 19.14 $ 16.67
------ ------
------ ------
TOTAL RETURN 14.82% 20.76%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 4,125 $ 2,654
Ratio of Expenses to Average Net Assets
(2) 1.25%** 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 3.28%** 1.67%**
Portfolio Turnover Rate 14% 24%
Average Commission Rate:
Per Share $0.0201 $0.0212
As a Percentage of Trade Amount 0.18% 0.23%
- -----------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.37%** 1.40%**
Net Investment Income to Average
Net Assets 3.16%** 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.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
161
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------
SIX PERIOD FROM
MONTHS TWO MONTHS JULY 15,
ENDED ENDED 1992*
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER TO OCTOBER
1997 ----------------------------------------- 31, 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.24 $ 14.31 $ 13.40 $ 13.87 $ 9.75 $ 9.35 $ 10.00
-------- -------- -------- -------- -------- ---------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.16 0.23 0.18 0.08 0.08 0.01 0.02
Net Realized and Unrealized
Gain (Loss) on Investments 2.57 3.02 2.26 0.79 4.18 0.39 (0.67)
-------- -------- -------- -------- -------- ---------- -----------
Total from Investment
Operations 2.73 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 $ 18.97 $ 16.24 $ 14.31 $ 13.40 $ 13.87 $ 9.75 $ 9.35
-------- -------- -------- -------- -------- ---------- -----------
-------- -------- -------- -------- -------- ---------- -----------
TOTAL RETURN 16.81% 22.83% 18.66% 6.95% 44.24% 4.28% (6.50)%
-------- -------- -------- -------- -------- ---------- -----------
-------- -------- -------- -------- -------- ---------- -----------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $96,056 $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%** 1.00%**
Ratio of Net Investment Income
to Average Net Assets (1) 1.89%** 1.38% 1.17% 0.87% 0.84% 0.69%** 1.00%**
Portfolio Turnover Rate 14% 26% 28% 12% 42% 5% 10%
Average Commission Rate:#
Per Share $0.0298 $0.0299 N/A N/A N/A N/A N/A
As a Percentage of Trade
Amount 0.27% 0.25% 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 $0.03 $0.02 $0.02 $0.01 $0.02 $0.08
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.14%** 1.15% 1.13% 1.24% 1.66% 2.49%** 5.22%**
Net Investment Income
(Loss) to Average Net
Assets 1.75%** 1.23% 1.04% 0.63% 0.18% (0.80)%** (3.22)%**
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
PERIOD FROM
SIX MONTHS JANUARY 2,
ENDED JUNE 1996*** TO
30, 1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.21 $ 14.36
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.12 0.13
Net Realized and Unrealized
Gain on Investments 2.57 3.02
------ ------
Total from Investment
Operations 2.69 3.15
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.21)
Net Realized Gain -- (1.09)
------ ------
Total Distributions -- (1.30)
------ ------
NET ASSET VALUE, END OF PERIOD $ 18.90 $ 16.21
------ ------
------ ------
TOTAL RETURN 16.60% 22.04%
------ ------
------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 5,063 $ 3,928
Ratio of Expenses to Average
Net Assets (2) 1.25%** 1.25%**
Ratio of Net Investment Income
to Average Net Assets (2) 1.67%** 1.29%**
Portfolio Turnover Rate 14% 26%
Average Commission Rate:
Per Share $0.0298 $0.0299
As a Percentage of Trade
Amount 0.27% 0.25%
- -----------------
(2) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.38%** 1.39%**
Net Investment Income to
Average Net Assets 1.54%** 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 portfolio trades, on
which commissions were charged, during the period.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
162
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
PERIOD FROM
SIX MONTHS FEBRUARY 1,
ENDED JUNE YEAR ENDED DECEMBER 31, 1994*
30, 1997 ----------------------------- TO DECEMBER 31,
(UNAUDITED) 1996 1995 1994
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.30 $ 8.55 $ 9.13 $ 10.00
------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (Loss)
(1) 0.03 0.05 (0.07) 0.03
Net Realized and Unrealized
Gain (Loss) on
Investments++ (2.71) 1.41 1.22 (0.88)
------ ------ ------ ------
Total from Investment
Operations (2.68) 1.46 1.15 (0.85)
------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.02) (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 (0.02) (0.71) (1.73) (0.02)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 6.60 $ 9.30 $ 8.55 $ 9.13
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN (28.86)% 16.94% 13.21% (8.49)%
------ ------ ------ ------
------ ------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $24,180 $27,810 $7,409 $30,243
Ratio of Expenses to Average
Net Assets (1) 1.25%** 1.25% 1.25% 1.25%**
Ratio of Net Investment Income
(Loss) to Average Net Assets
(1) 0.66%** 0.57% (0.31)% 0.41%**
Portfolio Turnover Rate 11% 94% 47% 56%
Average Commission Rate:#
Per Share $0.0120 $0.0246 N/A N/A
As a Percentage of Trade
Amount 0.45% 0.47% N/A N/A
- -----------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.02 $0.04 $0.11 $0.04
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.64%** 1.73% 1.76% 1.72%**
Net Investment Income
(Loss) to Average Net
Assets 0.29%** 0.10% (0.82)% (0.06)%**
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------------------------
PERIOD FROM
SIX MONTHS JANUARY 2,
ENDED JUNE 1996*** TO
30, 1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ---------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.28 $ 8.81
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.02 0.03
Net Realized and Unrealized
Gain (Loss) on
Investments++ (2.68) 1.14
------ ------
Total from Investment
Operations (2.66) 1.17
------ ------
DISTRIBUTIONS
Net Investment Income (0.02) (0.04)
In Excess of Net Investment
Income -- (0.01)
Net Realized Gain -- (0.65)
------ ------
Total Distributions (0.02) (0.70)
------ ------
NET ASSET VALUE, END OF PERIOD $ 6.60 $ 9.28
------ ------
------ ------
TOTAL RETURN (28.75)% 13.21%
------ ------
------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 1,119 $ 1,370
Ratio of Expenses to Average
Net Assets (2) 1.50%** 1.50%**
Ratio of Net Investment Income
to Average Net Assets (2) 0.43%** 0.30%**
Portfolio Turnover Rate 11% 94%
Average Commission Rate:
Per Share $0.0120 $0.0246
As a Percentage of Trade
Amount 0.45% 0.47%
- -----------------
(2) Effect of voluntary expense limitation
during the period:
Per share benefit to net
investment income $0.02 $0.04
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.90%** 1.94%**
Net Investment Income
(Loss) to Average Net
Assets 0.06%** (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.
++ 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.
- --------------------------------------------------------------------------------
163
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED TWO MONTHS
JUNE 30, YEAR ENDED DECEMBER 31, ENDED YEAR ENDED
1997 --------------------------------------------------- DECEMBER 31, OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.95 $ 15.15 $ 15.34 $ 14.09 $ 9.98 $ 9.83 $ 10.52
----------- ----------- ----------- ----------- --------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1) 0.21 0.25 0.16 0.16 0.15 0.01 0.12
Net Realized and
Unrealized Gain
(Loss) on Investments 2.43 2.71 1.55 1.54 4.36 0.14 (0.59)
----------- ----------- ----------- ----------- --------- ------ ------
Total from Investment
Operations 2.64 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 $ 19.59 $ 16.95 $ 15.15 $ 15.34 $ 14.09 $ 9.98 $ 9.83
----------- ----------- ----------- ----------- --------- ------ ------
----------- ----------- ----------- ----------- --------- ------ ------
TOTAL RETURN 15.58% 19.64% 11.77% 12.39% 46.50% 1.53% (4.56)%
----------- ----------- ----------- ----------- --------- ------ ------
----------- ----------- ----------- ----------- --------- ------ ------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands) $2,840,689 $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%** 1.00%
Ratio of Net Investment
Income to Average Net
Assets (1) 2.47%** 1.64% 1.38% 1.12% 1.25% 0.68%** 1.46%
Portfolio Turnover Rate 16% 18% 27% 16% 23% 5% 12%
Average Commission Rate:#
Per Share $0.0186 $0.0238 N/A N/A N/A N/A N/A
As a Percentage of
Trade Amount 0.21% 0.26% 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+ $0.00 $0.003 $0.004 $0.01 $0.00 $0.00
Ratios before expense
limitation:
Expenses to Average
Net Assets 1.03%** 1.02% 1.03% 1.03% 1.06% 1.14%** 1.02%
Net Investment
Income to Average
Net Assets 2.45%** 1.61% 1.35% 1.09% 1.19% 0.54%** 1.44%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.93 $ 15.24
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.17 0.23
Net Realized and Unrealized Gain
on Investments 2.44 2.59
------ ------
Total from Investment
Operations 2.61 2.82
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.33)
Net Realized Gain -- (0.80)
------ ------
Total Distributions -- (1.13)
------ ------
NET ASSET VALUE, END OF PERIOD $ 19.54 $ 16.93
------ ------
------ ------
TOTAL RETURN 15.42% 18.58%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 3,008 $ 5,393
Ratio of Expenses to Average Net
Assets (2) 1.25%** 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 2.09%** 1.68%**
Portfolio Turnover Rate 16% 18%
Average Commission Rate:
Per Share $0.0186 $0.0238
As a Percentage of Trade Amount 0.21% 0.26%
- -----------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.00+ $0.00
Ratios before expense
limitation:
Expenses to Average Net Assets 1.26%** 1.27%**
Net Investment Income to
Average Net Assets 2.08%** 1.66%**
</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.
- --------------------------------------------------------------------------------
164
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------
SIX MONTHS
ENDED
JUNE 30, PERIOD FROM
1997 MARCH 15, 1996* TO
(UNAUDITED) DECEMBER 31, 1996
<S> <C> <C>
- ----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.66 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.11 0.06
Net Realized and Unrealized Gain
on Investments 1.60 0.76
------ ------
Total from Investment
Operations 1.71 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 $ 12.37 $ 10.66
------ ------
------ ------
TOTAL RETURN 16.04% 8.25%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $140,458 $85,316
Ratio of Expenses to Average Net
Assets (1) 1.00%** 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 2.15%** 0.99%**
Portfolio Turnover Rate 16% 18%
Average Commission Rate:
Per Share $0.0214 $0.0211
As a Percentage of Trade Amount 0.29% 0.25%
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.03
Ratios before expense
limitation:
Expenses to Average Net Assets 1.26%** 1.54%**
Net Investment Income to
Average Net Assets 1.88%** 0.44%**
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------
SIX MONTHS
ENDED
JUNE 30, PERIOD FROM
1997 MARCH 15, 1996* TO
(UNAUDITED) DECEMBER 31, 1996
<S> <C> <C>
- ----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.63 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.10 0.01
Net Realized and Unrealized Gain
on Investments 1.60 0.78
------ ------
Total from Investment
Operations 1.70 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 $ 12.33 $ 10.63
------ ------
------ ------
TOTAL RETURN 15.99% 7.90%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $30,351 $23,173
Ratio of Expenses to Average Net
Assets (2) 1.25%** 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.82%** 0.60%**
Portfolio Turnover Rate 16% 18%
Average Commission Rate:
Per Share $0.0214 $0.0211
As a Percentage of Trade Amount 0.29% 0.25%
- -----------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net Assets 1.51%** 1.69%**
Net Investment Income to
Average Net Assets 1.56%** 0.15%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
165
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS PERIOD FROM
ENDED DECEMBER 15,
JUNE 30, YEAR ENDED DECEMBER 31, 1992* TO
1997 ------------------------------------------------------------- DECEMBER 31,
(UNAUDITED) 1996 1995 1994 1993++ 1992
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.83 $ 14.94 $ 15.15 $ 14.64 $ 10.09 $ 10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.15 0.21 0.24 0.14 0.09 0.01
Net Realized and Unrealized
Gain on Investments (2) 1.22 2.29 0.15 0.62 4.48 0.08
------ ------ ------ ------ ------ ------
Total from Investment
Operations 1.37 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 $ 18.20 $ 16.83 $ 14.94 $ 15.15 $ 14.64 $ 10.09
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN 8.14% 16.82% 2.60% 5.25% 45.34% 0.90%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $266,527 $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% 1.15%**
Ratio of Net Investment Income
to Average Net Assets (1) 1.84%** 1.29% 1.72% 1.18% 0.66% 1.37%**
Portfolio Turnover Rate 16% 35% 24% 8% 14% 0%
Average Commission Rate:#
Per Share $0.0127 $0.0159 N/A N/A N/A N/A
As a Percentage of Trade
Amount 0.33% 0.30% 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 $0.10 $0.16
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.22%** 1.23% 1.24% 1.29% 1.86% 21.67%**
Net Investment Income
(Loss) to Average Net
Assets 1.78%** 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.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
166
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED APRIL 25,
JUNE 30, YEAR ENDED DECEMBER 31, 1994* TO
1997++ -------------------------------- DECEMBER 31,
(UNAUDITED) 1996++ 1995 1994
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 7.96 $ 9.27 $ 9.83 $ 10.00
------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (Loss)
(1) -- -- 0.04 (0.01)
Net Realized and Unrealized
Gain (Loss) on
Investments+ 1.86 (0.13) (0.40) (0.16)
------ ------ ------ ------
Total from Investment
Operations 1.86 (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 $ 9.82 $ 7.96 $ 9.27 $ 9.83
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN 23.37% (1.40)% (3.64)% (1.70)%
------ ------ ------ ------
------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $172,141 $152,229 $119,278 $50,332
Ratio of Expenses to Average
Net Assets (1) 1.00%** 1.00% 1.00% 1.00%**
Ratio of Net Investment Income
(Loss) to Average Net Assets
(1) (0.12)%** (0.04)% 0.15% (0.10)%**
Portfolio Turnover Rate 28% 38% 52% 1%
Average Commission Rate:#
Per Share $0.0418 $0.0561 N/A N/A
As a Percentage of Trade
Amount 0.40% 0.43% N/A N/A
- -----------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.00 $0.01 $0.06 $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.18%** 1.07% 1.20% 1.27%**
Net Investment Loss to
Average Net Assets (0.20)%** (0.11)% (0.05)% (0.37)%**
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997++ DECEMBER 31,
(UNAUDITED) 1996++
<S> <C> <C>
- -----------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 7.94 $ 9.25
----------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (2) (0.02) (0.02)
Net Realized and Unrealized
Gain (Loss) on
Investments+ 1.85 (0.14)
----------- ------
Total from Investment
Operations 1.83 (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 $ 9.77 $ 7.94
----------- ------
----------- ------
TOTAL RETURN 23.05% (1.67)%
----------- ------
----------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $2,408 $3,431
Ratio of Expenses to Average
Net Assets (2) 1.25%** 1.25%**
Ratio of Net Investment Loss
to Average Net Assets (2) (0.50)%** (0.26)%**
Portfolio Turnover Rate 28% 38%
Average Commission Rate:
Per Share $0.0418 $0.0561
As a Percentage of Trade
Amount 0.40% 0.43%
- -----------------
(2) Effect of voluntary expense limitation
during the period:
Per share benefit to net
investment income $0.00 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.41%** 1.31%**
Net Investment Loss to
Average Net Assets (0.58)%** (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, 1996 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 six months ended June 30, 1997 and 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.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
167
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------
PERIOD FROM
SIX MONTHS JANUARY 18,
ENDED JUNE 30, YEAR ENDED 1995* TO
1997 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1996 1995
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.32 $ 9.06 $10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.03 0.14 0.05
Net Realized and Unrealized Gain
(Loss) on Investments 4.96 4.27 (0.92)
------ ------ ------
Total from Investment Operations 4.99 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 $ 16.31 $ 11.32 $ 9.06
------ ------ ------
------ ------ ------
Total Return 44.08% 48.77% (8.68)%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $75,766 $30,409 $15,376
Ratio of Expenses to Average Net Assets
(1) 1.70%** 1.70% 1.70%**
Ratio of Net Investment Income to
Average Net Assets (1) 0.53%** 1.21% 1.62%**
Portfolio Turnover Rate 114% 192% 137%
Average Commission Rate:#
Per Share $0.0065 $0.0004 N/A
As a Percentage of Trade Amount 0.35% 0.30% N/A
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.05 $0.09
Ratios before expense limitation:
Expenses to Average Net Assets 1.97%** 2.18% 3.13%**
Net Investment Income (Loss) to
Average Net Assets 0.37%** 0.75% (0.48)%**
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------
SIX MONTHS
ENDED JUNE 30,
1997 PERIOD FROM JANUARY 2, 1996*** TO DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.31 $ 9.44
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.02 0.09
Net Realized and Unrealized Gain on
Investments 4.95 3.90
------ ------
Total from Investment Operations 4.97 3.99
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.10)
Net Realized Gain -- (2.02)
------ ------
Total Distributions -- (2.12)
------ ------
NET ASSET VALUE, END OF PERIOD $ 16.28 $ 11.31
------ ------
------ ------
TOTAL RETURN 43.94% 42.44%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 3,374 $ 1,333
Ratio of Expenses to Average Net Assets
(2) 1.95%** 1.95%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.11%** 0.89%**
Portfolio Turnover Rate 114% 192%
Average Commission Rate:
Per Share $0.0065 $0.0004
As a Percentage of Trade Amount 0.35% 0.30%
- -----------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.02 $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 2.20%** 2.43%**
Net Investment Income (Loss) to
Average Net Assets (0.03)%** 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.
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:
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------
SIX MONTHS PERIOD FROM
ENDED MARCH 8,
JUNE 30, YEAR ENDED 1995*
1997 DECEMBER 31, TO DECEMBER 31,
(UNAUDITED) 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.43 $ 12.17 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.01 0.18 0.15
Net Realized and Unrealized Gain on
Investments 1.97 4.73 3.95
------ ------ ------
Total from Investment Operations 1.98 4.91 4.10
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.01) (0.17) (0.15)
Net Realized Gain -- (2.48) (1.78)
------ ------ ------
Total Distributions (0.01) (2.65) (1.93)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 16.40 $ 14.43 $ 12.17
------ ------ ------
------ ------ ------
TOTAL RETURN 13.76% 40.90% 41.25%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $133,897 $68,480 $28,548
Ratio of Expenses to Average Net Assets
(1) 1.00%** 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 0.20%** 1.26% 1.64%**
Portfolio Turnover Rate 126% 380% 309%
Average Commission Rate Per Share# $0.0564 $0.0484 N/A
- -----------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.00+ $0.03 $0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.07%** 1.24% 1.59%**
Net Investment Income to Average
Net Assets 0.12%** 1.02% 1.05%**
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- -------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.42 $ 12.25
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.01 0.13
Net Realized and Unrealized Gain on
Investments 1.97 4.67
------ ------
Total from Investment Operations 1.98 4.80
------ ------
DISTRIBUTIONS
Net Investment Income (0.01) (0.15)
Net Realized Gain -- (2.48)
------ ------
Total Distributions (0.01) (2.63)
------ ------
NET ASSET VALUE, END OF PERIOD $ 16.39 $ 14.42
------ ------
------ ------
TOTAL RETURN 13.71% 39.72%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $14,402 $8,805
Ratio of Expenses to Average Net Assets
(2) 1.25%** 1.25%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) (0.03)%** 0.95%**
Portfolio Turnover Rate 126% 380%
Average Commission Rate Per Share $0.0564 $0.0484
- -----------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 1.32%** 1.47%**
Net Investment Income (Loss) to
Average Net Assets (0.11)%** 0.73%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** 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.
- --------------------------------------------------------------------------------
169
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------
SIX TWO
MONTHS MONTHS YEAR
ENDED ENDED ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER OCTOBER
1997 ----------------------------------------- 31, 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 13.50 $ 21.49 $ 16.12 $ 16.22 $ 16.22 $ 14.97 $ 16.18
-------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (1) (0.06) (0.19) (0.18) (0.09) (0.11) (0.01) (0.09)
Net Realized and Unrealized Gain
(Loss) on Investments 0.16 0.89 5.55 (0.01) 0.11 1.26 (1.12)
-------- -------- -------- -------- -------- -------- --------
Total from Investment
Operations 0.10 0.70 5.37 (0.10) 0.00 1.25 (1.21)
-------- -------- -------- -------- -------- -------- --------
DISTRIBUTIONS
Net Realized Gain -- (8.69) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total Distributions -- (8.69) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 13.60 $ 13.50 $ 21.49 $ 16.12 $ 16.22 $ 16.22 $ 14.97
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
TOTAL RETURN 0.74% 3.72% 33.31% (0.62)% 0.00% 8.35% (7.48)%
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $58,596 $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%** 1.25%
Ratio of Net Investment Loss to
Average Net Assets (1) (0.90)%** (0.88)% (0.76)% (0.61)% (0.77)% (0.68)%** (0.66)%
Portfolio Turnover Rate 112% 33% 25% 24% 25% 1% 17%
Average Commission Rate Per Share# $0.0500 $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 $0.00+ $0.01 $0.003 $0.002 $0.01 $0.00 $0.01
Ratios before expense
limitation:
Expenses to Average Net Assets 1.32%** 1.30% 1.26% 1.26% 1.31% 1.36%** 1.29%
Net Investment Loss to Average
Net Assets (0.95)%** (0.92)% (0.77)% (0.62)% (0.83)% (0.79)%** (0.71)%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------
PERIOD FROM
SIX MONTHS JANUARY 2,
ENDED JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 13.45 $ 21.47
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (2) -- (0.15)
Net Realized and Unrealized Gain
on Investments 0.08 0.82
------ ------
Total From Operations 0.08 0.67
------ ------
DISTRIBUTIONS
Net Realized Gain -- (8.69)
------ ------
Total Distributions -- (8.69)
------ ------
NET ASSET VALUE, END OF PERIOD $ 13.53 $ 13.45
------ ------
------ ------
TOTAL RETURN 0.60% 3.58%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 1,097 $ 3,997
Ratio of Expenses to Average Net
Assets (2) 1.50%** 1.50%**
Ratio of Net Investment Loss to
Average Net Assets (2) (1.15)%** (1.09)%**
Portfolio Turnover Rate 112% 33%
Average Commission Rate Per Share $0.0500 $0.0507
- -----------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment loss $0.00+ $0.01
Ratios before expense
limitation:
Expenses to Average Net Assets 1.56%** 1.54%**
Net Investment Loss to Average
Net Assets (1.23)%** (1.14)%**
</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.
- --------------------------------------------------------------------------------
170
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------
SIX TWO
MONTHS MONTHS YEAR
ENDED ENDED ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER OCTOBER
1997 --------------------------------------------- 31, 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 14.94 $ 14.14 $ 12.02 $ 12.14 $ 11.88 $ 11.44 $ 10.66
--------- --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.03 0.17 0.22 0.17 0.22 0.03 0.16
Net Realized and Unrealized Gain
on Investments 2.02 4.07 4.93 0.21 0.28 0.41 0.82
--------- --------- --------- --------- --------- --------- ---------
Total from Investment
Operations 2.05 4.24 5.15 0.38 0.50 0.44 0.98
--------- --------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income (0.02) (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 (0.02) (3.44) (3.03) (0.50) (0.24) -- (0.20)
--------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 16.97 $ 14.94 $ 14.14 $ 12.02 $ 12.14 $ 11.88 $ 11.44
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN 13.74% 30.97% 45.02% 3.26% 4.33% 3.85% 9.26%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $500,808 $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%** 0.80%
Ratio of Net Investment Income to
Average Net Assets (1) 0.45%** 1.12% 1.57% 1.44% 1.59% 1.93%** 1.73%
Portfolio Turnover Rate 88% 186% 186% 146% 172% 1% 38%
Average Commission Rate Per Share# $0.0555 $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 $0.00+ $0.01 $0.01 $0.01 $0.02 $0.01 $0.02
Ratios before expense
limitation:
Expenses to Average Net Assets 0.84%** 0.88% 0.88% 0.89% 0.93% 1.11%** 1.01%
Net Investment Income to
Average Net Assets 0.41%** 1.04% 1.49% 1.35% 1.46% 1.62%** 1.52%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 14.92 $ 14.22
------ ------
Net Investment Income (2) 0.02 0.13
Net Realized and Unrealized Gain on
Investments 2.01 3.99
------ ------
Total from Investment
Operations 2.03 4.12
------ ------
DISTRIBUTIONS
Net Investment Income (0.01) (0.15)
Net Realized Gain -- (3.27)
------ ------
Total Distributions (0.01) (3.42)
------ ------
NET ASSET VALUE, END OF PERIOD $ 16.94 $ 14.92
------ ------
------ ------
TOTAL RETURN 13.62% 29.92%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $8,449 $ 5,498
Ratio of Expenses to Average Net
Assets (2) 1.05%** 1.05%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.19%** 0.91%**
Portfolio Turnover Rate 88% 186%
Average Commission Rate Per Share $0.0555 $0.0535
- -----------------
(2) Effect of voluntary expense limitation during
the period:
Per share benefit to net
investment income $0.00+ $0.01
Ratios before expense
limitation:
Expenses to Average Net Assets 1.08%** 1.12%**
Net Investment Income to
Average Net Assets 0.16%** 0.84%**
</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.
- --------------------------------------------------------------------------------
171
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------
PERIOD FROM
DECEMBER
SIX MONTHS 17,
ENDED 1992* TO
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER
1997 ----------------------------------------------------- 31,
(UNAUDITED) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.89 $ 11.91 $ 10.80 $ 11.10 $ 10.14 $ 10.00
------ ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.08 0.32 0.30 0.28 0.24 0.01
Net Realized and Unrealized
Gain (Loss) on Investments 1.68 2.36 1.82 (0.01) 0.90 0.13
------ ----------- ----------- ----------- ----------- -----------
Total from Investment
Operations 1.76 2.68 2.12 0.27 1.14 0.14
------ ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income (0.05) (0.32) (0.38) (0.27) (0.18) --
Net Realized Gain -- (3.38) (0.63) (0.30) -- --
------ ----------- ----------- ----------- ----------- -----------
Total Distributions (0.05) (3.70) (1.01) (0.57) (0.18) --
------ ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $12.60 $10.89 $11.91 $10.80 $11.10 $10.14
------ ----------- ----------- ----------- ----------- -----------
------ ----------- ----------- ----------- ----------- -----------
TOTAL RETURN 16.23% 22.99% 20.63% 2.53% 11.33% 1.40%
------ ----------- ----------- ----------- ----------- -----------
------ ----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $27,149 $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% 1.00%**
Ratio of Net Investment Income
to Average Net Assets (1) 1.32%** 2.20% 2.60% 2.67% 2.56% 1.64%**
Portfolio Turnover Rate 98% 32% 36% 22% 29% 0%
Average Commission Rate Per
Share# $0.0476 $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 $0.02 $0.04 $0.02 $0.03 $0.06 $0.13
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.34%** 1.32% 1.21% 1.26% 1.68% 23.14%**
Net Investment Income
(Loss) to Average Net
Assets 0.98%** 1.89% 2.39% 2.41% 1.88% (20.50)%**
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 30,
(UNAUDITED) 1996
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $10.88 $11.95
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.09 0.23
Net Realized and Unrealized
Gain on Investments 1.66 2.38
------ ------
Total from Investment
Operations 1.75 2.61
------ ------
DISTRIBUTIONS
Net Investment Income (0.04) (0.30)
Net Realized Gain -- (3.38)
------ ------
Total Distributions (0.04) (3.68)
------ ------
NET ASSET VALUE, END OF PERIOD $12.59 $10.88
------ ------
------ ------
TOTAL RETURN 16.17% 22.33%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $4,067 $1,689
Ratio of Expenses to Average
Net Assets (2) 1.25%** 1.24%**
Ratio of Net Investment Income
to Average Net Assets (2) 1.04%** 1.93%**
Portfolio Turnover Rate 98% 32%
Average Commission Rate Per
Share $0.0476 $0.0402
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.03 $0.05
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.57%** 1.69%**
Net Investment Income to
Average Net Assets 0.70%** 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.
- --------------------------------------------------------------------------------
172
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------
SIX MONTHS PERIOD FROM
ENDED SEPTEMBER 16,
JUNE 30, 1996* TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ----------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.71 $ 10.00
------------ -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (1) (0.03) (0.02)
Net Realized and Unrealized
Gain on Investments 2.97 0.73
------------ -------
Total from Investment
Operations 2.94 0.71
------------ -------
NET ASSET VALUE, END OF PERIOD $13.65 $10.71
------------ -------
------------ -------
TOTAL RETURN 27.45% 7.10%
------------ -------
------------ -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 16,214 $3,595
Ratio of Expenses to Average
Net Assets (1) 1.25%** 1.25%**
Ratio of Net Investment Loss
to Average Net Assets (1) (0.84)%** (0.70)%**
Portfolio Turnover Rate 324% 77%
Average Commission Rate Per
Share $0.0356 $0.0374
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment loss $ 0.09 $ 0.22
Ratios before expense
limitation:
Expenses to Average Net
Assets 3.91%** 8.51%**
Net Investment Loss to
Average Net Assets (3.51)%** (7.96)%**
- ----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------------------------
PERIOD FROM
SIX MONTHS SEPTEMBER 16,
ENDED JUNE 30, 1996* TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ---------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $10.71 $10.00
------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (2) (0.07) (0.02)
Net Realized and Unrealized
Gain on Investments 2.98 0.73
------- -------
Total from Investment
Operations 2.91 0.71
------- -------
NET ASSET VALUE, END OF PERIOD $13.62 $10.71
------- -------
TOTAL RETURN 27.17% 7.10%
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $1,334 $1,487
Ratio of Expenses to Average
Net Assets (2) 1.50%** 1.50%**
Ratio of Net Investment Loss
to Average Net Assets (2) (1.04)%** (1.00)%**
Portfolio Turnover Rate 324% 77%
Average Commission Rate Per
Share $0.0356 $0.0374
- -----------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment loss $0.26 $0.19
Ratios before expense
limitation:
Expenses to Average Net
Assets 5.31%** 9.14%**
Net Investment Loss to
Average Net Assets (4.92)%** (8.65)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
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:
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------
SIX MONTHS PERIOD FROM
ENDED FEBRUARY 24,
JUNE 30, YEAR ENDED 1995* TO
1997 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1996 1995
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.41 $ 11.42 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.19 0.37 0.26
Net Realized and Unrealized Gain on
Investments 1.46 4.02 1.84
------ ------ ------
Total from Investment Operations 1.65 4.39 2.10
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.08) (0.39) (0.24)
Net Realized Gain -- (1.01) (0.44)
------ ------ ------
Total Distributions (0.08) (1.40) (0.68)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 15.98 $ 14.41 $ 11.42
------ ------ ------
------ ------ ------
TOTAL RETURN 11.46% 39.56% 21.07%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $299,436 $210,368 $69,509
Ratio of Expenses to Average Net Assets
(1) 1.00%** 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 2.76%** 3.08% 4.04%**
Portfolio Turnover Rate 67% 171% 158%
Average Commission Rate Per Share# $0.0590 $0.0568 N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.00+ $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.06%** 1.14% 1.33%**
Net Investment Income to Average
Net Assets 2.70%** 2.93% 3.71%**
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ---------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.39 $ 11.50
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.15 0.35
Net Realized and Unrealized Gain on
Investments 1.46 3.92
------ ------
Total from Investment Operations 1.61 4.27
------ ------
DISTRIBUTIONS
Net Investment Income (0.07) (0.37)
Net Realized Gain -- (1.01)
------ ------
Total Distributions (0.07) (1.38)
------ ------
NET ASSET VALUE, END OF PERIOD $ 15.93 $ 14.39
------ ------
------ ------
TOTAL RETURN 11.20% 38.23%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $12,251 $8,734
Ratio of Expenses to Average Net Assets
(2) 1.25%** 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 2.20%** 2.91%**
Portfolio Turnover Rate 67% 171%
Average Commission Rate Per Share $0.0590 $0.0568
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.00+ $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.30%** 1.37%**
Net Investment Income to Average
Net Assets 2.15%** 2.79%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** 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 commisions were charged, during the period.
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:
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------
TWO
SIX MONTHS MONTHS YEAR
ENDED ENDED ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER OCTOBER
1997 ---------------------------------------------- 31, 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 13.89 $ 13.94 $ 11.50 $ 12.63 $ 11.31 $ 10.71 $ 10.24
------ --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.19 0.41 0.38 0.40 0.37 0.08 0.38
Net Realized and Unrealized
Gain (Loss) on Investments 1.67 2.27 3.30 (0.55) 1.31 0.52 0.48
------ --------- --------- --------- --------- --------- ---------
Total from Investment
Operations 1.86 2.68 3.68 (0.15) 1.68 0.60 0.86
------ --------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income (0.09) (0.41) (0.47) (0.40) (0.36) -- (0.39)
Net Realized Gain -- (2.32) (0.77) (0.58) -- -- --
------ --------- --------- --------- --------- --------- ---------
Total Distributions (0.09) (2.73) (1.24) (0.98) (0.36) -- (0.39)
------ --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 15.66 $ 13.89 $ 13.94 $ 11.50 $ 12.63 $ 11.31 $ 10.71
------ --------- --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- --------- ---------
TOTAL RETURN 13.49% 19.73% 33.69% (1.29)% 15.14% 5.60% 8.51%
------ --------- --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $97,500 $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%** 0.70%
Ratio of Net Investment Income
to Average Net Assets (1) 2.41%** 2.62% 3.01% 3.37% 3.23% 4.41%** 3.72%
Portfolio Turnover Rate 13% 42% 43% 33% 51% 9% 56%
Average Commission Rate Per
Share# $0.0408 $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 $0.01 $0.03 $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.82%** 0.78% 0.77% 0.80% 0.95% 1.20%** 0.84%
Net Investment Income to
Average Net Assets 2.30%** 2.55% 2.94% 3.27% 2.98% 3.91%** 3.58%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 13.89 $ 14.06
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.11 0.29
Net Realized and Unrealized
Gain on Investments 1.70 2.25
------ ------
Total from Investment
Operations 1.81 2.54
------ ------
DISTRIBUTIONS
Net Investment Income (0.08) (0.39)
Net Realized Gain -- (2.32)
------ ------
Total Distributions (0.08) (2.71)
------ ------
Net Asset Value, End of Period $ 15.62 $ 13.89
------ ------
------ ------
TOTAL RETURN 13.13% 18.57%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 1,975 $ 2,555
Ratio of Expenses to Average
Net Assets (2) 0.95%** 0.95%**
Ratio of Net Investment Income
to Average Net Assets (2) 2.14%** 2.33%**
Portfolio Turnover Rate 13% 42%
Average Commission Rate Per
Share $0.0408 $0.0434
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.06%** 1.03%**
Net Investment Income to
Average Net Assets 2.03%** 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.
- --------------------------------------------------------------------------------
175
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED TWO MONTHS
JUNE 30, YEAR ENDED DECEMBER 31, ENDED YEAR ENDED
1997 --------------------------------------------- DECEMBER 31, OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 8.19 $ 9.98 $ 8.96 $ 11.13 $ 11.31 $ 11.00 $ 10.61
------ --------- --------- --------- --------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.19 0.52 0.39 0.42 0.44 0.10 0.58
Net Realized and Unrealized
Gain (Loss) on Investments 0.46 0.54 1.62 (0.64) 0.79 0.21 0.42
------ --------- --------- --------- --------- ------ ------
Total from Investment
Operations 0.65 1.06 2.01 (0.22) 1.23 0.31 1.00
------ --------- --------- --------- --------- ------ ------
DISTRIBUTIONS
Net Investment Income (0.09) (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 (0.09) (2.85) (0.99) (1.95) (1.41) -- (0.61)
------ --------- --------- --------- --------- ------ ------
NET ASSET VALUE, END OF PERIOD $ 8.75 $ 8.19 $ 9.98 $ 8.96 $ 11.13 $ 11.31 $ 11.00
------ --------- --------- --------- --------- ------ ------
------ --------- --------- --------- --------- ------ ------
TOTAL RETURN 8.01% 10.93% 23.63% (2.32)% 12.09% 2.82% 9.57%
------ --------- --------- --------- --------- ------ ------
------ --------- --------- --------- --------- ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $5,439 $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%** 0.70%
Ratio of Net Investment Income
to Average Net Assets (1) 4.00%** 3.93% 4.10% 4.13% 3.88% 5.29%** 5.21%
Portfolio Turnover Rate 6% 22% 26% 44% 136% 4% 40%
Average Commission Rate Per
Share# $0.0439 $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 $0.05 $0.08 $0.03 $0.03 $0.04 $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.79%** 1.32% 1.02% 0.95% 1.02% 1.00%** 0.79%
Net Investment Income to
Average Net Assets 2.91%** 3.31% 3.78% 3.88% 3.56% 4.99%** 5.12%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 8.18 $ 10.02
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.07 0.34
Net Realized and Unrealized
Gain on Investments 0.55 0.65
------ ------
Total from Investment
Operations 0.62 0.99
------ ------
DISTRIBUTIONS
Net Investment Income (0.08) (0.46)
Net Realized Gain -- (2.37)
------ ------
Total Distributions (0.08) (2.83)
------ ------
NET ASSET VALUE, END OF PERIOD $ 8.72 $ 8.18
------ ------
------ ------
TOTAL RETURN 7.70% 10.24%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 1,246 $ 2,197
Ratio of Expenses to Average
Net Assets (2) 0.95%** 0.95%**
Ratio of Net Investment Income
to Average Net Assets (2) 3.74%** 3.73%**
Portfolio Turnover Rate 6% 22%
Average Commission Rate Per
Share $0.0439 $0.0397
- -----------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.05 $0.07
Ratios before expense
limitation:
Expenses to Average Net
Assets 2.01%** 1.68%**
Net Investment Income to
Average Net Assets 2.67%** 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.
- --------------------------------------------------------------------------------
176
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------
PERIOD FROM
SIX MONTHS FEBRUARY 1,
ENDED YEAR ENDED DECEMBER 31, 1994* TO
JUNE 30, 1997 ----------------------------- DECEMBER 31,
(UNAUDITED) 1996 1995 1994
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 7.54 $ 8.59 $ 8.59 $ 10.00
------ ------ ------ -------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.35 1.54 1.36 0.50
Net Realized and Unrealized
Gain (Loss) on Investments 0.95 2.79 0.91 (1.91)
------ ------ ------ -------------
Total from Investment
Operations 1.30 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 $ 8.84 $ 7.54 $ 8.59 $ 8.59
------ ------ ------ -------------
------ ------ ------ -------------
TOTAL RETURN 17.24% 50.52% 28.23% (14.10)%
------ ------ ------ -------------
------ ------ ------ -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $162,199 $152,142 $181,878 $144,949
Ratio of Expenses to Average
Net Assets 1.66%** 2.70% 1.75% 1.49%**
Ratio of Expenses to Average
Net Assets (Excluding
Dividend and Interest
Expense) 1.33%** 1.42% N/A N/A
Ratio of Net Investment Income
to Average Net Assets 8.39%** 11.66% 14.70% 9.97%**
Portfolio Turnover Rate 241% 560% 406% 273%
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------
PERIOD FROM
SIX MONTHS JANUARY 2,
ENDED 1996*** TO
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- --------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 7.53 $ 8.68
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.15 1.01
Net Realized and Unrealized
Gain on Investments 1.14 3.20
------ ------
Total from Investment
Operations 1.29 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 $ 8.82 $ 7.53
------ ------
------ ------
TOTAL RETURN 17.13% 48.52%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 2,933 $ 4,253
Ratio of Expenses to Average
Net Assets 2.06%** 2.81%**
Ratio of Expenses to Average
Net Assets (Excluding
Dividend and
Interest Expense) 1.58%** 1.65%**
Ratio of Net Investment Income
to Average Net Assets 8.37%** 11.09%**
Portfolio Turnover Rate 241% 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.
- --------------------------------------------------------------------------------
177
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
TWO
SIX MONTHS MONTHS YEAR
ENDED ENDED ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER OCTOBER
1997 --------------------------------------------- 31, 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $10.58 $10.81 $9.82 $11.05 $10.93 $10.92 $10.55
------ --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.33 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 0.33 0.47 1.78 (0.33) 0.95 0.11 1.08
------ --------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income (0.27) (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 (0.27) (0.70) (0.79) (0.90) (0.83) (0.10) (0.71)
------ --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 10.64 $ 10.58 $ 10.81 $ 9.82 $ 11.05 $ 10.93 $ 10.92
------ --------- --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- --------- ---------
TOTAL RETURN 3.13% 4.61% 18.76% (3.10)% 9.07% 1.02% 10.61%
------ --------- --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $133,959 $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%** 0.45%
Ratio of Net Investment Income
to Average Net Assets (1) 6.27%** 6.30% 6.85% 5.73% 4.97% 5.56%** 6.59%
Portfolio Turnover Rate 109% 183% 172% 388% 240% 15% 105%
- ---------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.01 $0.02 $0.01 $0.01 $0.02 $0.01 $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.60%** 0.60% 0.59% 0.58% 0.60% 0.75%** 0.59%
Net Investment Income to
Average Net Assets 6.12%** 6.15% 6.71% 5.60% 4.82% 5.26%** 6.45%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.58 $ 10.81
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.32 0.64
Net Realized and Unrealized
Gain (Loss) on Investments 0.01 (0.19)
------ ------
Total from Investment
Operations 0.33 0.45
------ ------
DISTRIBUTIONS
Net Investment Income (0.26) (0.68)
------ ------
Total Distributions (0.26) (0.68)
------ ------
NET ASSET VALUE, END OF PERIOD $ 10.65 $ 10.58
------ ------
------ ------
TOTAL RETURN 3.16% 4.35%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 2,663 $ 1,462
Ratio of Expenses to Average
Net Assets (2) 0.60%** 0.60%**
Ratio of Net Investment Income
to Average Net Assets (2) 6.10%** 6.15%**
Portfolio Turnover Rate 109% 183%
- ---------------
(2) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.74%** 0.74%**
Net Investment Income to
Average Net Assets 5.96%** 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.
- --------------------------------------------------------------------------------
178
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
TWO
SIX MONTHS MONTHS YEAR
ENDED ENDED ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER OCTOBER
1997++ --------------------------------------------- 31, 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 11.30 $ 11.22 $ 10.29 $ 11.68 $ 11.26 $ 11.41 $ 10.61
------ --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.28 0.61 0.76 0.70 0.69 0.14 0.53
Net Realized and Unrealized
Gain (Loss) on Investments (0.41) 0.08 1.15 (1.38) 0.90 (0.29) 0.55
------ --------- --------- --------- --------- --------- ---------
Total from Investment
Operations (0.13) 0.69 1.91 (0.68) 1.59 (0.15) 1.08
------ --------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income (0.16) (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 (0.16) (0.61) (0.98) (0.71) (1.17) -- (0.28)
------ --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 11.01 $ 11.30 $ 11.22 $ 10.29 $ 11.68 $ 11.26 $ 11.41
------ --------- --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- --------- ---------
TOTAL RETURN (1.07)% 6.44% 19.32% (6.08)% 15.34% (1.31)% 10.29%
------ --------- --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $85,760 $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%** 0.50%
Ratio of Net Investment Income
to Average Net Assets (1) 5.13%** 5.50% 6.79% 6.34% 5.99% 6.99%** 6.92%
Portfolio Turnover Rate 73% 258% 207% 171% 108% 9% 144%
- ---------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.01 $0.02 $0.02 $0.02 $0.02 $0.01 $0.03
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.72%** 0.72% 0.71% 0.66% 0.70% 0.90%** 0.86%
Net Investment Income to
Average Net Assets 4.92%** 5.29% 6.58% 6.18% 5.79% 6.59%** 6.56%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997++ DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 11.29 $ 11.23
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.27 0.48
Net Realized and Unrealized
Gain (Loss) on Investments (0.40) 0.18
------ ------
Total from Investment
Operations (0.13) 0.66
------ ------
DISTRIBUTIONS
Net Investment Income (0.16) (0.60)
------ ------
Total Distributions (0.16) (0.60)
------ ------
NET ASSET VALUE, END OF PERIOD $ 11.00 $ 11.29
------ ------
------ ------
TOTAL RETURN (1.12)% 6.12%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 405 $ 1,559
Ratio of Expenses to Average
Net Assets (2) 0.65%** 0.65%**
Ratio of Net Investment Income
to Average Net Assets (2) 4.94%** 5.28%**
Portfolio Turnover Rate 73% 258%
- ---------------
(2) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.01 $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.86%** 0.86%**
Net Investment Income to
Average Net Assets 4.73%** 5.08%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
++ Per share amounts for the six months ended June 30, 1997 are based on
average outstanding shares.
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:
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------------
TWO
SIX MONTHS MONTHS PERIOD FROM
ENDED ENDED SEPTEMBER 28,
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER 1992*
1997 --------------------------------------------- 31, TO OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.91 $ 10.46 $ 9.55 $ 11.16 $ 9.95 $ 9.77 $ 10.00
------ --------- --------- --------- --------- --------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.49 1.03 1.14 0.97 0.90 0.14 0.08
Net Realized and Unrealized
Gain (Loss) on Investments 0.32 0.47 0.97 (1.40) 1.21 0.19 (0.31)
------ --------- --------- --------- --------- --------- ------
Total from Investment
Operations 0.81 1.50 2.11 (0.43) 2.11 0.33 (0.23)
------ --------- --------- --------- --------- --------- ------
DISTRIBUTIONS
Net Investment Income (0.39) (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 (0.39) (1.05) (1.20) (1.18) (0.90) (0.15) --
------ --------- --------- --------- --------- --------- ------
NET ASSET VALUE, END OF PERIOD $ 11.33 $ 10.91 $ 10.46 $ 9.55 $ 11.16 $ 9.95 $ 9.77
------ --------- --------- --------- --------- --------- ------
------ --------- --------- --------- --------- --------- ------
TOTAL RETURN 7.55% 15.01% 23.35% (4.18)% 22.11% 3.41% (2.30)%
------ --------- --------- --------- --------- --------- ------
------ --------- --------- --------- --------- --------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $111,679 $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%** 0.75%**
Ratio of Net Investment Income
to Average Net Assets (1) 8.96%** 9.78% 11.09% 9.42% 8.70% 8.96%** 9.89%**
Portfolio Turnover Rate 63% 117% 90% 74% 104% 24% 9%
- -----------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.00+ $0.01 $0.01 $0.001 $0.02 $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.78%** 0.82% 0.83% 0.76% 0.96% 1.62%** 1.23%**
Net Investment Income to
Average Net Assets 8.93%** 9.71% 11.01% 9.41% 8.49% 8.09%** 9.41%**
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, 1996*** TO
1997 DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- -------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $10.90 $ 10.49
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.48 0.98
Net Realized and Unrealized
Gain on Investments 0.30 0.45
------ ------
Total from Investment
Operations 0.78 1.43
------ ------
DISTRIBUTIONS
Net Investment Income (0.37) (1.02)
------ ------
Total Distributions (0.37) (1.02)
------ ------
NET ASSET VALUE, END OF PERIOD $ 11.31 $ 10.90
------ ------
------ ------
TOTAL RETURN 7.32% 14.37%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $ 5,737 $ 5,665
Ratio of Expenses to Average
Net Assets (2) 1.00%** 1.00%**
Ratio of Net Investment Income
to Average Net Assets (2) 8.77%** 9.49%**
Portfolio Turnover Rate 63% 117%
- -----------------
(2) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.00+ $ 0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.03%** 1.05%**
Net Investment Income to
Average Net Assets 8.74%** 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.
- --------------------------------------------------------------------------------
180
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
PERIOD FROM
JANUARY 18,
SIX MONTHS ENDED YEAR ENDED 1995* TO
JUNE 30, 1997 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1996 1995
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.25 $ 10.37 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.23 0.49 0.44
Net Realized and Unrealized
Gain (Loss) on Investments 0.02 (0.12) 0.42
------ ------ ------
Total from Investment
Operations 0.25 0.37 0.86
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.19) (0.49) (0.45)
In Excess of Net Investment
Income -- -- (0.00)+
Net Realized Gain -- -- (0.04)
------ ------ ------
Total Distributions (0.19) (0.49) (0.49)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.31 $ 10.25 $ 10.37
------ ------ ------
------ ------ ------
TOTAL RETURN 2.42% 3.67% 8.80%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $53,554 $40,227 $45,869
Ratio of Expenses to Average
Net Assets (1) 0.45%** 0.45% 0.45%**
Ratio of Net Investment Income
to Average Net Assets (1) 4.60%** 4.77% 4.61%**
Portfolio Turnover Rate 13% 45% 180%
- -----------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.03 $0.03
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.68%** 0.73% 0.73%**
Net Investment Income to
Average Net Assets 4.38%** 4.50% 4.33%**
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------
PERIOD FROM
PERIOD ENDED JANUARY 2,
MARCH 19, 1996*** TO
1997++ DECEMBER 31,
(UNAUDITED) 1996
<S> <C> <C>
- -----------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.24 $ 10.37
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.08 0.44
Net Realized and Unrealized
Loss on Investments (0.06) (0.08)
------ ------
Total from Investment
Operations 0.02 0.36
------ ------
DISTRIBUTIONS
Net Investment Income (0.04) (0.49)
------ ------
Total Distributions (0.04) (0.49)
------ ------
NET ASSET VALUE, END OF PERIOD $ 10.22 $ 10.24
------ ------
------ ------
TOTAL RETURN N/A 3.55%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $0 $69
Ratio of Expenses to Average
Net Assets (2) 0.70%** 0.70%**
Ratio of Net Investment Income
to Average Net Assets (2) 4.46%** 4.56%**
Portfolio Turnover Rate N/A 45%
- -----------------
(2) Effect of voluntary expense limitation
during the period:
Per share benefit to net
investment income $0.00+ $0.03
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.87%** 0.98%**
Net Investment Income to
Average Net Assets 4.26%** 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.
++ As of March 19, 1997, there are no outstanding Class B shares for the
Municipal Bond Portfolio.
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:
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED TWO MONTHS
JUNE 30, YEAR ENDED DECEMBER 31, ENDED YEAR ENDED
1997 ----------------------------------------------- DECEMBER 31, OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------ ----------- --------- --------- --------- ------------- ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.025 0.049 0.054 0.040 0.027 0.005 0.039
------------ ----------- --------- --------- --------- ------------- ------------
DISTRIBUTIONS
Net Investment Income (0.025) (0.049) (0.054) (0.040) (0.027) (0.005) (0.039)
In Excess of Net Investment
Income -- -- -- -- 0.000+ -- --
------------ ----------- --------- --------- --------- ------------- ------------
Total Distributions (0.025) (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 $ 1.000
------------ ----------- --------- --------- --------- ------------- ------------
------------ ----------- --------- --------- --------- ------------- ------------
TOTAL RETURN 2.50% 5.03% 5.51% 3.84% 2.76% 0.50% 3.77%
------------ ----------- --------- --------- --------- ------------- ------------
------------ ----------- --------- --------- --------- ------------- ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $1,275,275 $1,284,633 $836,693 $690,503 $657,163 $599,172 $612,968
Ratio of Expenses to Average
Net Assets (1) 0.50%** 0.52% 0.51% 0.49% 0.53% 0.55%** 0.52%
Ratio of Net Investment Income
to Average Net Assets (1) 5.04%** 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 N/A $0.000+ $0.000+ N/A
Ratios before expense
limitation:
Expenses to Average Net
Assets N/A 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 N/A 2.70% 3.07%** N/A
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
+ Amount is less than $0.001 per share.
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED TWO MONTHS
JUNE 30, YEAR ENDED DECEMBER 31, ENDED YEAR ENDED
1997 --------------------------------------------- DECEMBER 31, OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------ --------- --------- --------- --------- ------------- ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.020 0.030 0.034 0.020 0.019 0.004 0.026
------------ --------- --------- --------- --------- ------------- ------------
DISTRIBUTIONS
Net Investment Income (0.020) (0.030) (0.034) (0.020) (0.019) (0.004) (0.026)
In Excess of Net Investment
Income -- -- -- -- (0.000)+ -- --
------------ --------- --------- --------- --------- ------------- ------------
Total Distributions (0.020) (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 $ 1.000
------------ --------- --------- --------- --------- ------------- ------------
------------ --------- --------- --------- --------- ------------- ------------
TOTAL RETURN 1.52% 3.02% 3.44% 2.44% 1.91% 0.37% 2.74%
------------ --------- --------- --------- --------- ------------- ------------
------------ --------- --------- --------- --------- ------------- ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $711,656 $721,410 $451,519 $359,444 $266,524 $208,866 $206,691
Ratio of Expenses to Average
Net Assets (1) 0.52%** 0.53% 0.52% 0.51% 0.54% 0.57%** 0.55%
Ratio of Net Investment Income
to Average Net Assets (1) 3.06%** 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 N/A $0.000+ $0.000+ N/A
Ratios before expense
limitation:
Expenses to Average Net
Assets N/A 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 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.
- --------------------------------------------------------------------------------
182
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
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 June 30, 1997, the Fund was comprised of 26 separate active,
diversified and non-diversified portfolios (individually referred to as a
"Portfolio", collectively as the "Portfolios"). Each Portfolio (with the
exception of the International Small Cap, Money Market and Municipal Money
Market Portfolios) offers two classes of shares -- Class A and Class B. 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. The Equity Plus Portfolio
commenced operations on July 31, 1997. 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
are 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 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
- --------------------------------------------------------------------------------
183
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
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 June 30, 1997, 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..... $7,755,453
------------
Liability for Reverse Repurchase Agreement.... 7,054,000
Weighted Average Interest Rate................ 5.625%
------------
</TABLE>
For the Emerging Markets Debt Portfolio, the average weekly balance of reverse
repurchase agreements outstanding during the six months ended June 30, 1997 was
approximately $5,964,000, at a weighted average interest rate of 5.668%.
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 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 June 30, 1997, 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. FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter into
foreign currency exchange contracts to attempt to protect securities and related
receivables and payables against changes in future foreign currency exchange
rates. A foreign currency exchange contract is an agreement between two parties
to buy or sell currency at a set price on a
- --------------------------------------------------------------------------------
184
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
future date. The market value of the contract will fluctuate with changes in
currency exchange rates. The contract is marked-to-market daily 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. A 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. A
Portfolio's investment in Participations typically results in the Portfolio
having a contractual relationship with only the Lender and not with the
borrower. The Portfolios have 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 Portfolios generally have 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 a 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, Technology and Emerging Markets Debt
Portfolios may sell securities short. A short sale is a transaction in which the
Portfolios sell securities it may or may not own, but has borrowed, in
anticipation of a decline in the market price of the securities. The Portfolios
are 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. A 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 Portfolios 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 Portfolios 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 and other financial instruments.
Premiums are received and are recorded as liabilities. The liabilities are
subsequently adjusted to reflect the
- --------------------------------------------------------------------------------
185
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
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, in exchange for the premium, foregoes 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 or other financial instruments. Each Portfolio may purchase call
options to protect against an increase in the price of the security or financial
instrument it anticipates purchasing. Each Portfolio may purchase put options on
securities which it holds or other financial instrument to protect against a
decline in the value of the security or financial instrument 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 the 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, after the interest rebate, is included in the Statement of
Operations as interest income. The value of loaned securities and related
collateral outstanding at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
VALUE OF LOANED VALUE OF
SECURITIES COLLATERAL
PORTFOLIO (000) (000)
- -------------------------------- --------------- -----------
<S> <C> <C>
Active Country Allocation....... $ 39,355 $ 41,808
Asian Equity.................... 34,808 37,586
International Equity............ 444,685 472,104
</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 approximately $253,000 during the six months ended June 30, 1997.
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
- --------------------------------------------------------------------------------
186
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
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 six months ended June 30, 1997, such transaction fees
totaled approximately $285,000.
B. ADVISER: Morgan Stanley Asset Management Inc. (the "Adviser" or "MSAM"), a
wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co., 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 0.40% 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
- --------------------------------------------------------------------------------
187
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
The Chase Manhattan Bank ("Chase"), through its affiliate Chase Global Funds
Services Company ("CGFSC"), Chase provides certain administrative services to
the Fund. For such services, MSAM pays Chase a portion of the fee MSAM receives
from the Fund. Certain employees of CGFSC are officers of 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, Dean Witter, Discover & Co., and an
affiliate of MSAM, serves as the distributor of the Fund and provides Class B
shareholders of the applicable Portfolios 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, Dean Witter, Discover & Co., 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 six months ended June 30, 1997, the following Portfolios incurred
custody fees and had amounts payable to MSTC at June 30, 1997:
<TABLE>
<CAPTION>
MSTC CUSTODY
CUSTODY FEES FEES PAYABLE TO
INCURRED MSTC
(000) (000)
--------------- -----------------
<S> <C> <C>
Active Country Allocation.... $ 104 $ 41
Asian Equity................. 243 105
Emerging Markets............. 1,960 1,089
European Equity.............. 65 33
Global Equity................ 20 8
Gold......................... 5 1
International Equity......... 377 155
International Magnum......... 77 36
International Small Cap...... 62 30
Japanese Equity.............. 17 9
Latin American............... 99 48
Emerging Markets Debt........ 60 82
Global Fixed Income.......... 16 9
</TABLE>
In addition, for the six months ended June 30, 1997, 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............ $ 1 $ 1
Asian Equity.............. 6 9
Emerging Markets.......... 7 15
European Equity........... 1 2
Global Equity............. -- 1
International Equity...... -- 12
International Small Cap... 0 2
Japanese Equity........... -- 1
Latin American............ -- 2
Emerging Markets Debt..... 20 31
Global Fixed Income....... 1 --
</TABLE>
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188
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
F. PURCHASES AND SALES: During the six months ended June 30, 1997, 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........... $ 55,467 $ 102,669
Asian Equity........................ 164,330 217,209
Emerging Markets.................... 729,016 613,359
European Equity..................... 82,570 29,934
Global Equity....................... 16,925 11,908
Gold................................ 11,508 3,020
International Equity................ 559,665 365,675
International Magnum................ 71,647 19,164
International Small Cap............. 44,285 35,698
Japanese Equity..................... 43,004 42,396
Latin American...................... 89,420 64,027
Aggressive Equity................... 201,112 146,802
Emerging Growth..................... 65,100 70,861
Equity Growth....................... 482,815 376,150
Small Cap Value Equity.............. 28,681 27,443
Technology.......................... 37,345 27,606
U.S. Real Estate.................... 216,271 160,018
Value Equity........................ 13,989 35,454
Balanced............................ 445 1,674
Emerging Markets Debt............... 405,816 440,501
Fixed Income........................ 32,591 64,118
Global Fixed Income................. 40,280 55,339
High Yield.......................... 66,326 65,175
Municipal Bond...................... 19,805 5,684
</TABLE>
Purchases and sales during the six months ended June 30, 1997 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.............................. $ -- $ 293
Fixed Income.......................... 99,671 73,670
Global Fixed Income................... 22,741 26,806
</TABLE>
During the six months ended June 30, 1997, 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................................... $ 92
Emerging Markets............................... 170
Global Equity.................................. 3
International Equity........................... 1
International Magnum........................... 3
Japanese Equity................................ 34
Latin American................................. 26
</TABLE>
In addition, during the six months ended June 30, 1997, the Equity Growth and
U.S. Real Estate Portfolios paid approximately $2,000 and $5,000, respectively,
of brokerage commissions to Dean Witter Reynolds, Inc., an affiliated
broker/dealer.
G. OTHER: At June 30, 1997, 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............... $ 128,748 $ 20,576 $ (6,860) $ 13,716
Asian Equity.............. 297,193 57,990 (27,312) 30,678
Emerging Markets.......... 1,516,437 439,250 (159,254) 279,996
European Equity........... 195,259 50,618 (2,235) 48,383
Global Equity............. 72,807 29,258 (3,264) 25,994
Gold...................... 36,641 354 (11,617) (11,263)
International Equity...... 2,000,541 712,174 (36,172) 676,002
International Magnum...... 154,360 23,001 (3,029) 19,972
International Small Cap... 235,162 44,504 (21,327) 23,177
Japanese Equity........... 157,897 21,911 (8,237) 13,674
Latin American............ 64,274 13,719 (676) 13,043
Aggressive Equity......... 139,433 14,225 (1,904) 12,321
Emerging Growth........... 51,583 9,480 (507) 8,973
Equity Growth............. 453,375 64,247 (4,369) 59,878
Small Cap Value Equity.... 28,814 3,573 (560) 3,013
Technology................ 15,538 1,715 (94) 1,621
U.S. Real Estate.......... 258,562 34,179 (516) 33,663
Value Equity.............. 77,236 22,009 (1,314) 20,695
Balanced.................. 5,867 830 (47) 783
Emerging Markets Debt..... 176,968 8,328 (578) 7,750
Fixed Income.............. 131,354 1,033 (531) 502
Global Fixed Income....... 84,008 692 (1,625) (933)
High Yield................ 112,532 4,961 (488) 4,473
Municipal Bond............ 51,380 1,195 (42) 1,153
Money Markets............. 1,271,845 -- -- --
Municipal Money Market.... 712,459 -- -- --
</TABLE>
During the six months ended June 30, 1997, the Emerging Markets Portfolio owned
shares of affiliated funds for which the Portfolio earned dividend income of
approximately $217,000.
At June 30, 1997, 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>
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189
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
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, $2,572,00, and $1,435,000, respectively.
To the extent that capital loss carryovers are used to offset any future capital
gains realized during the 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.
During the six months ended June 30, 1997, 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,
1996............................... $ -- $ --
Options written during the period... 45,414 1,037
Options closed during the period.... (38,314) (909)
Options exercised during the
period............................. (7,100) (128)
------------- -----------
Options outstanding at June 30,
1997............................... -- --
------------- -----------
------------- -----------
</TABLE>
At June 30, 1997, 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 June 30, 1997:
<TABLE>
<S> <C> <C> <C>
Argentine Peso....................... 0.99985 = $1.00
Australian Dollar.................... 1.32406 = $1.00
Austrian Schilling................... 12.26350 = $1.00
Belgian Franc........................ 35.95000 = $1.00
Brazilian Real....................... 1.07660 = $1.00
British Pound........................ 1.65126 = $1.00
Canadian Dollar...................... 1.38075 = $1.00
Colombian Peso....................... 1091.00000 = $1.00
Danish Krone......................... 6.63690 = $1.00
French Franc......................... 5.87470 = $1.00
German Mark.......................... 1.74335 = $1.00
Hong Kong Dollar..................... 7.74730 = $1.00
Hungarian Forint..................... 187.23500 = $1.00
Indian Rupee......................... 35.80000 = $1.00
Indonesian Rupiah.................... 2432.00000 = $1.00
Irish Punt........................... 0.66050 = $1.00
Italian Lira......................... 1699.70000 = $1.00
Japanese Yen......................... 114.56500 = $1.00
Malaysian Ringgit.................... 2.52400 = $1.00
Mexican Peso......................... 7.93200 = $1.00
Netherlands Guilder.................. 1.96130 = $1.00
New Zealand Dollar................... 1.47221 = $1.00
Norwegian Krone...................... 7.32710 = $1.00
Pakistani Rupee...................... 40.41950 = $1.00
Peruvian New Sol..................... 2.65200 = $1.00
Philippines Peso..................... 26.37600 = $1.00
Polish Zloty......................... 3.28650 = $1.00
Singapore Dollar..................... 1.42970 = $1.00
South African Rand................... 4.53700 = $1.00
South Korean Won..................... 888.00000 = $1.00
Spanish Peseta....................... 147.25000 = $1.00
Sri Lankan Rupee..................... 58.49000 = $1.00
Swedish Krona........................ 7.73330 = $1.00
Swiss Franc.......................... 1.46000 = $1.00
Taiwan Dollar........................ 27.80000 = $1.00
Thai Baht............................ 25.90500 = $1.00
Turkish Lira......................... 148525.00000 = $1.00
Venezuelan Bolivar................... 486.80500 = $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.
- --------------------------------------------------------------------------------
190
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
H. SUPPLEMENTAL PROXY INFORMATION:
On May 1, 1997, a special meeting of the stockholders of Morgan Stanley
Institutional Fund, Inc. (the "Fund") was held for the purpose of voting on the
following matter:
1. Approval of the investment advisory agreement by and between the Fund and
Morgan Stanley Asset Management Inc.
<TABLE>
<CAPTION>
TOTAL SHARES
PORTFOLIO VOTED FOR VOTED AGAINST ABSTENTIONS VOTED
- -------------------------------------------------------------- ------------- ------------- ------------ -----------------
<S> <C> <C> <C> <C>
Active Country Allocation..................................... 8,890,283 -- -- 8,890,283
Asian Equity.................................................. 10,258,100 76,438 268,592 10,603,130
European Equity............................................... 6,589,595 86,350 222,853 6,898,798
Gold.......................................................... 1,973,015 41,909 14,384 2,029,308
Japanese Equity............................................... 10,300,071 132,932 364,978 10,797,981
Latin American................................................ 2,261,411 8,179 60,493 2,330,083
Aggressive Equity............................................. 4,051,445 -- 37,431 4,088,876
Emerging Growth............................................... 3,837,840 -- 1,646 3,839,486
Equity Growth................................................. 18,912,633 149,402 95,439 19,157,474
Small Cap Value Equity........................................ 1,450,173 22,891 10,081 1,483,145
Technology.................................................... 274,583 -- -- 274,583
U.S. Real Estate.............................................. 9,036,110 10,829 44,071 9,091,010
Fixed Income.................................................. 6,372,373 -- -- 6,372,373
Global Fixed Income........................................... 5,673,179 -- 67,289 5,740,468
High Yield.................................................... 5,897,556 9,337 19,448 5,926,341
Municipal Bond................................................ 2,389,370 -- 20,650 2,410,020
Money Market.................................................. 610,734,143 11,211,336 20,496,210 642,441,689
Municipal Money Market........................................ 355,324,086 2,168,594 10,663,082 368,155,762
</TABLE>
- --------------------------------------------------------------------------------
191
<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
Michael F. Klein
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
3 Chase MetroTech Center
Brooklyn, NY 11245
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
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Karl O. Hartmann
ASSISTANT SECRETARY
Joanna M. Haigney
TREASURER
Rene J. Feuerman
ASSISTANT TREASURER
FOR CURRENT PERFORMANCE, CURRENT NET ASSET VALUE, OR FOR ASSISTANCE WITH YOUR
ACCOUNT, PLEASE CONTACT THE FUND AT (800) 548-7786.
- --------------------------------------------------------------------------------
192
