<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
-----------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
MUNICIPAL BOND PORTFOLIO
MORTGAGE-BACKED SECURITIES PORTFOLIO
MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
twenty-nine portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the Fixed Income, Municipal Bond and Mortgage-Backed Securities Portfolios (the
"Non-Money Portfolios") and to the Class A shares of the Money Market and
Municipal Money Market Portfolios (the "Money Portfolios") (each, a "Portfolio"
and collectively, the "Portfolios"). The Class A and Class B shares currently
offered by the Non-Money Portfolios have different minimum investment
requirements and fund expenses. Shares of the portfolios are offered with no
sales charge, exchange fee or redemption fee, (except that the International
Small Cap Portfolio may impose a transaction fee). The Mortgage-Backed
Securities Portfolio currently is not being offered.
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.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator") and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity,
Technology, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield and Municipal Bond Portfolios; and (v)
MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional
information about the Fund is contained in a "Statement of Additional
Information" dated May 1, 1997, which is incorporated herein by reference. The
Statement of Additional Information and the prospectuses pertaining to the other
portfolios of the Fund are available upon request and without charge by writing
or calling the Fund at the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Portfolios indicated below will incur:
<TABLE>
<CAPTION>
MORTGAGE- MUNICIPAL
FIXED MUNICIPAL BACKED MONEY MONEY
INCOME BOND SECURITIES MARKET MARKET
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A........................................................... None None None None None
Class B........................................................... None None None N/A N/A
Maximum Sales Load Imposed on Reinvested Dividends
Class A........................................................... None None None None None
Class B........................................................... None None None N/A N/A
Deferred Sales Load
Class A........................................................... None None None None None
Class B........................................................... None None None N/A N/A
Redemption Fees
Class A........................................................... None None None None None
Class B........................................................... None None None N/A N/A
Exchange Fees
Class A........................................................... None None None None None
Class B........................................................... None None None N/A N/A
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE- MUNICIPAL
FIXED MUNICIPAL BACKED MONEY MONEY
INCOME BOND SECURITIES MARKET MARKET
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO PORTFOLIO
- -------------------------------------------------- -------- -------- -------- -------- --------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C> <C> <C> <C>
Management Fee (Net of Fee Waivers)*
Class A......................................... 0.20% 0.07% 0.20%+ 0.30%** 0.30%**
Class B......................................... 0.20% 0.07% 0.20%+ N/A N/A
12b-1 Fees
Class A......................................... None None None+ None None
Class B......................................... 0.15%*** 0.25% 0.25%+ N/A N/A
Other Expenses
Class A......................................... 0.25% 0.38% 0.25%+ 0.22% 0.23%
Class B......................................... 0.25% 0.38% 0.25%+ N/A N/A
-------- -------- -------- -------- --------
Total Operating Expenses (Net of Fee Waivers)*
Class A......................................... 0.45% 0.45% 0.45%+ 0.52%** 0.53%**
Class B......................................... 0.60% 0.70% 0.70%+ N/A N/A
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
- ------------------------------
+Estimated.
*The Adviser has agreed to waive its management fees and/or reimburse each
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolios to exceed a specified percentage of their respective
average daily net assets. As a result of these reductions, the Management Fees
stated above are lower than the contractual fees stated under "Management of
the Fund." The Adviser reserves the right to terminate any of its fee waivers
and/or expense reimbursements at any time in its sole discretion. For further
information on Fund expenses see "Management of the Fund." Set forth below, for
each Portfolio as applicable, are the management fees and total operating
expenses absent such fee waivers and/or expense reimbursements as a percent of
average daily net assets of the Class A shares of the Portfolios and Class B
shares of the Non-Money Portfolios, respectively.
2
<PAGE>
<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT FEES ----------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- ------------------------------------------------------ ----------------------- ------------- -------------
<S> <C> <C> <C>
Fixed Income.......................................... 0.35% 0.60% 0.74%
Municipal Bond........................................ 0.35% 0.73% 0.98%
Mortgage-Backed Securities............................ 0.35% 0.60% 0.85%
Money Market.......................................... 0.30% 0.52% N/A
Municipal Money Market................................ 0.30% 0.53% N/A
</TABLE>
- ------------------------
**No fee waiver or expense reimbursement is in effect for this Portfolio.
***The Distributor has agreed to waive 0.10% of the 0.25% distribution fee it is
entitled to receive from this Portfolio.
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. Expenses and fees are based on actual figures for the fiscal year
ended December 31, 1996. Expenses for the Mortgage-Backed Securities Portfolio
are based on estimates and assume that the average daily net assets of the
Mortgage-Backed Securities Portfolio will be $50,000,000. Due to the continuous
nature of Rule 12b-1 fees, long term Class B shareholders may pay more than the
equivalent of the maximum front-end sales charges otherwise permitted by the
National Association of Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The following example is based on total
operating expenses of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
----- ----- ----- -----
<S> <C> <C> <C> <C>
Fixed Income Portfolio
Class A............................. $ 5 $ 14 $ 25 $ 57
Class B............................. 6 19 33 75
Municipal Bond Portfolio
Class A............................. 5 14 25 57
Class B............................. 7 22 39 87
Mortgage-Backed Securities Portfolio
Class A............................. 5 14 * *
Class B............................. 7 22 * *
Money Market Portfolio
Class A............................. 5 17 29 65
Municipal Money Market Portfolio
Class A............................. 5 17 30 66
</TABLE>
- ------------------------------
* Because the Mortgage-Backed Securities Portfolio was not operational as of the
Fund's fiscal year end, the Fund has not projected expenses beyond the
three-year period shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Class A and Class
B shares of the Fixed Income and Municipal Bond Portfolios and the Class A
shares of the Money Market and Municipal Money Market Portfolios for each of the
periods presented. The audited financial highlights for the Portfolios' shares
for each of the periods presented are part of the Fund's financial statements
which appear in the Fund's December 31, 1996 Annual Report to Shareholders and
which are incorporated by reference in the Fund's Statement of Additional
Information. The Portfolios' financial highlights for each of the periods
presented have been audited by Price Waterhouse LLP, whose unqualified report
thereon is also incorporated by reference in the Statement of Additional
Information. Additional performance information is included in the Annual
Report. The Annual Report and the financial statements therein, along with the
Statement of Additional Information, are available at no cost from the Fund at
the address and telephone number noted on the cover page of this Prospectus. The
Mortgage-Backed Securities Portfolio was not operational as of December 31,
1996. After October 31, 1992, the Fund changed its fiscal year end to December
31. The following information should be read in conjunction with the financial
statements and notes thereto.
4
<PAGE>
FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
CLASS B
---------
PERIOD
FROM
CLASS A JANUARY
--------------------------------------------------------------------- 2,
TWO 1996***
YEAR YEAR YEAR YEAR MONTHS YEAR TO
ENDED ENDED ENDED ENDED ENDED ENDED DECEMBER
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER OCTOBER 31,
31, 1996 31, 1995 31, 1994 31, 1993 31, 1992 31, 1992 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 10.81 $ 9.82 $ 11.05 $ 10.93 $ 10.92 $ 10.55 $ 10.81
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment
Income (1)............ 0.67 0.72 0.59 0.54 0.10 0.69 0.64
Net Realized and
Unrealized Gain (Loss)
on Investments........ (0.20) 1.06 (0.92) 0.41 0.01 0.39 (0.19)
--------- --------- --------- --------- --------- --------- ---------
Total from Investment
Operations.......... 0.47 1.78 (0.33) 0.95 0.11 1.08 0.45
--------- --------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment
Income................ (0.70) (0.79) (0.53) (0.56) (0.10) (0.69) (0.68)
In Excess of Net
Investment Income..... (0.00)+ -- -- (0.01) -- -- --
Net Realized Gain...... -- -- (0.37) (0.26) -- (0.02) --
In Excess of Net
Realized Gain......... -- -- (0.00)+ -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total
Distributions....... (0.70) (0.79) (0.90) (0.83) (0.10) (0.71) (0.68)
--------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF
PERIOD.................. $ 10.58 $ 10.81 $ 9.82 $ 11.05 $ 10.93 $ 10.92 $ 10.58
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN............. 4.61% 18.76% (3.10)% 9.07% 1.02% 10.61% 4.35%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands).... $130,733 $165,527 $209,331 $240,668 $154,210 $146,546 $ 1,462
Ratio of Expenses to
Average Net
Assets (1)............ 0.45% 0.45% 0.45% 0.45% 0.45%** 0.45% 0.60%**
Ratio of Net Investment
Income to Average Net
Assets (1)............ 6.30% 6.85% 5.73% 4.97% 5.56%** 6.59% 6.15%**
Portfolio Turnover
Rate.................. 183% 172% 388% 240% 15% 105% 183%
- ------------------------------
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income............. $0.02 $0.01 $0.01 $0.02 $0.01 $0.02 $0.01
Ratios before expense
limitation:
Expenses to Average
Net Assets......... 0.60% 0.59% 0.58% 0.60% 0.75%** 0.59% 0.74%**
Net Investment
Income to Average
Net Assets......... 6.15% 6.71% 5.60% 4.82% 5.26%** 6.45% 6.01%**
</TABLE>
** Annualized.
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
5
<PAGE>
MUNICIPAL BOND PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------- ------------
PERIOD FROM PERIOD FROM
JANUARY 18, JANUARY 2,
YEAR ENDED 1995* TO 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............................. $ 10.37 $ 10.00 $ 10.37
------------ ------------ ------------
------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)...................................... 0.49 0.44 0.44
Net Realized and Unrealized Gain (Loss) on Investments......... (0.12) 0.42 (0.08)
------------ ------------ ------------
Total from Investment Operations............................. 0.37 0.86 0.36
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income.......................................... (0.49) (0.45) (0.49)
In Excess of Net Investment Income............................. -- (0.00)+ --
Net Realized Gain.............................................. -- (0.04) --
------------ ------------ ------------
Total Distributions.......................................... (0.49) (0.49) (0.49)
------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD................................... $ 10.25 $ 10.37 $ 10.24
------------ ------------ ------------
------------ ------------ ------------
TOTAL RETURN..................................................... 3.67% 8.80% 3.55%
------------ ------------ ------------
------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands).......................... $ 40,227 $ 45,869 $ 69
Ratio of Expenses to Average Net Assets (1).................... 0.45% 0.45%** 0.70%**
Ratio of Net Investment Income to Average Net Assets (1)....... 4.77% 4.61%** 4.56%**
Portfolio Turnover Rate........................................ 45% 180% 45%
</TABLE>
- ------------------------------
<TABLE>
<C> <S> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income................ $0.03 $0.03 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets............................ 0.73% 0.73%** 0.98%**
Net Investment Income to Average Net Assets............... 4.50% 4.33%** 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.
6
<PAGE>
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
TWO YEAR
YEAR MONTHS ENDED
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED OCTOBER
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER 31,
31, 1996 31, 1995 31, 1994 31, 1993 31, 1992 1992
----------- ----------- ----------- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000
----------- ----------- ----------- --------- --------- ------
----------- ----------- ----------- --------- --------- ------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income (1)....... 0.049 0.054 0.040 0.027 0.005 0.039
----------- ----------- ----------- --------- --------- ------
DISTRIBUTIONS
Net Investment
Income........... (0.049) (0.054) (0.040) (0.027) (0.005) (0.039)
In Excess of Net
Investment
Income........... -- -- -- 0.000+ -- --
----------- ----------- ----------- --------- --------- ------
Total
Distributions... (0.049) (0.054) (0.040) (0.027) (0.005) (0.039)
----------- ----------- ----------- --------- --------- ------
NET ASSET VALUE, END
OF PERIOD.......... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000
----------- ----------- ----------- --------- --------- ------
----------- ----------- ----------- --------- --------- ------
TOTAL RETURN........ 5.03% 5.51% 3.84% 2.76% 0.50% 3.77%
----------- ----------- ----------- --------- --------- ------
----------- ----------- ----------- --------- --------- ------
RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of
Period
(Thousands)...... $1,284,633 $836,693 $690,503 $657,163 $599,172 $612,968
Ratio of Expenses
to Average Net
Assets (1)....... 0.52% 0.51% 0.49% 0.53% 0.55%** 0.52%
Ratio of Net
Investment Income
to Average Net
Assets (1)....... 4.92% 5.37% 3.77% 2.71% 3.11%** 3.74%
- ------------------------------
(1) Effect of
voluntary
expense
limitation
during the
period:
Per share
benefit to net
investment
income........ N/A N/A N/A $0.000+ $0.000+ N/A
Ratios before
expense
limitation:
Expenses to
Average Net
Assets........ N/A N/A N/A 0.54% 0.59%** N/A
Net Investment
Income to
Average Net
Assets........ N/A N/A N/A 2.70% 3.07%** N/A
</TABLE>
** Annualized.
+ Amount if less than $0.001 per share.
7
<PAGE>
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
TWO
MONTHS YEAR
YEAR YEAR ENDED
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED OCTOBER
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER 31,
31, 1996 31, 1995 31, 1994 31, 1993 31, 1992 1992
----------- ----------- ----------- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000
----------- ----------- ----------- --------- --------- ------
----------- ----------- ----------- --------- --------- ------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income (1)....... 0.030 0.034 0.020 0.019 0.004 0.026
----------- ----------- ----------- --------- --------- ------
DISTRIBUTIONS
Net Investment
Income........... (0.030) (0.034) (0.020) (0.019) (0.004) (0.026)
In Excess of Net
Investment
Income........... -- -- -- (0.000)+ -- --
----------- ----------- ----------- --------- --------- ------
Total
Distributions... (0.030) (0.034) (0.020) (0.019) (0.004) (0.026)
----------- ----------- ----------- --------- --------- ------
NET ASSET VALUE, END
OF PERIOD.......... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000
----------- ----------- ----------- --------- --------- ------
----------- ----------- ----------- --------- --------- ------
TOTAL RETURN........ 3.02% 3.44% 2.44% 1.91% 0.37% 2.74%
----------- ----------- ----------- --------- --------- ------
----------- ----------- ----------- --------- --------- ------
RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of
Period
(Thousands)...... $721,410 $451,519 $359,444 $266,524 $208,866 $206,691
Ratio of Expenses
to Average Net
Assets (1)....... 0.53% 0.52% 0.51% 0.54% 0.57%** 0.55%
Ratio of Net
Investment Income
to Average Net
Assets (1)....... 2.98% 3.38% 2.42% 1.89% 2.31%** 2.66%
- ------------------------------
(1) Effect of
voluntary
expense
limitation dur-
ing the period:
Per share
benefit to net
investment
income........ N/A N/A N/A $0.000+ $0.000+ N/A
Ratios before
expense
limitation:
Expenses to
Average Net
Assets........ N/A N/A N/A 0.56% 0.67%** N/A
Net Investment
Income to
Average Net
Assets........ N/A N/A N/A 1.87% 2.21%** N/A
</TABLE>
** Annualized.
+ Amount is less than $0.001 per share.
8
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-nine portfolios, offering institutional and high
net worth individual investors a broad range of investment choices coupled with
the advantages of a no-load mutual fund with Morgan Stanley and its affiliates
providing customized services as Adviser, Administrator and Distributor. Each
portfolio offers Class A shares and, except the International Small Cap, Money
Market and Municipal Money Market Portfolios, also offers Class B shares. Each
portfolio has its own investment objective and policies designed to meet its
specific goals. The investment objective of each Portfolio described in this
Prospectus is as follows:
- The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio
of fixed income securities.
- The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing primarily in
municipal obligations, the interest on which is exempt from federal income
tax.
- The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
- The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one
year or less.
- The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and telephone number noted on the
cover page of this Prospectus. The investment objectives of these other
portfolios are listed below:
GLOBAL AND INTERNATIONAL EQUITY:
- The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
- The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
9
<PAGE>
- The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
- The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
- The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
- The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
- The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
- The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
- The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
- The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
- The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
- The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Portfolio's investment adviser, are expected to be benefit from their
involvement in technology and technology-related industries.
- 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.
- The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
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FIXED INCOME:
- The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
- The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
- 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 three
highest rating categories of the recognized rating services.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at February 28, 1997, had approximately $176.9 billion in assets
under management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Non-Money Portfolio are offered at net asset value with no sales commission, but
with a 12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of
the Class B shares average daily net assets on an annualized basis. The
Distributor has agreed to waive 0.10% of the 0.25% 12b-1 fee with respect to the
Fixed Income Portfolio. Share purchases may be made by sending investments
directly to the Fund or through the Distributor. The minimum initial investment,
generally, is $500,000 for Class A shares of each Portfolio and $100,000 for
Class B shares of each Non-Money Portfolio. The minimum initial investment
amount is reduced for certain categories of investors. For additional
information on how to purchase shares and minimum initial investments, see
"Purchase of Shares."
HOW TO REDEEM
Shares of each Portfolio may be redeemed at any time, without cost, at the
net asset value per share of shares of the applicable class next determined
after receipt of the redemption request. The redemption price may be more or
less than the purchase price. Certain redemptions that cause the value of an
account to remain for a continuous 60-day period below the minimum investment
amount for Class A shares or Class B shares may result in involuntary redemption
or automatic conversion. For additional information on how to redeem shares and
involuntary redemption or conversion, see "Purchase of Shares -- Minimum Account
Sizes and Involuntary Redemption of Shares" and "Redemption of Shares."
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RISK FACTORS
The investment policies of each of the Portfolios entail certain risks and
considerations of which an investor should be aware. The Fixed Income and Money
Market Portfolios may invest in securities of foreign issuers, which are subject
to certain risks not typically associated with U.S. securities. In addition,
each Portfolio may invest in repurchase agreements, lend its portfolio
securities and purchase securities on a when-issued or delayed delivery basis.
The Money Market Portfolio may invest in reverse repurchase agreements. Each
Non-Money Portfolio may invest in certain derivatives, including futures
contracts and options on futures contracts and, in the case of the Fixed Income
Portfolio, options. These investments entail certain costs and risks, including
imperfect correlation between the value of securities held by a Portfolio and
the value of the particular derivative instrument, and the risk that a Portfolio
could not close out a derivatives position when it would be most advantageous to
do so. The Fixed Income Portfolio may invest in foreign currency forward
contracts to hedge currency risks associated with investment in non-U.S. dollar
denominated securities. The Municipal Money Market Portfolio may invest in
"puts" on municipal bonds or notes and the Municipal Bond and Municipal Money
Market Portfolios may invest up to 20% of such Portfolios' total assets in
taxable securities. Each of these investment strategies involves specific risks
which are described under "Investment Objectives and Policies" and "Additional
Investment Information."
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies the Portfolios employ in their efforts to achieve these objectives.
Each Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolios will attain their
objectives. In addition to the investments and strategies described below, the
Portfolios may invest in certain securities and obligations as set forth in
"Additional Investment Information" below and as described under "Investment
Objectives and Policies" in the Statement of Additional Information. The
investment policies described below are not fundamental policies unless
otherwise noted and may be changed without shareholder approval.
THE FIXED INCOME PORTFOLIO
The Fixed Income Portfolio seeks to produce a high total return consistent
with the preservation of capital by investing 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, such as certificates of deposit and short-term money
market instruments. Short- and intermediate-term bonds form the core of the
Portfolio, and long-term bonds (i.e., those with maturities over ten years) are
purchased on a short-term opportunistic basis when the Adviser believes they
will enhance return without significantly increasing risk. The Adviser sets an
annual target rate of return for the Portfolio based on current and projected
market and economic conditions and manages the Portfolio conservatively --
primarily through gradual shifts in maturities in attempting to achieve this
target rate.
The Portfolio emphasizes investments in U.S. Government and mortgage-backed
securities. Typically, between 50% and 75% of the Portfolio's total assets will
be invested in these securities. When corporate bonds are purchased, they will
generally be rated in the two highest rating categories by Moody's Investors
Service, Inc. ("Moody's") (Aaa or Aa) or Standard & Poor's Ratings Group ("S&P")
(AAA or AA). The Portfolio will not invest in a corporate bond if it is not
rated at least investment grade by either rating agency at the time of
investment. The Portfolio may invest up to 15% of its assets in fixed income
instruments denominated in foreign currencies and issued by corporate or
governmental issuers when the Adviser feels that the currency component and
underlying market characteristics of such obligations will add value to the
Portfolio.
THE MUNICIPAL BOND PORTFOLIO
The Municipal Bond Portfolio seeks to produce a high level of current income
consistent with preservation of principal by investing in a portfolio consisting
primarily of intermediate- and long-term investment-grade Municipal Obligations,
the interest on which is exempt from federal income tax. "Municipal Obligations"
include notes, bonds and other securities issued by or on behalf of states,
territories and possessions of the U.S. and the District of Columbia, and their
political subdivisions, agencies and instrumentalities, on which the interest on
such Obligations is, in the opinion of counsel for the issuer or the Portfolio,
exempt from federal income tax.
The Portfolio will invest only in Municipal Obligations if they are
investment grade securities. Investment grade securities are (i) bonds rated
within one of the four highest rating categories of Moody's (Aaa, Aa, A or Baa)
or S&P (AAA, AA, A or BBB); (ii) notes rated within one of the two highest
rating categories of Moody's (MIG1 or MIG2) or one of the two highest rating
categories of S&P (SP-1 or SP-2); (iii) commercial paper rated P-1 or
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P-2 by Moody's or A-1 or A-2 by S&P; (iv) variable rate securities rated VMIG1
or VMIG2 by Moody's; and (v) unrated Municipal Obligations that the Adviser
believes are of comparable quality to securities in the foregoing rating
categories. Bonds rated Baa by Moody's or BBB by S&P have speculative
characteristics.
Under normal market conditions, the Portfolio will invest at least 80% of
its net assets in Municipal Obligations (or futures contracts or options on
futures relating thereto), which at the time of investment are "investment grade
securities." This policy is fundamental and may not be changed without the
approval of a majority of the Portfolio's outstanding voting securities.
Although there are no maturity restrictions on the Municipal Obligations in
which the Portfolio invests, it is currently anticipated that the average
maturity of the Portfolio will range between 7 and 20 years. Under normal market
conditions, at least 65% of the Portfolio's net assets will be invested in
Municipal Obligations having an initial maturity of more than one year. The
Adviser will actively manage the Portfolio, and adjust its average maturity
(including by the use of futures contracts and options on futures), depending on
its assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates. During
periods of rising interest rates and declining prices, the average maturity of
the Portfolio may be shorter, while during periods of declining interest rates
and rising prices, the Portfolio may have a longer average maturity.
The Portfolio may also invest up to 20% of its net assets in cash, cash
equivalents, U.S. Government Securities and taxable corporate "investment grade
securities." U.S. Government Securities consist of direct obligations of the
U.S. Treasury and securities issued or guaranteed by agencies or
instrumentalities of the U.S. Government. Securities issued or guaranteed by
agencies or instrumentalities may be backed by the full faith and credit of the
United States (such as securities issued by the Government National Mortgage
Association ("GNMA")), or supported by the issuing agency's right to borrow from
the U.S. Treasury (such as securities issued by the Federal Home Loan Banks), or
backed only by the credit of the issuing instrumentality such as securities
issued by the Federal National Mortgage Association ("FNMA")). The Portfolio
will not invest more than 20% of its net assets in Municipal Obligations the
interest on which is subject to alternative minimum tax.
THE MORTGAGE-BACKED SECURITIES PORTFOLIO
The Mortgage-Backed Securities Portfolio seeks to produce as high a level of
current income as is consistent with the preservation of capital by investing
primarily in mortgage-backed securities either (i) issued or guaranteed by the
U.S. Government or (ii) rated A or higher by Moody's or S&P or, if unrated,
determined by the Adviser to be of comparable quality.
Mortgage-backed securities are securities that, directly or indirectly,
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including governmental pass-through securities such as those
issued or guaranteed by GNMA, FNMA and the Federal Home Loan Mortgage
Corporation ("FHLMC"). Unlike GNMA certificates, FNMA and FHLMC obligations are
not backed by the full faith and credit of the U.S. government; they are
supported by the issuing instrumentality's right to borrow from the U.S.
Treasury. Each of GNMA, FNMA and FHLMC guarantees timely distributions of
interest to certificate holders and GNMA and FNMA also guarantee timely
distributions of scheduled principal. Mortgage-backed securities also include
collateralized mortgage obligations ("CMOs") and pass-through securities issued
or guaranteed by private sector entities. CMOs are debt obligations or
pass-through certificates issued by agencies or instrumentalities of the U.S.
government or by private originators or investors in mortgage loans. CMOs are
backed by
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mortgage pass-through securities or whole loans and are evidenced by a series of
bonds or certificates issued in multiple classes or tranches. Private
pass-through securities are issued by private originators of or investors in
mortgage loans and are structured similarly to governmental pass-through
securities. Because private pass-throughs typically lack a guarantee by an
entity having the credit status of a governmental agency or instrumentality,
they are generally structured with one or more types of credit enhancement.
The Portfolio will invest in mortgage-backed securities that are either (i)
issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities or (ii) at the time of investment rated within one of the
three highest rating categories of Moody's (Aaa, Aa or A) or S&P (AAA, AA or A),
or if unrated, determined by the Adviser to be of comparable quality. Under
normal market conditions, the Adviser expects that at least 75% of the
Portfolio's net assets will be invested in mortgage-backed securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or rated
Aaa by Moody's or AAA by S&P. Up to 15% of the Portfolio's net assets may be
invested in mortgage-backed securities rated A by Moody's or S&P.
The Adviser expects that short- and intermediate-term mortgage-backed
securities will form the core of the Portfolio, with long-term securities (i.e.,
with maturities over ten years) being purchased when the Adviser believes that
they will enhance return without significantly increasing risk. The Adviser sets
an annual target rate of return for the Portfolio based on current and projected
market and economic conditions and manages the Portfolio conservatively --
primarily through gradual shifts in maturities -- in attempting to achieve this
target rate.
Due to the possibility that prepayments on home mortgages will alter cash
flow on mortgage-backed securities, it is not possible to determine in advance
the actual final maturity date or average life. Like bonds in general,
mortgage-backed securities will generally decline in price when interest rates
rise. Rising interest rates also tend to discourage refinancings of home
mortgages, with the result that the average life of mortgage-backed securities
held by a portfolio may be lengthened. This extension of average life causes the
market price of the securities to decrease further than if their average lives
were fixed. However, when interest rates fall, mortgage-backed securities may
not enjoy as large a gain in market value due to prepayment risk because
additional mortgage prepayments must be reinvested at lower interest rates.
Faster prepayment will shorten the average life and slower prepayments will
lengthen it. However, it is possible to determine what the range of that
movement could be and to calculate the effect that it will have on the price of
the security. In selecting these securities, the Adviser will look for those
securities that offer a higher yield to compensate for any variation in average
maturity.
THE MONEY MARKET PORTFOLIO
The Money Market Portfolio seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in the
following high quality money market instruments which have remaining maturities
of one year or less. 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.
U.S. GOVERNMENT OBLIGATIONS. The Portfolio may invest in obligations issued
or guaranteed by the U.S. Government, such as U.S. Treasury securities and those
backed by the full faith and credit of the United States, such as obligations of
GNMA, the Farmers Home Administration and the Export-Import Bank. The Portfolio
may also invest in obligations issued or guaranteed by U.S. Government agencies
or instrumentalities where the
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Portfolio must look principally to the issuing or guaranteeing agency for
ultimate repayment; some examples of agencies or instrumentalities issuing these
obligations are the Federal Farm Credit System and the Federal Home Loan Banks.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities in which the
Portfolio may invest, such as GNMA securities, differ from other fixed income
securities in that the principal is paid back by the borrower over the life of
the loan rather than returned in a lump sum at maturity. When prevailing
interest rates rise, the value of a GNMA security may decrease as with other
debt securities. When prevailing interest rates decline, however, the value of
GNMA securities may not rise as much as other debt securities because of the
prepayment feature of GNMA securities. Additionally, if a GNMA certificate is
purchased at a premium above its principal value because its fixed rate of
interest exceeds the prevailing level of yields, the decline in price to par may
result in a loss of the premium in the event of prepayment. Funds received from
prepayments may be reinvested at the prevailing interest rates which may be
lower than the rate of interest that had previously been earned.
BANK OBLIGATIONS. The Portfolio may invest in high quality U.S.
dollar-denominated negotiable certificates of deposit, time deposits, deposit
notes and bankers' acceptances of (i) banks, savings and loan associations and
savings banks which have more than $2 billion in total assets and are organized
under federal or state law, (ii) foreign branches of these banks ("Euros") and
(iii) U.S. branches of foreign banks of equivalent size ("Yankees"). The
Portfolio may also invest in U.S. dollar-denominated obligations of the
International Bank for Reconstruction and Development ("World Bank"). These
obligations are supported by appropriated but unpaid commitments of the World
Bank's member countries, and there is no assurance these commitments will be
undertaken or met in the future.
COMMERCIAL PAPER; CORPORATE BONDS. The Portfolio may invest in high quality
commercial paper and corporate bonds issued by U.S. corporations. The Portfolio
may also invest in commercial paper issued by foreign corporations if the issuer
is a direct subsidiary of a U.S. corporation, the obligation is U.S. dollar-
denominated and is not subject to foreign withholding tax, and the aggregate of
these foreign investments does not exceed 10% of the Portfolio's net assets.
QUALITY INFORMATION. The Portfolio uses the amortized cost method of
valuation in accordance with regulations issued by the Securities and Exchange
Commission (the "Commission"). Accordingly, the Portfolio will limit its
portfolio investments to those instruments that present minimal credit risks and
are of "eligible quality" as determined by the Adviser under the supervision of
the Board of Directors in accordance with regulations of the Commission, as they
may from time to time be amended. For this purpose, "eligible quality" means a
security rated (i) in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations assigning a rating to the
security or issuer or, (ii) if only one rating organization assigned a rating,
by that rating organization or (iii) if unrated, of comparable quality as
determined by the Board of Directors. The Money Market Portfolio will not
purchase any bank or corporate obligation unless it is rated at least Aa or
Prime-1 by Moody's or AA or A-1 by S&P, or is deemed to be of comparable
quality.
These standards must be satisfied at the time an investment is made. In the
event that an investment held by the Portfolio is assigned a lower rating or
ceases to be rated, the Adviser under the supervision of the Board of Directors,
will promptly reassess whether such security presents minimal credit risk and
whether the Portfolio
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should continue to hold the security. If a portfolio security no longer presents
minimal credit risk or is in default, the Portfolio will dispose of the security
as soon as reasonably practicable unless the Board of Directors determines that
it is not in the best interests of the Portfolio to do so.
THE MUNICIPAL MONEY MARKET PORTFOLIO
The Municipal Money Market Portfolio seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity through
investing in the following high quality municipal money market instruments
which, in the opinion of bond counsel for the issuer, earn interest exempt from
federal income tax. 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 the 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.
MUNICIPAL BONDS. The Portfolio may invest in bonds issued by or on behalf
of states, territories and possessions of the United States and its political
subdivisions, agencies, authorities and instrumentalities. These obligations may
be general obligation bonds secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest, or they may
be revenue bonds payable from specific revenue sources, but not generally backed
by the issuer's taxing power. These obligations include private activity bonds
where payment is the responsibility of the private industrial user of the
facility financed by the bonds. The Portfolio may invest more than 25% of its
total assets in private activity bonds (provided that the interest on such bonds
is not subject to the alternative minimum tax), but may not invest more than 25%
of its total assets in these bonds in projects of similar type or in the same
state.
MUNICIPAL NOTES. The Portfolio may also invest in municipal notes of
various types, including notes issued in anticipation of receipt of taxes, the
proceeds of the sale of bonds, other revenues or grant proceeds and project
notes, as well as municipal commercial paper and municipal demand obligations.
There may be no secondary market for project notes, and the Portfolio intends to
hold such notes until maturity. There is no specific percentage limitation on
these investments.
QUALITY INFORMATION. The Portfolio uses the amortized cost method of
valuation in accordance with regulations issued by the Commission. Accordingly,
the Portfolio will limit its portfolio investments to those instruments which
present minimal credit risk and which are of "eligible quality" as determined by
the Adviser under the supervision of the Board of Directors in accordance with
regulations of the Commission, as they may from time to time be amended. For
this purpose, "eligible quality" means a security rated (i) in one of the two
highest rating categories by at least two nationally recognized statistical
rating organizations assigning a rating to the security or issuer or, (ii) if
only one rating organization assigned a rating, by that rating organization or
(iii) if unrated, of comparable quality as determined by the Board of Directors.
The Municipal Money Market Portfolio will not purchase any municipal obligation
unless it is rated at least Aa, MIG-1 (or MIG-2 in the case of New York State
municipal notes), or Prime-1 by Moody's, or AA, SP-1 or A-1 by S&P, or is deemed
to be of comparable quality.
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These standards must be satisfied at the time an investment is made. In the
event that an investment held by the Portfolio is assigned a lower rating or
ceases to be rated, the Adviser under the supervision of the Board of Directors
will promptly reassess whether such security presents minimal credit risk and
whether the Portfolio should continue to hold the security. If a portfolio
security no longer presents minimal credit risk or is in default, the Portfolio
will dispose of the security as soon as reasonably practicable unless the Board
of Directors determines that it is not in the best interests of the Portfolio to
do so. The credit quality of municipal obligations is frequently enhanced by
various arrangements with domestic or foreign financial institutions, such as
letters of credit, guarantees and insurance, and these arrangements are
considered when investment quality is evaluated.
PUTS FOR THE MUNICIPAL MONEY MARKET PORTFOLIO. The Portfolio may to the
extent consistent with the Portfolio's investment policies, purchase without
limit municipal bonds or notes together with the right to resell them at an
agreed price or yield within a specified period prior to maturity. This right to
resell is known as a "put." The aggregate price paid for securities with puts
may be higher than the price which otherwise would be paid. The purpose of this
practice is to permit the Portfolio to be fully invested in tax-exempt
securities while maintaining the necessary liquidity to purchase securities on a
when-issued basis, to meet unusually large redemptions, to purchase at a later
date securities other than those subject to the put and to facilitate the
Adviser's ability to manage the Portfolio actively. The principal risk of puts
is that the put writer may default on its obligation to repurchase. The Adviser
will monitor each put writer's ability to meet its obligations. No value is
assigned to any puts. The cost of any such put is carried as an unrealized loss
from the time of purchase until it is exercised or expires.
ADDITIONAL INVESTMENT INFORMATION
FOREIGN INVESTMENT. The Fixed Income Portfolio may invest in U.S.
dollar-denominated securities of foreign issuers trading in U.S. markets and in
non-U.S. dollar-denominated obligations of foreign issuers. The Money Market
Portfolio may invest in U.S. dollar-denominated commercial paper issued by a
foreign corporation that is a direct parent or subsidiary of a U.S. corporation.
Investment in obligations of foreign issuers and in foreign branches of domestic
banks involves somewhat different investment risks than those affecting
obligations of U.S. issuers. There may be limited publicly available information
with respect to foreign issuers, and foreign issuers are not generally subject
to uniform accounting, auditing and financial standards and requirements
comparable to those applicable to domestic companies. Brokerage commissions and
other transaction costs on foreign securities exchanges are generally higher
than in the United States. Dividends and interest paid by foreign issuers may be
subject to withholding and other foreign taxes, which may decrease the net
return on foreign investments as compared to dividends and interest paid to the
Portfolio by domestic companies. It is not expected that a Portfolio or its
shareholders would be able to claim a credit for U.S. tax purposes with respect
to any such foreign taxes. Additional risks include future political and
economic developments, the possibility that a foreign jurisdiction might impose
or change withholding taxes on income payable with respect to foreign
securities, possible seizure, nationalization or expropriation of the foreign
issuer or foreign deposits, and the possible adoption of foreign governmental
restrictions such as exchange controls. Many of the foreign countries described
above may have less stable political environments than more developed countries.
Also, it may be more difficult to obtain a judgment in a court outside the
United States.
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Investments in securities of foreign issuers are frequently denominated in
foreign currencies and the Fixed Income Portfolio may temporarily hold
uninvested reserves in bank deposits in foreign currencies. Therefore, the value
of the Portfolio's assets as measured in U.S. dollars may be affected favorably
or unfavorably by changes in currency rates and in exchange control regulations,
and the Portfolio may incur costs in connection with conversions between various
currencies.
FOREIGN CURRENCY FORWARD CONTRACTS. The Fixed Income Portfolio may enter
into foreign currency forward contracts ("forward contracts") that provide for
the purchase or sale of an amount of a specified currency at a future date. The
Portfolio may use such contracts to protect against a decline in a foreign
currency against the U.S. dollar between the trade date and settlement date when
the Portfolio purchases or sells securities, lock in the U.S. dollar value of
dividends and interest on securities held by the Portfolio, and generally to
protect the U.S. dollar value of securities held by the Portfolio against
exchange rate fluctuation. While forward contracts may limit losses as a result
of exchange rate fluctuations, they will also limit any gains that might
otherwise have been realized. The Portfolio's Custodian may be required to place
cash or liquid securities in a segregated account in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will be at least equal to the amount of
the Portfolio's commitments with respect to such contracts.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Each Portfolio, except
the Money Market and Municipal Money Market Portfolios, may purchase and sell
futures contracts and options on futures contracts, including but not limited to
financial futures, securities index futures, foreign currency exchange futures,
and interest rate futures contracts. Futures contracts provide for the sale by
one party and purchase by another party of a specified amount of a specific
security, instrument or basket thereof, at a specific future date and at a
specified price. An option on a futures contract is a legal contract that gives
the holder the right to buy or sell a specified amount of futures contracts at a
fixed or determinable price upon the exercise of the option.
The Portfolios may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or purchase securities
index futures in order to gain market exposure. Subject to applicable laws, the
Portfolios may engage in transactions in securities index futures contracts (and
options thereon) which are traded on a recognized securities or futures
exchange, or may purchase or sell such instruments in the over-the-counter
market. There currently are limited securities index futures and options on such
futures in many countries, particularly emerging countries. The nature of the
strategies adopted by the Adviser, and the extent to which those strategies are
used, may depend on the development of such markets.
The Portfolios may engage in transactions involving foreign currency
exchange futures contracts. Such contracts involve an obligation to purchase or
sell a specific currency at a specified date and at a specified price. The
Portfolios may engage in such transactions to hedge their respective holdings
and commitments against changes in the level of future currency rates or to gain
exposure to a particular currency.
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The Portfolios may engage in transactions in interest rate futures
transactions. Interest rate futures contracts involve an obligation to purchase
or sell a specific debt security, instrument or basket thereof at a specified
future date at a specified price. The value of the contract rises and falls
inversely with changes in interest rates. The Portfolios may engage in such
transactions to hedge their holdings of debt instruments against future changes
in interest rates.
Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies, and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures contracts, the value of financial futures
contracts rises and falls inversely with changes in interest rates. The
Portfolios may engage in financial futures contracts for hedging and non-hedging
purposes.
Under rules adopted by the Commodity Futures Trading Commission, each
Portfolio may enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of such Portfolios'
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to
activities that do not constitute "bona-fide" hedging. No Portfolio, except the
Fixed Income Portfolio, will enter into futures contracts to the extent that its
outstanding obligations to purchase securities under such contracts, in
combination with its outstanding obligations with respect to options
transactions (including options to purchase securities or instruments) would
exceed 20% of its total assets.
Gains and losses on futures contracts and options thereon depend on the
Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by a Portfolio and the prices of futures and
options relating to investments purchased or sold by the Portfolio, and (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position. The risk that a Portfolio will
be unable to close out a futures position or options contract will be minimized
by only entering into futures contracts or options transactions for which there
appears to be a liquid exchange or secondary market. The risk of loss in trading
on futures contracts in some strategies can be substantial, due both to the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. A Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets.
MONEY MARKET INSTRUMENTS. The Portfolios are permitted to invest in money
market instruments, although each Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
Each Portfolio may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. See "Temporary
Investments." The money market investments
20
<PAGE>
permitted for the Portfolios include obligations of the U.S. Government and its
agencies and instrumentalities; obligations of foreign sovereignties; other debt
securities; commercial paper; bank obligations; certificates of deposit
(including Eurodollar certificates of deposit); and repurchase agreements.
OPTIONS TRANSACTIONS. The Fixed Income Portfolio may seek to increase its
return or may hedge its portfolio investments through options transactions with
respect to securities, instruments, indices or baskets thereof in which the
Portfolio may invest, as well as with respect to foreign currency. Purchasing a
put option gives the Portfolio the right to sell a specified security, currency
or basket of securities or currencies at the exercise price until the expiration
of the option. Purchasing a call option gives the Portfolio the right to
purchase a specified security, currency or basket of securities or currencies at
the exercise price until the expiration of the option. The Portfolio may not
purchase call and put options to the extent that the value of its aggregate
investment in options exceeds 5% of its total assets.
The Portfolio also may write (i.e., sell) put and call options on
investments held in its portfolio, as well as with respect to foreign currency.
A Portfolio that has written an option receives a premium, which increases the
Portfolio's return on the underlying security or instrument in the event the
option expires unexercised or is closed out at a profit. However, by writing a
call option, the Portfolio will limit its opportunity to profit from an increase
in the market value of the underlying security or instrument above the exercise
price of the option for as long as the Portfolio's obligation as writer of the
option continues. The Portfolio may only write options that are "covered." A
covered call option means that so long as the Portfolio is obligated as the
writer of the option, it will own (i) the underlying security or instrument
subject to the option or (ii) securities or instruments convertible or
exchangeable without the payment of any consideration into the security or
instrument subject to the option.
By writing (or selling) a put option, the Portfolio incurs an obligation to
buy the security or instrument underlying the option from the purchaser of the
put at the option's exercise price at any time during the option period, at the
purchaser's election. Options written by the Portfolio may be exercisable by the
purchaser only on a specific date. A Portfolio that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option.
The Portfolio may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Adviser and
the extent to which those strategies are used will depend on the development of
such option markets. The primary risks associated with the use of options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by the Portfolio and the prices of options relating to
such investments; and (ii) possible lack of a liquid secondary market for an
option.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines of the Fund's
Board of Directors. In a repurchase agreement, a Portfolio buys a security from
a seller that has agreed to repurchase it at a mutually agreed upon date and
price, reflecting the interest rate effective for the term of the agreement. The
term of these agreements is usually from overnight to one week and never exceeds
one year. Repurchase agreements may be viewed as a fully collateralized loan of
money by the Portfolio to the seller. The Portfolio always receives securities
with a market value at least equal to the purchase price (including accrued
interest) as collateral, and this value is maintained during the term of the
agreement. If the seller defaults and the collateral value declines, the
Portfolio might incur a loss. If bankruptcy
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<PAGE>
proceedings are commenced with respect to the seller, the Portfolio's
realization upon the collateral may be delayed or limited. The Portfolio may not
enter into repurchase agreements with more than seven days to maturity if, as a
result, more than 15% of the market value of the Portfolio's net assets are
invested in these agreements and other investments for which market quotations
are not readily available or which are otherwise illiquid.
REVERSE REPURCHASE AGREEMENTS. The Money Market Portfolio may enter into
reverse repurchase agreements with brokers, dealers, domestic and foreign banks
or other financial institutions. In a reverse repurchase agreement, the
Portfolio sells a security and agrees to repurchase it at a mutually agreed upon
date and price, reflecting the interest rate effective for the term of the
agreement. Reverse Repurchase Agreements may also be viewed as the borrowing of
money by the Portfolio and are, therefore, subject to the Portfolio's overall
borrowing limitations. The Portfolio's investment of the proceeds of a reverse
repurchase agreement is the speculative factor known as leverage. The Portfolio
may enter into a reverse repurchase agreement only if the interest income from
investment of the proceeds is greater than the interest expense of the
transaction and the proceeds are invested for a period no longer than the term
of the agreement. The Portfolio will maintain with the Custodian a separate
account with a segregated portfolio of securities at least equal to its purchase
obligations under these agreements. If interest rates rise during a reverse
repurchase agreement, it may adversely affect the Portfolio's ability to
maintain a stable net asset value.
TAXABLE INVESTMENTS. The Municipal Bond and Municipal Money Market
Portfolios attempt to invest 80% and 100%, respectively, of their assets in
tax-exempt municipal securities. However, the Portfolios are permitted to invest
up to 20% of the value of their total assets in securities, the interest income
of which is subject to federal income tax. Either Portfolio may make taxable
investments pending investment of proceeds from sales of its shares or portfolio
securities or pending settlement of purchases of portfolio securities in order
to maintain liquidity to meet redemptions or when it is advisable in the
Adviser's opinion because of adverse market conditions. The taxable investments
permitted for either Portfolio include obligations of the U.S. Government and
its agencies and instrumentalities, bank obligations, commercial paper and
repurchase agreements. Fees from loans of tax-exempt securities will also be
taxable income of the Portfolio.
TEMPORARY INVESTMENTS. For temporary defensive purposes, when the Adviser
determines that market conditions warrant, each Portfolio may invest up to 100%
of its assets in dollar and non-dollar denominated money market instruments and
short- and medium-term debt securities that the Adviser believes to be of high
quality, or hold cash. The short- and medium-term debt securities in which a
Portfolio may invest consist of (a) obligations of the U.S. or foreign country
governments, their respective agencies or instrumentalities; (b) bank deposits
and bank obligations (including certificates of deposit, time deposits and
bankers' acceptances) of U.S. or foreign country banks denominated in any
currency; (c) floating rate securities and other instruments denominated in any
currency issued by international development agencies; (d) finance company and
corporate commercial paper and other short-term corporate debt obligations of
U.S. and foreign country corporations meeting the Portfolio's credit quality
standards; and (e) repurchase agreements with banks and broker-dealers with
respect to such securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of
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<PAGE>
the purchase commitment but will take place no more than 120 days after the
trade date. Each Portfolio will maintain with the Custodian a separate account
with a segregated portfolio of cash or liquid securities in an amount at least
equal to these commitments. The payment obligation and the interest rates that
will be received are each fixed at the time a Portfolio enters into the
commitment and no interest accrues to the Portfolio until settlement. Thus, it
is possible that the market value at the time of settlement could be higher or
lower than the purchase price if the general level of interest rates has
changed. It is a fundamental policy of the Money Market Portfolio and a current
policy of the Municipal Money Market Portfolio not to enter into when-issued
commitments exceeding, in the aggregate, 15% of the market value of the
Portfolio's total assets less liabilities other than the obligations created by
these commitments.
INVESTMENT LIMITATIONS
Each Portfolio is a diversified investment company under the Investment
Company Act of 1940, as amended (the "1940 Act") and is subject to the following
limitations: (a) as to 75% of its total assets, a Portfolio may not invest more
than 5% of its total assets in the securities of any one issuer, except
obligations of the U.S. Government and its agencies and instrumentalities, and
(b) a Portfolio may not own more than 10% of the outstanding voting securities
of any one issuer.
Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each portfolio. The Adviser provides investment
advice and portfolio management services pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes the portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the portfolio's
investments. Set forth below as an annual percentage of daily net assets are the
management fees payable to the Adviser quarterly by each Portfolio pursuant to
the terms of the Investment Advisory Agreement. The Adviser has agreed to a
reduction in the fees payable to it and to reimburse the Non-Money Portfolios,
if necessary, if such fees would cause the total annual operating expenses of
any Portfolio to exceed the maximum set forth in the table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING EXPENSES
AFTER FEE WAIVERS
MANAGEMENT FEE ----------------------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- -------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Fixed Income 0.35% 0.45% 0.60%
Municipal Bond 0.35% 0.45% 0.70%
Mortgage-Backed Securities 0.35% 0.45% 0.70%
Money Market 0.30% 0.55% N/A
Municipal Money Market 0.30% 0.57% N/A
</TABLE>
23
<PAGE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
U.S. and abroad. On February 5, 1997, Morgan Stanley Group Inc. and Dean Witter,
Non-Money Discover & Co. announced that they had entered into an Agreement and
Plan of Merger to form Morgan Stanley, Dean Witter, Discover & Co. Morgan
Stanley Group Inc. is the direct parent of the Adviser and Morgan Stanley.
Subject to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, the Adviser and Morgan Stanley
will be subsidiaries of Morgan Stanley, Dean Witter, Discover & Co. At February
28, 1997, the Adviser, together with its affiliated asset management companies
had approximately $176.9 billion in assets under management as an investment
manager or as a Named Fiduciary or Fiduciary Adviser. See "Management of the
Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. The following individuals have primary portfolio
management responsibility for the Portfolios noted below:
FIXED INCOME PORTFOLIO -- WARREN ACKERMAN, III. Warren Ackerman is a
Principal of the Advisor and a Senior Fixed Income Portfolio Manager. Mr.
Ackerman joined the Advisor in December 1993. Prior to joining the Advisor, Mr.
Ackerman spent over 14 years with Bankers Trust Company as a Managing Director
responsible for institutional active fixed income management. Prior to Bankers,
he spent almost seven years as a Vice President with Irving Trust Company in the
Trust Investment Division. Mr. Ackerman is a graduate of Monmouth College with a
B.S. in Economics. Mr. Ackerman has had primary responsibility for managing the
Portfolio's assets since March 1994.
MUNICIPAL BOND PORTFOLIO -- LORI A. COHANE. Lori A. Cohane joined the
Adviser in 1994 as a Vice President and Municipal Bond Portfolio Manager. Prior
to joining the Adviser, Ms. Cohane spent eight years with Salomon Brothers Asset
Management as a Vice President, Portfolio Manager and Senior Credit Analyst of
municipal bond accounts managing portfolios for high net worth individuals,
open- and closed-end bond funds and institutional accounts. Ms. Cohane is a
magna cum laude graduate of the State University of New York at Albany with a
B.S. degree in Finance and Economics. Ms. Cohane has had primary responsibility
for managing the Portfolio's assets since its inception.
MORTGAGE-BACKED SECURITIES PORTFOLIO -- WARREN ACKERMAN, III. Information
about Mr. Ackerman is included under Fixed Income Portfolio above. Mr. Ackerman
has had primary responsibility for managing the Portfolio's assets since its
inception.
MONEY MARKET PORTFOLIO -- ABIGAIL JONES FEDER, KENNETH R. HOLLEY, ELLEN D.
HARVEY, CHRISTIAN G. ROTH AND SCOTT F. RICHARD. Abigail Feder is a Principal of
Morgan Stanley and shares responsibility for managing short-term taxable and
tax-exempt portfolios. Ms. Feder joined Morgan Stanley's Corporate Finance
Department in 1985. In 1987 she joined the Adviser as a Marketing Analyst and
was promoted to a Marketing Director in 1988. She joined the Fixed Income Group
as a Portfolio Manager in 1989 and she became a Vice President in 1992. Ms.
Feder holds a B.A. from Vassar College. Kenneth R. Holley joined the Adviser as
a short-term fixed income portfolio manager in July, 1993. Prior thereto, he
worked for 2 1/2 years as a Finance Officer for the African Development Bank
implementing trading strategies for the bank's $1 billion short to intermediate
U.S. dollar portfolio. Prior to joining the ADB, Mr. Holley spent 1 1/2 years
with Ward and Associates Asset Management as a Vice President responsible for
fixed income strategy. Before Ward and Associates he worked in the fixed income
department of Salomon Brothers, Inc. Mr. Holley holds a B.S. degree in
Engineering from University of
24
<PAGE>
Pennsylvania and an M.B.A. from the Wharton School. Mr. Barth and Ms. Feder have
had primary responsibility for managing the Portfolio's assets since inception.
Mr. Holley has shared primary responsibility for managing the Portfolio's assets
since August, 1993. Ellen D. Harvey shares primary responsibility for managing
the Portfolio's assets. She joined the Adviser in 1996 and has been a portfolio
manager with Miller Anderson & Sherrerd, LLP ("MAS"), an affiliate of the
Adviser, since 1984. She assumed responsibility for the MAS-advised Cash
Reserves Portfolio in 1990, the Limited Duration Portfolio in 1992 and the
Intermediate Duration Portfolio in 1994. Ms. Harvey holds an A.B. in economics
from Princeton University and an M.A. in economics from George Washington
University. Christian G. Roth shares primary responsibility for managing the
Portfolio's assets. He joined the Adviser in 1996 and has been a portfolio
manager with MAS since 1991. He served as Senior Associate, Dean Witter Capital
Corporation from 1987 to 1991. He assumed responsibility for the MAS-advised
Limited Duration and Intermediate Duration Portfolios in 1994. Mr. Roth holds a
B.S. from The Wharton School of the University of Pennsylvania. Scott F. Richard
shares primary responsibility for managing the Portfolio's assets. He joined the
Adviser in 1996 and has been a portfolio manager with MAS since 1992. He served
as Vice President, Head of Fixed Income Research & Model Development for
Goldman, Sachs & Co. from 1987 to 1991 and as Head of Mortgage Research in 1992.
He assumed responsibility for the MAS-advised Mortgage-Backed Securities
Portfolio in 1992 and the Limited Duration, Intermediate Duration, Municipal and
PA Municipal Portfolios in 1994. Mr. Richard holds a B.S. from Massachusetts
Institute of Technology and a D.B.A. from Harvard Graduate School of Business
Administration.
MUNICIPAL MONEY MARKET PORTFOLIO -- GERALD P. BARTH AND ABIGAIL JONES
FEDER. Information about Mr. Barth and Ms. Feder is included under Money Market
Bond Portfolio above. Mr. Barth and Ms. Feder have shared primary responsibility
for managing the Portfolio's assets since inception.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the Officers and the
Board of Directors of the Fund, and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator through its agents will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals .15% of the average daily net assets of each Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The Officers of the Fund conduct and supervise its daily business
operations.
25
<PAGE>
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each of the Non-Money Portfolios pursuant to Rule 12b-1 under the 1940
Act (each, a "Plan"). Under each Plan, the Distributor is entitled to receive
from each of the Non-Money Portfolios a distribution fee, which is accrued daily
and paid quarterly, of 0.25% of the Class B shares' average daily net assets on
an annualized basis. The Distributor expects to reallocate most of its fee to
its investment representatives. The Distributor may, in its discretion,
voluntarily waive from time to time all or any portion of its distribution fee
and each of the Distributor and the Adviser is free to make additional payments
out of its own assets to promote the sale of Fund shares, including payments
that compensate financial institutions for distribution services or shareholder
services. The Distributor has agreed to waive 0.10% of the 0.25% distribution
fee it is entitled to receive from the Fixed Income Portfolio.
Each Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountant's fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of the Non-Money Portfolios and Class A shares of
the Money Portfolios may be purchased, without sales commission, at the net
asset value per share next determined after receipt of the purchase order by the
Non-Money Portfolio and, in the case of the Money Portfolios, at the price next
determined after Federal Funds are available to the Money Portfolio. See
"Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Non-Money Portfolio account opened on or after January 2, 1996 (a "New
Non-Money Account"), the minimum initial investment and minimum account size are
$500,000 for Class A shares and $100,000 for Class B shares. The minimum initial
investment for each Money Portfolio is $50,000. Certain advisory or asset
allocation accounts, such as Total Funds Management accounts, managed by Morgan
Stanley or its affiliates, including the Adviser ("Managed Accounts") may
purchase Class A shares without being subject to any minimum initial investment
or minimum account size requirements for a Portfolio account. Employees of the
Adviser and certain of its affiliates may purchase Class A shares subject to
conditions, including a lower minimum initial investment, established by
Officers of the Fund.
26
<PAGE>
If the value of a New Non-Money Account containing Class A shares falls
below $500,000 (but remains at or above $100,000) because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $500,000 (but remains at or above $100,000) for a continuous
60-day period, the Class A shares in such account will convert to Class B shares
and will be subject to the distribution fee and other features applicable to the
Class B shares. The Fund, however, will not convert Class A shares to Class B
shares based solely upon changes in the market that reduce the net asset value
of shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 were
designated Class A shares on January 2, 1996. Shares in a Non-Money Portfolio
account opened prior to January 2, 1996 (each, a "Pre 1996 Non-Money Account")
with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A
Account") remained Class A shares regardless of account size thereafter. Except
for shares in a Managed Account, shares in a Pre-1996 Non-Money Account with a
value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account")
convert to Class B shares on March 1, 1996. Grandfathered Class A Accounts and
Managed Accounts are not subject to conversion from Class A shares to Class B
shares.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution.
The minimum investment levels may be waived at the discretion of the Adviser
for (i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planners,
financial services firms, or investment advisers that have entered into an
agreement with Morgan Stanley or its affiliates; and (ii) retirement and
deferred compensation plans and trusts used to fund such plans, including, but
not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal
Revenue Code of 1986, as amended (the "Code") and "rabbi trusts". The Fund
reserves the right to modify or terminate the conversion features of the shares
as stated above at any time upon 60-days notice to shareholders.
The Adviser reserves the right in its sole discretion to determine which of
such advisory or asset allocation accounts shall be Managed Accounts. For
information regarding Managed Accounts, please contact your Morgan Stanley
account representative or the Fund at the telephone number provided on the cover
of this Prospectus.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Non-Money Account falls below $100,000 because of
shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains below $100,000 for a continuous 60-day period, the shares
in such accounts are subject to redemption by the Fund and, if redeemed, the net
asset value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption. If a shareholder reduces its
total investment in Class A shares of a Money Portfolio to less than $10,000,
the investment may be subject to redemption. The Fund reserves the right to
modify or terminate the involuntary redemption features of the shares as stated
above at any time upon 60-days notice to shareholders.
27
<PAGE>
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Non-Money Portfolio account increases,
whether due to shareholder share purchases or market activity, to $500,000 or
more, the Class B shares will convert to Class A shares. Under current tax law,
such conversion is not a taxable event to the shareholder. Class A shares
converted from Class B shares are subject to the same minimum account size
requirements that are applicable to New Non-Money Accounts containing Class A
shares, as stated above. The Fund reserves the right to modify or terminate this
conversion feature at any time upon 60-days notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of each Non-Money Portfolio, $100,000 minimum for Class B
shares of each Non-Money Portfolio, and $50,000 minimum for each Money
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers, including those who participate in the Automatic Purchase of
Portfolio Shares program described below) payable to "Morgan Stanley
Institutional Fund, Inc. -- [portfolio name]", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The classes of shares of the
Portfolio(s) to be purchased should be designated on the Account Registration
Form. For purchases by check, the Fund is ordinarily credited with Federal
Funds within one business day. Thus, your purchase of shares by check is
ordinarily credited to your account at the net asset value per share of the
relevant Portfolio determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
28
<PAGE>
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA#021000021
DDA#910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
The purchase price of the Class A and Class B shares of each Non-Money
Portfolio is the net asset value next determined after the order is received.
See "Valuation of Shares." An order received prior to the regular close of the
New York Stock Exchange ("NYSE"), which is currently 4:00 p.m. Eastern Time,
will be executed at the price computed on the date of receipt; an order
received after the regular close of the NYSE will be executed at the price
computed the next day the NYSE is open as long as the Transfer Agent receives
payment by check or in Federal Funds prior to the regular close of the NYSE on
such day. Orders for the purchase of shares of the Money Market Portfolio or
Municipal Money Market Portfolio become effective on the business day Federal
Funds are received, and the purchase will be effected at the net asset value
next computed after receipt.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Share purchases of the
Money Market Portfolio in Federal Funds received by 12:00 noon (Eastern Time),
and share purchases of the Municipal Money Market Portfolio in Federal Funds
received by 11:00 a.m. (Eastern Time) will begin to earn income on the day of
receipt. Your bank may charge a service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested.
For the Money Market and Municipal Money Market Portfolios, if money is not
converted the same day, it will be converted the next business day and shares
will be purchased at the net asset value next determined after such
conversion. Your bank may charge a service fee for wiring funds.
4) AUTOMATIC PURCHASE OF PORTFOLIO SHARES. Free cash balances (i.e., any cash
that is available on demand at the close of the previous business day) which
are held in certain eligible accounts at Morgan Stanley Asset Management
Inc., Morgan Stanley or any other affiliated investment adviser or broker,
and which are selected at the discretion of the Adviser, will be
automatically invested on the next business day at net asset value in shares
of the Money Market Portfolio or the Municipal Money Market Portfolio. A
shareholder may
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elect in writing from time to time in which portfolio to invest. This
automatic purchase facility permits certain eligible investment management
and brokerage customers of Morgan Stanley to have their free cash balances
invested in portfolio shares on a daily basis pending other investments.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000 for each portfolio, except for automatic reinvestment of dividends and
capital gains distributions for which there are no minimums) by purchasing
shares at net asset value by mailing a check to the Fund (payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]") at the above address or
by wiring monies to the Custodian Bank as outlined above. It is very important
that your account name, the Portfolio name and the class selected be specified
in the letter or wire to assure proper crediting to your account. In order to
ensure that your wire orders are invested promptly, you are requested to notify
one of the Fund's representatives (toll-free 1-800-548-7786) prior to the wire
date. Additional investments will be applied to purchase additional shares in
the same class held by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolios will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a Portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolios and each Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging
shares of
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Portfolio A for shares of Portfolio B, then exchanging shares of Portfolio B for
shares of Portfolio C and again exchanging shares of Portfolio C for shares of
Portfolio B within a 120-day period. Two types of transactions are exempt from
these excessive trading restrictions: (1) trades exclusively between money
market portfolios; and (2) trades done in connection with an asset allocation
service, such as TFM Accounts or accounts, managed or advised by the Adviser
and/or any of its affiliates.
INVESTMENT IN FUNDS THROUGH A TOTAL FUNDS MANAGEMENT ("TFM") ACCOUNT
In addition to the considerable diversification among individual securities
you receive by investing in a particular Portfolio, you can further reduce risk
by spreading your assets among several different Portfolios that each have
different risk and return characteristics. TFM is an active investment
management service managed by Morgan Stanley or its affiliates, including Morgan
Stanley Asset Management Inc. (each, a "TFM Adviser"), that allocates your
investments across a combination of either Class A or Class B shares of certain
of the Portfolios selected to meet your long-term investment objectives as well
as, in certain circumstances, your current income objectives.
The TFM Adviser has developed investment strategies for TFM Accounts to meet
the diverse financial needs of different investors. You can open a TFM Account
by meeting with one of the investment professionals of a Participating Dealer
who will review your situation and help you identify your long-term investment
and/or current income objectives. After using TFM criteria to determine your
long-term investment and/or current income objectives, you can choose one of
several TFM investment strategies. Based on your chosen strategy, your initial
investment will be allocated among a number of the Class A or Class B shares of
the Portfolios. Depending on market conditions, the TFM Adviser periodically
reallocates the combination of Portfolios or the percentage amounts invested in
the shares of each Portfolio to implement your TFM investment strategy. In
addition, your TFM Account will be periodically rebalanced to maintain your TFM
strategy's current asset allocation mix, if and when the performance of one or
more of the Portfolios unbalances the strategy's mix. You will pay the TFM
Adviser a fee for the TFM Account service that is in addition to and separate
from the fees and expenses you will pay directly or indirectly as an investor in
the Portfolios. See "Fund Expenses."
From time to time, one or more of the Portfolios used for investment by the
TFM Accounts may experience relatively large investments or redemptions due to
the TFM Account allocations or rebalancings recommended by the TFM Adviser.
These transactions will affect the Portfolios, since Portfolios that experience
redemptions as a result of reallocations or rebalancings may have to sell
portfolio securities and Portfolios that receive additional cash will have to
invest it in additional portfolio securities. While it is impossible to predict
the overall impact of these transactions over time, there could be adverse
effects on portfolio management to the extent that Portfolios may be required to
sell securities or invest cash at times when they would not otherwise do so.
These transactions could also have tax consequences if sales of securities
resulted in gains and could also increase transaction costs. The Adviser,
representing the interests of the Portfolios, is committed to minimizing the
impact of TFM Account transactions on the Portfolios. The Adviser, however, will
have a conflict in fulfilling this responsibility in that it also serves as a
TFM Adviser. In that capacity, the Adviser, representing the interests of the
TFM Accounts, also is committed to minimizing the impact of TFM Account
transactions on the Portfolios to the extent consistent with pursuing the
investment objectives of the TFM Accounts. In addition, an affiliate of the TFM
Adviser, the Distributor is compensated on the sale, and may be compensated for
distribution or
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shareholder services on the sale of shares of the Portfolios. See "Purchase of
Shares" and "Shareholder Services -- Exchange Features." The Adviser will
monitor the impact of TFM Account transactions on the Portfolios.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A and Class B shares of each Non-Money Portfolio and Class A shares of
each Money Portfolio at the next determined net asset value of shares of the
applicable class. On days that both the NYSE and the Custodian Bank are open for
business, the net asset value per share of the Fixed Income, Municipal Bond and
Mortgage-Backed Securities Portfolios is determined at the regular close of
trading of the NYSE (currently 4:00 p.m. Eastern Time), and the net asset value
per share of the Municipal Money Market Portfolio is determined at 11:00 a.m.
(Eastern Time) and the net asset value per share of the Money Market Portfolio
is determined at 12:00 p.m. (Eastern Time). Shares of a Portfolio may be
redeemed by mail or telephone. No charge is made for redemption. Any redemption
proceeds may be more or less than the purchase price of your shares depending
on, among other factors, the market value of the investment securities held by
the Portfolio.
BY MAIL
Each Non-Money Portfolio will redeem its Class A and Class B shares and each
Money Portfolio will redeem its Class A shares at the net asset value next
determined after your request is received if the request is received in "good
order." Your request should be addressed to Morgan Stanley Institutional Fund,
Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798, except that deliveries by
overnight courier should be addressed to Morgan Stanley Institutional Fund,
Inc., c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Fund's representatives for further
details. In times of drastic market conditions, the telephone redemption option
may be difficult to implement. If you experience difficulty in making a
telephone redemption, your request may be made by mail or express mail and will
be
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implemented at the net asset value next determined after it is received.
Redemption requests sent to the Fund through express mail must be mailed to the
address of the Dividend Disbursing and Transfer Agent listed under "General
Information." The Fund and the Fund's transfer agent (the "Transfer Agent") will
employ reasonable procedures to confirm that the instructions communicated by
telephone are genuine. These procedures include requiring the investor to
provide certain personal identification information at the time an account is
opened and prior to effecting each transaction requested by telephone. In
addition, all telephone transaction requests will be recorded and investors may
be required to provide additional telecopied written instructions regarding
transaction requests. Neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.
To change the name of the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Fund at the address
above. Requests to change the bank or account must be signed by each shareholder
and each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Commission.
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution-in-kind of securities held by a Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of Portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in a Portfolio for shares of any other
available portfolio(s) of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in
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which you seek to invest. Because an exchange transaction is treated as a
redemption followed by a purchase, an exchange would be considered a taxable
event for shareholders subject to tax. The exchange privilege may be modified or
terminated by the Fund at any time upon 60-days notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the names of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, MA 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current Portfolio, the name(s) of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the class of
the portfolios involved in the exchange of shares at the close of business.
Requests received after 4:00 p.m. are processed the next business day based on
the net asset value determined at the close of such day. For additional
information regarding responsibility for the authenticity of telephoned
instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolios' shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of each Non-Money
Portfolio is determined by dividing the total market value of the Non-Money
Portfolio's investments and other assets attributable to such class, less all
liabilities attributable to such class, by the number of total outstanding
shares of such a class of the Non-Money Portfolio. Net asset value is calculated
separately for each class of the Portfolio. Net asset value per share of the
Non-Money Portfolios is determined as of the regular close of the NYSE on each
day that the NYSE is open for business. Price information on listed securities
is taken from the exchange where the security is primarily traded. Securities
listed on a U.S. securities exchange for which market quotations are available
are valued at the last quoted sale price on the day the valuation is made.
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 a price within a
range not exceeding the current asked price nor less than the current bid price.
The current bid and asked prices are determined based on the average of the bid
and asked prices quoted on such valuation date by two reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily unless collection is in doubt. In addition, bonds and other fixed
income
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securities may be valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market value of such
securities. The prices provided by a pricing service are determined without
regard to bid or last sale prices, but take into account institutional size,
trading in similar groups of securities and any developments related to the
specific securities. Securities not priced in this manner are valued at the most
recently quoted bid price or, when securities exchange valuations are used, at
the latest quoted sale price on the day of valuation. If there is no such
reported sale, the latest quoted bid price will be used. Securities purchased
with remaining maturities of 60 days or less are valued at amortized cost, if it
approximates market value. In the event that amortized cost does not approximate
market value, market prices as determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine prices in accordance
with the above-stated procedures are determined in good faith at fair value
using methods determined by the Board of Directors. For purposes of calculating
net asset value per share, all assets and liabilities initially expressed in
foreign currencies will be converted into U.S. dollars at the mean of the bid
and asked price for such currencies against the U.S. dollar last quoted by any
major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of Class A shares as a result of the distribution expenses charged to
Class B shares.
The net asset value per share of each of the Money Market and Municipal
Money Market Portfolios is determined by subtracting the Portfolio's liabilities
(including accrued expenses and dividends payable) from the total value of the
Portfolio's investments and other assets and dividing the result by the total
number of outstanding shares of the Portfolio. The net asset values per share of
the Municipal Money Market Portfolio and the Money Market Portfolio are
determined at 11:00 a.m. and 12:00 noon (Eastern Time), respectively, on the
days on which the NYSE is open. For the purpose of calculating each Money Market
Portfolio's net asset value per share, securities are valued by the "amortized
cost" method of valuation, which does not take into account unrealized gains or
losses. This involves valuing an instrument at its cost and thereafter assuming
a constant amortization to maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which the value, as determined by amortized cost, is higher or lower than
the price the Portfolio would receive if it sold the instrument.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Fixed Income, Municipal Bond and Mortgage-Backed Securities Portfolios. In
addition, from time to time the Fund may advertise "yield" for the Municipal
Bond, Money Market and Municipal Money Market Portfolios and "effective yield"
for the Money Market and Municipal Money Market Portfolios. In addition to these
yield figures, the Municipal Bond and Municipal Money Market Portfolio may
advertise a tax equivalent yield. THESE FIGURES ARE BASED ON HISTORICAL
PERFORMANCE AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
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Each of the Non-money Portfolios may advertise "total return" which shows
what an investment in a class of the Portfolio would have earned over a
specified period of time (such as one, five or ten years) assuming that all
distributions and dividends by the Portfolio were reinvested in the same class
on the reinvestment dates during the period. Total return does not take into
account any federal or state income taxes that may be payable on dividends and
distributions or upon redemption. The "yield" of the Municipal Bond Portfolio
refers to the income generated by an investment in the Portfolio over a
one-month or 30-day period, while the "yield" of the Money Market and Municipal
Money Market Portfolios refers to the income generated by an investment in the
Portfolio over a seven-day period (which period will be stated in the
advertisement). This income is then "annualized." That is, the amount of income
generated by the investment during that 30- or seven-day period is assumed to be
generated each 30-day period for twelve periods or each week over a 52-week
period, and is shown as a percentage of the investment. The "effective yield" is
calculated similarly but, when annualized, the income earned on an investment in
the Portfolio is assumed to be reinvested. The "effective yield" will be
slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment. A "tax equivalent yield" is the "yield" of the Portfolio
increased by an amount based on an assumed rate of tax for a shareholder. For
further information concerning these figures, see "Calculation of Yield and
Total Return" in the Statement of Additional Information. The Fund may also use
comparative performance information in marketing the Portfolios' shares,
including data from Lipper Analytical Services, Inc., Donoghue's Money Fund
Report, other industry publications, business periodicals, rating services and
market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
FIXED INCOME, MUNICIPAL BOND AND MORTGAGE-BACKED SECURITIES PORTFOLIOS
All income dividends and capital gains distributions for a class of shares
of each Non-Money Portfolio will be automatically reinvested in additional
shares of such class at net asset value, except that, upon written notice to the
Fund or by checking off the appropriate box in the Distribution Option Section
on the Account Registration Form, a shareholder may elect to receive income
dividends and capital gains distributions in cash.
Each Non-Money Portfolio expects to distribute substantially all of its
taxable net investment income in the form of monthly dividends. Net realized
capital gains of each Non-Money Portfolio, if any, after reduction for any tax
loss carryforwards will also be distributed annually.
Undistributed net investment income is included in each Non-Money
Portfolio's net assets for the purpose of calculating net asset value per share.
Therefore, on the "ex-dividend" date, the net asset value per share excludes the
dividend (I.E., is reduced by the per share amount of the dividend). Dividends
paid shortly after the purchase of shares by an investor, although in effect a
return of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of each Non-Money Portfolio will differ
at times. Expenses of each Non-Money Portfolio allocated to a particular class
of shares will be borne on a pro rata basis by each outstanding share of that
class.
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MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS
Net investment income is computed and dividends declared as of 1:00 p.m.
(Eastern time), on each day. Such dividends are payable to Municipal Money
Market Portfolio shareholders of record as of 11:00 a.m. (Eastern time) on that
day and to Money Market Portfolio shareholders of record as of 12:00 noon
(Eastern time) on that day, if the Fund and Custodian Bank are open for
business. This means that shareholders whose purchase orders become effective as
of 12:00 noon (for the Money Market Portfolio) or 11:00 a.m. (for the Municipal
Money Market Portfolio) receive the dividend for that day. Dividends declared
for Saturdays, Sundays and holidays are payable to shareholders of record as of
4:00 p.m. on the last preceding day the Fund and its Custodian Bank were open
for business.
For the purpose of calculating dividends, net income of each Money Portfolio
shall consist of interest earned, including any discount or premium ratably
amortized to the date of maturity, minus estimated expenses of the Money
Portfolio.
Each Money Portfolio's daily dividends are accrued throughout the month and
are distributed on the fifteenth calendar day of each month (or next business
day if the fifteenth calendar day falls on a holiday or weekend). Dividends of
each Money Portfolio are payable in additional shares, except that, upon written
notice to the Fund or by checking off the appropriate box in the Distribution
Option Section on the Account Registration Form, a shareholder may elect to
receive income dividends and any capital gains distributions in cash.
Each shareholder receives a monthly statement summarizing activity in the
account. If at any time a shareholder wishes to withdraw all of the funds in an
account, the proceeds will be sent to the shareholder by wire or check,
according to the shareholder's instructions. If the withdrawal is by wire, a
check in the amount of the income to the shareholder's account through the day
of withdrawal will be mailed to the shareholder on the next business day.
Withdrawals by check will include accrued income through the date of withdrawal.
Net realized short-term capital gains, if any, of each Money Portfolio are
to be distributed whenever the Board of Directors determine that such
distributions would be in the best interest of shareholders, but in any event,
at least once a year. The Money Portfolios do not expect to realize any
long-term capital gains. Should any such gains be realized, they will be
distributed annually.
It is an objective of management to maintain the price per share of each
Money Portfolio as computed for the purpose of sales and redemptions at exactly
$1.00. In the event the Board of Directors determine that a deviation from the
$1.00 per share price may exist which may result in a material dilution or other
unfair results to investors or existing shareholders, they will take corrective
action they regard as necessary and appropriate, including the sale of
instruments from a Money Portfolio prior to maturity to realize capital gains or
losses; shortening average portfolio maturity; withholding dividends; making a
special capital distribution; or redemptions of shares in kind.
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TAXES
GENERAL
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other Portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
Each Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from a Portfolio's net investment income (other than
"exempt-interest dividends," described below) are taxable to shareholders as
ordinary income, whether received in cash or in additional shares. Distributions
of net capital gain (the excess of net long-term capital gain over net
short-term capital loss) are taxable to shareholders as long-term capital gain,
regardless of how long shareholders have held their shares. Distributions of net
investment income and net capital gain are not eligible for the corporate
dividends-received deduction. Each Portfolio will send reports annually to its
shareholders of the federal income tax status of all distributions made during
the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
loss, including any available capital loss carryforwards) prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (1) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Application Form, (2) who is subject to backup withholding by the Internal
Revenue Service, or (3) who has not certified to the Fund that such shareholder
is not subject to backup withholding. This backup withholding is not an
additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the redemption proceeds exceed or
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are less than the shareholder's adjusted basis in the sold, exchanged or
redeemed shares. If capital gain distributions have been made with respect to
shares that are sold at a loss after being held for six months or less, then the
loss is treated as a long-term capital loss to the extent of the capital gain
distributions.
Conversion of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
THE MUNICIPAL BOND AND MUNICIPAL MONEY MARKET PORTFOLIOS
The dividends payable by the Municipal Bond and the Municipal Money Market
Portfolios from net tax-exempt interest from municipal bonds and notes will
qualify as "exempt-interest dividends" if, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
securities the interest on which is excludable from gross income. Each of the
Municipal Bond and Municipal Money Market Portfolios intends to invest a
sufficient portion of its assets in municipal bonds and notes to qualify to pay
"exempt-interest dividends."
Exempt-interest dividends are excludable from a shareholder's gross income
for regular income tax purposes. However, the receipt of such dividends may have
collateral federal income tax consequences, including alternative minimum tax
consequences. In addition, the receipt of exempt-interest dividends may cause
persons receiving Social Security or Railroad Retirement benefits to be taxable
on a portion of such benefits. See the Statement of Additional Information.
Current federal tax law limits the types of volume of bonds qualifying for the
federal income tax exemption of interest, which may have an effect on the
ability of the Portfolios to purchase sufficient amounts of tax-exempt
securities to satisfy the Code's requirement for the payment of exempt-interest
dividends.
All or a portion of the interest on indebtedness incurred or continued by an
investor to purchase or carry shares is not deductible for federal income tax
purposes. Furthermore, entities or persons who are "substantial users" (or
persons related to "substantial users") of facilities financed by "private
activity bonds" or "industrial development bonds" should consult their tax
advisors before purchasing shares of the Portfolios. See the Statement of
Additional Information.
The Portfolios will report annually to their shareholders the portion of
dividends that is taxable and the portion that is tax-exempt based on income
received by the Portfolios during the year to which the dividends relate.
The exemption of dividends paid by the Municipal Bond and Municipal Money
Market Portfolio for Federal income tax purposes may not result in similar
exemptions under the laws of a particular state or local taxing authority. Each
of the Municipal Bond and Municipal Money Market Portfolio will report annually
to its shareholders the percentage and source, on a state-by-state basis, of
interest income earned on municipal bonds and municipal notes held by the
Portfolio during the preceding year.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
39
<PAGE>
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolios generally do not invest for short-term trading purposes,
however, when circumstances warrant, each Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolios will not consider portfolio turnover rate
a limiting factor in making investment decisions consistent with their
respective objectives and policies. For the fiscal year ended December 31, 1996,
the Fixed Income Portfolio had a portfolio turnover rate of 183%. As portfolio
turnover increases, the Portfolios may expect to pay correspondingly increased
brokerage and trading costs. In addition to transaction costs, higher portfolio
turnover may result in the realization of capital gains. As discussed under
"Taxes," to the extent net short-term capital gains are realized, any
distributions resulting from such gains are considered ordinary income for
federal income tax purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 35 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
portfolio are currently classified into two classes, the Class A shares and
Class B shares, except for the International Small Cap, Money Market and
Municipal Money Market Portfolios, which offer only Class A shares.
40
<PAGE>
The shares of each Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Persons or organizations owning 25% or more
of the outstanding shares of a Portfolio may be presumed to "control" (as that
term is defined in the 1940 Act) that Portfolio. Under Maryland law, the Fund is
not required to hold an annual meeting of its shareholders unless required to do
so under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser, or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
41
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
FIXED INCOME, MUNICIPAL BOND, MORTGAGE-BACKED SECURITIES,
MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, please contact your Morgan Stanley representative
or call us toll free 1-800-548-7786. Please print all items except
signature, and mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First Name Initial Last Name
2.
First Name Initial Last Name
First Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely,
including telephone number(s).
<CAPTION>
B)
<CAPTION>
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien:
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor
OR
1. TAXPAYER IDENTIFICATION SOCIAL SECURITY
NUMBER ("TIN") NUMBER ("SSN")
OR
2. TIN
SSN
OR
TIN
SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your
correct TIN(s) or SSN(s). Accounts that have a missing or incorrect
TIN(s) or SSN(s) will be subject to backup withholding at a 31% rate on
dividends, distributions and other payments. If you have not provided us
with your correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of
persons subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained.
You may be notified that you are subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code because you have
underreported interest or dividends or you were required to, but failed
to, file a return which would have included a reportable interest or
dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following / / Class A Shares $ / / Class B Shares $
CLASS SELECTION Portfolio(s): / / Class A Shares $ / / Class B Shares $
(Class A shares minimum $500,000 Fixed Income Portfolio / / Class A Shares $ / / Class B Shares $
and Class B shares minimum $100,000 Municipal Bond Portfolio / / Class A Shares $
for each of the Fixed Income, Mortgage-Backed Securities / / Class A Shares $
Municipal Bond and Mortgage-Backed Portfolio
Securities Portfolios. Minimum Money Market Portfolio
$50,000 for each of the Money Municipal Money Market
Market and Municipal Money Market Portfolio
Portfolios). Please indicate
Portfolio, class and amount.
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate
portfolio, manner of
payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From - - - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the account
statement sent to my/our registered
address, I/we hereby authorize the Address
Fund to mail duplicate statements
to the name and address provided at City State Zip Code
right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative No. Branch
No.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE ARE
SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE
APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL SECURITY
ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND THAT IF
I/ WE DO NOT PROVIDE EITHER NUMBER TO CHASE GLOBAL FUNDS
SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE DATE OF THIS
APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR CORRECT SSN(S)
OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP
WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION PROCEEDS. (PLEASE
PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU MAY REQUEST SUCH
FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 9
Investment Objectives and Policies................ 13
Additional Investment Information................. 18
Investment Limitations............................ 23
Management of the Fund............................ 23
Purchase of Shares................................ 26
Redemption of Shares.............................. 32
Shareholder Services.............................. 33
Valuation of Shares............................... 34
Performance Information........................... 35
Dividends and Capital Gains Distributions......... 36
Taxes............................................. 38
Portfolio Transactions............................ 40
General Information............................... 40
Account Registration Form
</TABLE>
FIXED INCOME PORTFOLIO
MUNICIPAL BOND PORTFOLIO
MORTGAGE-BACKED SECURITIES PORTFOLIO
MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. Box 2798, Boston, MA 02208-2798
- ---------------------------------
- ---------------------------------
- ---------------------------------
- ---------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
BALANCED PORTFOLIO
GLOBAL FIXED INCOME PORTFOLIO
HIGH YIELD PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
twenty-nine portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the Small Cap Value Equity, Value Equity, Balanced, Global Fixed Income and High
Yield Portfolios (each, a "Portfolio," and collectively, the "Portfolios"). The
Class A and Class B shares currently offered by the Portfolios have different
minimum investment requirements and fund expenses. Shares of the portfolios are
offered with no sales charge, exchange fee or redemption fee, (except that the
International Small Cap Portfolio may impose a transaction fee).
THE HIGH YIELD PORTFOLIO INVESTS PREDOMINANTLY IN LOWER RATED BONDS,
COMMONLY REFERRED TO AS "JUNK BONDS." BONDS OF THIS TYPE ARE CONSIDERED TO BE
SPECULATIVE WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL.
INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THIS PORTFOLIO. SEE "RISK FACTORS RELATING TO INVESTING IN HIGH YIELD
SECURITIES."
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity,
Technology, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield and Municipal Bond Portfolios; and (v)
MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional
information about the Fund is contained in a "Statement of Additional
Information", dated May 1, 1997, which is incorporated herein by reference. The
Statement of Additional Information and the prospectuses pertaining to the other
portfolios of the Fund are available upon request and without charge by writing
or calling the Fund at the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
each Portfolio will incur:
<TABLE>
<CAPTION>
GLOBAL
FIXED HIGH
SMALL CAP VALUE VALUE EQUITY BALANCED INCOME YIELD
SHAREHOLDER TRANSACTION EXPENSES EQUITY PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------ ----------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A................................. None None None None None
Class B................................. None None None None None
Maximum Sales Load Imposed on Reinvested
Dividends
Class A................................. None None None None None
Class B................................. None None None None None
Deferred Sales Load
Class A................................. None None None None None
Class B................................. None None None None None
Redemption Fees
Class A................................. None None None None None
Class B................................. None None None None None
Exchange Fees
Class A................................. None None None None None
Class B................................. None None None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
<S> <C> <C> <C> <C> <C>
- ------------------------------------------
<CAPTION>
GLOBAL
FIXED HIGH
SMALL CAP VALUE VALUE EQUITY BALANCED INCOME YIELD
(AS A PERCENTAGE OF AVERAGE NET ASSETS) EQUITY PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------------- ------------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Management Fee (Net of Fee Waivers)**
Class A................................. 0.53% 0.42% 0.00% 0.18% 0.375%
Class B................................. 0.53% 0.42% 0.00% 0.18% 0.375%
12b-1 Fees
Class A................................. None None None None None
Class B................................. 0.25% 0.25% 0.25% 0.15%* 0.25%
Other Expenses
Class A................................. 0.47% 0.28% 0.70% 0.32% 0.32%
Class B................................. 0.47% 0.28% 0.70% 0.32% 0.32%
------ ------ ----------- -------- --------
Total Operating Expenses (Net of Fee
Waivers)**
Class A................................. 1.00% 0.70% 0.70% 0.50% 0.695%
Class B................................. 1.25% 0.95% 0.95% 0.65% 0.945%
------ ------ ----------- -------- --------
------ ------ ----------- -------- --------
</TABLE>
- --------------------------
*The Distributor has agreed to waive 0.10% of the 0.25% distribution fee it is
entitled to receive from this Portfolio.
**The Adviser has agreed to waive its management fee and/or reimburse each
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolios to exceed a specified percentage of their
respective average daily net assets. As a result of these reductions, the
Management Fees stated above are lower than the contractual fees stated under
"Management of the Fund." The Adviser reserves the right to terminate any of
its fee waivers and/or expense reimbursements at any time in its sole
discretion. For further
2
<PAGE>
information on Fund expenses, see "Management of the Fund." Set forth below,
for each Portfolio, are the management fees and total operating expenses
absent such fee waivers and/or expense reimbursements as a percent of the
average daily net assets of the Class A shares and Class B shares,
respectively.
3
<PAGE>
<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT FEE ------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- ------------------------------------------------------------ -------------------- ---------- ------------
<S> <C> <C> <C>
Small Cap Value Equity...................................... 0.85% 1.32% 1.69%
Value Equity................................................ 0.50% 0.78% 1.03%
Balanced.................................................... 0.50% 1.32% 1.68%
Global Fixed Income......................................... 0.40% 0.72% 0.86%
High Yield.................................................. 0.375% 0.695% 0.945%
</TABLE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. Expenses and fees are based on actual figures for the fiscal year
ended December 31, 1996. Due to the continuous nature of Rule 12b-1 fees, long
term Class B shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by the National Association of
Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted above, the Portfolios charge no redemption
fees of any kind. The following example is based on total operating expenses of
the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Small Cap Value Equity Portfolio
Class A.......................................................... $ 10 $ 32 $ 55 $ 122
Class B.......................................................... 13 40 69 151
Value Equity Portfolio
Class A.......................................................... 7 22 39 87
Class B.......................................................... 10 30 53 117
Balanced Portfolio
Class A.......................................................... 7 22 39 87
Class B.......................................................... 10 30 53 117
Global Fixed Income
Class A.......................................................... 5 16 28 63
Class B.......................................................... 7 21 36 81
High Yield Portfolio
Class A.......................................................... 8 24 42 93
Class B.......................................................... 10 32 55 122
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Class A and Class
B shares for each of the Portfolios for the periods presented. The audited
financial highlights for the Portfolios' shares for each of the periods
presented are part of the Fund's financial statements which appear in the Fund's
December 31, 1996 Annual Report to Shareholders and which are incorporated by
reference in the Fund's Statement of Additional Information. The Portfolios'
financial highlights for each of the periods presented have been audited by
Price Waterhouse LLP, whose unqualified report thereon is also incorporated by
reference in the Statement of Additional Information. Additional performance
information is included in the Annual Report. The Annual Report and the
financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. After October 31, 1992, the
Fund changed its fiscal year end to December 31. The following information
should be read in conjunction with the financial statements and notes thereto.
5
<PAGE>
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------------------------ ------------
PERIOD FROM PERIOD FROM
DECEMBER 17, JANUARY 2,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1992* TO 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, DECEMBER 31,
1996 1995 1994 1993 1992 1996
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 11.91 $ 10.80 $ 11.10 $ 10.14 $ 10.00 $ 11.95
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)............. 0.32 0.30 0.28 0.24 0.01 0.23
Net Realized and Unrealized Gain
(Loss) on Investments................ 2.36 1.82 (0.01) 0.90 0.13 2.38
Total from Investment Operations.... 2.68 2.12 0.27 1.14 0.14 2.61
DISTRIBUTIONS
Net Investment Income................. (0.32) (0.38) (0.27) (0.18) -- (0.30)
Net Realized Gain..................... (3.38) (0.63) (0.30) -- -- (3.38)
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions................. (3.70) (1.01) (0.57) (0.18) -- (3.68)
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD.......... $ 10.89 $ 11.91 $ 10.80 $ 11.10 $ 10.14 $ 10.88
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN............................ 22.99% 20.63% 2.53% 11.33% 1.40% 22.33%
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands).......................... $23,970 $51,919 $40,033 $26,775 $ 5,974 $ 1,689
Ratio of Expenses to Average Net
Assets (1)........................... 1.00% 1.00% 1.00% 1.00% 1.00%** 1.24%**
Ratio of Net Investment Income to
Average Net Assets (1)............... 2.20% 2.60% 2.67% 2.56% 1.64%** 1.93%**
Portfolio Turnover Rate............... 32% 36% 22% 29% 0% 32%
Average Commission Rate#.............. $0.0402 N/A N/A N/A N/A $0.0402
</TABLE>
- ------------------------------
<TABLE>
<C><S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net in-
vestment income............ $0.04 $0.02 $0.03 $0.06 $0.13 $0.05
Ratios before expense
limitation:
Expenses to Average Net As-
sets....................... 1.32 % 1.21 % 1.26 % 1.68 % 23.14 %** 1.69 %**
Net Investment Income (Loss)
to Average Net Assets...... 1.89 % 2.39 % 2.41 % 1.88 % (20.50 )%** 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.
6
<PAGE>
VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 13.94 $ 11.50 $ 12.63 $ 11.31
------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)..................... 0.41 0.38 0.40 0.37
Net Realized and
Unrealized Gain (Loss)
on Investments.......... 2.27 3.30 (0.55) 1.31
------------ ------------ ------------ ------------
Total from Investment
Operations.......... 2.68 3.68 (0.15) 1.68
------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment
Income................ (0.41) (0.47) (0.40) (0.36)
Net Realized Gain...... (2.32) (0.77) (0.58) --
------------ ------------ ------------ ------------
Total
Distributions....... (2.73) (1.24) (0.98) (0.36)
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD.................. $ 13.89 $ 13.94 $ 11.50 $ 12.63
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
TOTAL RETURN............. 19.73% 33.69% (1.29)% 15.14%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands).... $106,128 $147,365 $73,406 $54,598
Ratio of Expenses to
Average Net Assets
(1)................... 0.70% 0.70% 0.70% 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1)............ 2.62% 3.01% 3.37% 3.23%
Portfolio Turnover
Rate.................. 42% 43% 33% 51%
Average Commission
Rate#................. $0.0434 N/A N/A N/A
<CAPTION>
TWO MONTHS
ENDED YEAR ENDED
DECEMBER 31, OCTOBER 31,
1992 1992
------------ ------------
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 10.71 $ 10.24
------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)..................... 0.08 0.38
Net Realized and
Unrealized Gain (Loss)
on Investments.......... 0.52 0.48
------------ ------------
Total from Investment
Operations.......... 0.60 0.86
------------ ------------
DISTRIBUTIONS
Net Investment
Income................ -- (0.39)
Net Realized Gain...... -- --
------------ ------------
Total
Distributions....... -- (0.39)
------------ ------------
NET ASSET VALUE, END OF
PERIOD.................. $ 11.31 $ 10.71
------------ ------------
------------ ------------
TOTAL RETURN............. 5.60% 8.51%
------------ ------------
------------ ------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands).... $27,541 $25,013
Ratio of Expenses to
Average Net Assets
(1)................... 0.70%** 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1)............ 4.41%** 3.72%
Portfolio Turnover
Rate.................. 9% 56%
Average Commission
Rate#................. N/A N/A
<CAPTION>
CLASS B
------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
------------
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 14.06
------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)..................... 0.29
Net Realized and
Unrealized Gain (Loss)
on Investments.......... 2.25
------------
Total from Investment
Operations.......... 2.54
------------
DISTRIBUTIONS
Net Investment
Income................ (0.39)
Net Realized Gain...... (2.32)
------------
Total
Distributions....... (2.71)
------------
NET ASSET VALUE, END OF
PERIOD.................. $ 13.89
------------
------------
TOTAL RETURN............. 18.57%
------------
------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands).... $ 2,555
Ratio of Expenses to
Average Net Assets
(1)................... 0.95%**
Ratio of Net Investment
Income to Average Net
Assets (1)............ 2.33%**
Portfolio Turnover
Rate.................. 42%
Average Commission
Rate#................. $0.0434
</TABLE>
- ----------------------------------
<TABLE>
<C> <S> <C> <C>
(1) 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........ 0.78 % 0.77 %
Net Investment
Income to
Average Net
Assets............ 2.55 % 2.94 %
<CAPTION>
(1)
<C> <C> <C> <C> <C>
$0.01 $0.03 $0.01 $0.01 $0.01
0.80 % 0.95 % 1.20 %** 0.84 % 1.03 %**
3.27 % 2.98 % 3.91 %** 3.58 % 2.26 %**
<CAPTION>
</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.
6
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
CLASS B
CLASS A ------------
----------------------------------------------------------------------------- PERIOD FROM
TWO MONTHS JANUARY 2,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, DECEMBER 31,
1996 1995 1994 1993 1992 1992 1996
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 9.98 $ 8.96 $ 11.13 $ 11.31 $ 11.00 $ 10.61 $ 10.02
------------ ------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)................... 0.52 0.39 0.42 0.44 0.10 0.58 0.34
Net Realized and
Unrealized Gain (Loss)
on Investments........ 0.54 1.62 (0.64) 0.79 0.21 0.42 0.65
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total from Investment
Operations.......... 1.06 2.01 (0.22) 1.23 0.31 1.00 0.99
------------ ------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment
Income................ (0.48) (0.50) (0.49) (0.41) -- (0.58) (0.46)
In Excess of Net
Investment Income..... 0.00+ -- -- (0.08) -- -- (2.37)
Net Realized Gain...... (2.37) (0.49) (1.46) (0.06) -- (0.03) (2.83)
In Excess of Net
Realized Gain......... -- -- -- (0.86) -- -- $ 8.18
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total
Distributions....... (2.85) (0.99) (1.95) (1.41) -- (0.61) 10.24%
------------ ------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD.................. $ 8.19 $ 9.98 $ 8.96 $ 11.13 $ 11.31 $ 11.00
------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN............. 10.93% 23.63% (2.32)% 12.09% 2.82% 9.57% 10.24%
------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of
Period (Thousands).... $ 5,992 $ 22,642 $ 18,492 $ 29,684 $ 39,984 $ 40,332 $ 2,197
Ratio of Expenses to
Average Net Assets
(1)................... 0.70% 0.70% 0.70% 0.70% 0.70%** 0.70% 0.95%**
Ratio of Net Investment
Income to Average Net
Assets (1)............ 3.93% 4.10% 4.13% 3.88% 5.29%** 5.21% 3.73%**
Portfolio Turnover
Rate.................. 22% 26% 44% 136% 4% 40% 22%
Average Commission
Rate#................. $0.0397 N/A N/A N/A N/A N/A $0.0397
</TABLE>
- ------------------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit
to net investment
income........... $0.08 $0.03 $0.03 $0.04 $0.01 $0.01 $0.07
Ratios before
expense limitation:
Expenses to
Average Net
Assets........... 1.32 % 1.02 % 0.95 % 1.02 % 1.00 ** 0.79 % 1.68% **
Net Investment
Income to Average
Net Assets....... 3.31 % 3.78 % 3.88 % 3.56 % 4.99 ** 5.12 % 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.
7
<PAGE>
GLOBAL FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
CLASS B
-------
PERIOD
FROM
CLASS A JANUARY
--------------------------------------------------------------------------- 2,
TWO MONTHS 1996***
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED TO
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER OCTOBER DECEMBER
31, 31, 31, 31, 31, 31, 31,
1996 1995 1994 1993 1992 1992 1996
---------- ---------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 11.22 $ 10.29 $ 11.68 $ 11.26 $ 11.41 $ 10.61 $11.23
---------- ---------- ---------- ---------- ---------- ---------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)..................... 0.61 0.76 0.70 0.69 0.14 0.53 0.48
Net Realized and
Unrealized Gain (Loss)
on Investments.......... 0.08 1.15 (1.38) 0.90 (0.29) 0.55 0.18
---------- ---------- ---------- ---------- ---------- ---------- -------
Total from Investment
Operations.......... 0.69 1.91 (0.68) 1.59 (0.15) 1.08 0.66
---------- ---------- ---------- ---------- ---------- ---------- -------
DISTRIBUTIONS
Net Investment
Income................ (0.61) (0.98) (0.40) (0.79) -- (0.27) (0.60)
In Excess of Net
Investment Income..... -- -- -- (0.22) -- -- --
Net Realized Gain...... -- -- (0.31) (0.16) -- (0.01) --
---------- ---------- ---------- ---------- ---------- ---------- -------
Total
Distributions....... (0.61) (0.98) (0.71) (1.17) -- (0.28) (0.60)
---------- ---------- ---------- ---------- ---------- ---------- -------
NET ASSET VALUE, END OF
PERIOD.................. $ 11.30 $ 11.22 $ 10.29 $ 11.68 $ 11.26 $ 11.41 $11.29
---------- ---------- ---------- ---------- ---------- ---------- -------
---------- ---------- ---------- ---------- ---------- ---------- -------
TOTAL RETURN............. 6.44% 19.32% (6.08)% 15.34% (1.31)% 10.29% 6.12%
---------- ---------- ---------- ---------- ---------- ---------- -------
---------- ---------- ---------- ---------- ---------- ---------- -------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands).... $112,888 $102,852 $130,675 $172,468 $ 92,897 $ 94,847 $1,559
Ratio of Expenses to
Average Net Assets
(1)................... 0.50% 0.50% 0.50% 0.50% 0.50%** 0.50% 0.65%**
Ratio of Net Investment
Income to Average Net
Assets (1)............ 5.50% 6.79% 6.34% 5.99% 6.99%** 6.92% 5.28%**
Portfolio Turnover
Rate.................. 258% 207% 171% 108% 9% 144% 258%
</TABLE>
- ----------------------------------
<TABLE>
<C><S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income................ $0.02 $0.02 $0.02 $0.02 $0.01 $0.03 $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets................ 0.72 % 0.71 % 0.66 % 0.70 % 0.90 %** 0.86 % 0.86 %**
Net Investment Income
to Average Net
Assets................ 5.29 % 6.58 % 6.18 % 5.79 % 6.59 %** 6.56 % 5.08 %**
</TABLE>
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
8
<PAGE>
HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------------------------------------------- -----------
PERIOD FROM PERIOD FROM
TWO MONTHS SEPTEMBER JANUARY 2,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 28, 1992* 1996*** TO
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER TO DECEMBER
31, 31, 31, 31, 31, OCTOBER 31, 31,
1996 1995 1994 1993 1992 1992 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ 10.46 $ 9.55 $ 11.16 $ 9.95 $ 9.77 $ 10.00 $ 10.49
----------- ----------- ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1)..... 1.03 1.14 0.97 0.90 0.14 0.08 0.98
Net Realized and Unrealized
Gain (Loss) on
Investments................ 0.47 0.97 (1.40) 1.21 0.19 (0.31) 0.45
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total from Investment
Operations............... 1.50 2.11 (0.43) 2.11 0.33 (0.23) 1.43
----------- ----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income....... (1.05) (1.20) (0.97) (0.90) (0.15) -- (1.02)
In Excess of Net Investment
Income..................... (0.00)+ -- -- -- -- -- --
Net Realized Gain........... -- -- (0.21) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Distributions....... (1.05) (1.20) (1.18) (0.90) (0.15) -- (1.02)
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD....................... $ 10.91 $ 10.46 $ 9.55 $ 11.16 $ 9.95 $ 9.77 $ 10.90
TOTAL RETURN.................. 15.01% 23.35% (4.18)% 22.11% 3.41% (2.30)% 14.37%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)................ $ 95,663 $ 62,245 $ 97,223 $ 74,500 $ 20,194 $ 16,950 $ 5,665
Ratio of Expenses to Average
Net Assets (1)............. 0.75% 0.75% 0.75% 0.75% 0.75%** 0.75%** 1.00%**
Ratio of Net Investment
Income to Average Net
Assets (1)................. 9.78% 11.09% 9.42% 8.70% 8.96%** 9.89%** 9.49%**
Portfolio Turnover Rate..... 117% 90% 74% 104% 24% 9% 117%
</TABLE>
- ----------------------------------
<TABLE>
<C><S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income.......... $ 0.01 $ 0.01 $ 0.001 $ 0.02 $ 0.01 $ 0.01 $ 0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets..................... 0.82% 0.83% 0.76% 0.96% 1.62%** 1.23%** 1.05%**
Net Investment Income to
Average Net Assets......... 9.71% 11.01% 9.41% 8.49% 8.09%** 9.41%** 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.
9
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-nine portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except for the
International Small Cap, Money Market and Municipal Money Market Portfolios,
also offers Class B shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. The investment objective of each
Portfolio described in this Prospectus is as follows:
- The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
- The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
- The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
- 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 three
highest rating categories of the recognized rating services.
The other portfolios of the Fund are described in other Prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The investment objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
- The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
- The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
- The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
10
<PAGE>
- The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
- The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
- The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
- The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
- The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
- The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
- The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
- The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
portfolio's investment adviser, are expected to benefit from their
involvement in technology and technology-related industries.
- 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.
FIXED INCOME:
- The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
- The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio
of fixed income securities.
- The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
11
<PAGE>
- The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing primarily in
municipal obligations, the interest on which is exempt from federal income
tax.
MONEY MARKET:
- The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one
year or less.
- The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at February 28, 1997 had approximately $176.9 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its Portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. The Distributor
has agreed to waive 0.10% of the 0.25% 12b-1 fee with respect to the Global
Fixed Income Portfolio. Share purchases may be made by sending investments
directly to the Fund or through the Distributor. The minimum initial investment,
generally, is $500,000 for Class A shares of each Portfolio and $100,000 for
Class B shares of each Portfolio. The minimum initial investment amount is
reduced for certain categories of investors. For additional information on how
to purchase shares and minimum initial investments, see "Purchase of Shares."
HOW TO REDEEM
Class A shares or Class B shares of each Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions that
cause the value of an account to remain for a continuous 60-day period below the
minimum investment amount for Class A shares or for Class B shares may result in
involuntary redemption or automatic conversion. For additional information on
how to redeem shares and involuntary redemption or conversion, see "Purchase of
Shares -- Minimum Account Sizes and Involuntary Redemption of Shares" and
"Redemption of Shares."
12
<PAGE>
RISK FACTORS
The investment policies of each of the Portfolios entail certain risks and
considerations of which an investor should be aware. Each Portfolio may invest
in securities of foreign issuers and foreign currency forward contracts to hedge
currency risk associated with investments in non-U.S. dollar-denominated
securities, which are subject to certain risks not typically associated with
U.S. securities. The High Yield Portfolio may invest in non-publicly traded
securities, private placements and restricted securities and in lower rated and
unrated securities which are subject to additional risk factors. In particular:
(1) adverse economic and corporate changes and changes in interest rates may
have a greater impact on issuers of lower rated securities and may lead to
greater price volatility, and (2) such securities may be more difficult to value
accurately or sell in the secondary market. Because the Small Cap Value Equity
Portfolio seeks high long-term total return by investing primarily in small- to
medium-sized corporations which are more vulnerable to financial risks and other
risks than larger corporations, investments may involve a higher degree of risk
and price volatility than investments in the general equity markets. In
addition, each Portfolio may invest in repurchase agreements, lend its portfolio
securities and purchase securities on a when-issued or delayed delivery basis
and invest in money market instruments. The Portfolios may invest in certain
derivatives, including futures and options on futures and, except in the case of
the High Yield Portfolio, options. These investments entail certain costs and
risks, including imperfect correlation between the value of securities held by a
Portfolio and the value of the particular derivative instrument, and the risk
that a Portfolio could not close out a derivatives position when it would be
most advantageous to do so. Each Portfolio, except the Global Fixed Income and
High Yield Portfolios, may also invest indirectly in securities through
Depositary Receipts. Each Portfolio may invest in short-term or medium-term debt
securities or hold cash or cash equivalents for temporary defensive purposes.
Each of these investment strategies involves specific risks which are described
under "Investment Objectives and Policies" and "Additional Investment
Information" herein and under "Investment Objectives and Policies" in the
Statement of Additional Information.
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies the Portfolios employ in their efforts to achieve these objectives.
Each Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolios will attain their
objectives. In addition to the investments and strategies described below, the
Porfolios may invest in certain securities and obligations as set forth in
"Additional Investment Information" below and as described under "Investment
Objectives and Policies" in the Statement of Additional Information. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval.
THE SMALL CAP VALUE EQUITY PORTFOLIO
The investment objective of the Small Cap Value Equity Portfolio is to
provide high long-term total return by investing in equity securities of small-
to medium-sized corporations that the Adviser believes to be undervalued
relative to the stock market in general at the time of purchase. The Portfolio
invests primarily in corporations domiciled in the U.S. with market
capitalizations that range generally from $70 million up to $1 billion, but may
from time to time invest in similar size foreign corporations. Under normal
circumstances, the Portfolio will invest at least 65% of the value of its total
assets in equity securities of corporations whose equity market capitalization
is up to $1 billion. The Portfolio may invest up to 35% of the value of its
total assets in equity securities of corporations which are generally smaller
than the 500 largest corporations in the United States. With respect to the
Portfolio, equity securities include common and preferred stocks, convertible
securities, rights and warrants to purchase common stocks, and similar equity
interests, such as trusts or partnership interests. These investments may or may
not carry voting rights. The portfolio may, on occasion, invest in equity
securities of foreign issuers that trade on a U.S. exchange or over-the-counter
in the form of Depositary Receipts or common stocks.
The Adviser invests with the philosophy that a diversified portfolio of
undervalued, small- to medium-sized companies will provide high total return in
the long run.
Companies considered attractive will have the following characteristics:
1. The market prices of the stocks will be undervalued relative to the
normal earning power of the companies;
2. Stock prices will be low relative to the intrinsic value of the
companies' assets;
3. Stocks will most often have yields distinctly above the average of
companies with similar capitalizations; and
4. Stocks will be of high quality, in the Adviser's judgment, as
evaluated by the companies' balance sheets, income statements, franchises
and product competitiveness.
The thrust of this approach is to seek investments in stocks for which
investor enthusiasm is currently low, as reflected in their valuation, but which
have the financial and fundamental features, which, according to the Adviser's
assessment, will allow the stocks to achieve a higher valuation. Value is
achieved and exposure is reduced for the Portfolio when the investment
community's perceptions improve and the stocks approach what the Adviser
believes is fair valuation.
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<PAGE>
THE VALUE EQUITY PORTFOLIO
The investment objective of the Value Equity Portfolio is to achieve high
total return (i.e., long-term growth of capital and high current income) by
investing in equity securities that the Adviser believes to be undervalued
relative to the stock market in general at the time of purchase. It seeks
superior market cycle total returns, with an emphasis on strong relative
performance in falling markets. The Portfolio invests primarily in equity
securities of large capitalization companies mainly domiciled in the United
States. With respect to the Portfolio, equity securities include common and
preferred stocks, convertible securities, and rights and warrants to purchase
common stocks. Under normal circumstances, the Portfolio will invest at least
65% of the value of its total assets in equity securities.
The Adviser invests with the philosophy that a diversified portfolio of
undervalued equity securities will outperform the market over the long term, as
well as preserve principal in difficult market environments. Companies
considered attractive will have the following characteristics: 1) stocks most
often will have distinctly above average dividend yields, 2) the market prices
of the stocks will be undervalued relative to the normal earning power of the
company, 3) many stocks will sell at close to or below the replacement value of
their assets and 4) most stocks' market prices will have underperformed the
general market due to a lower level of investor expectations regarding the
company outlook. The thrust of this approach is to seek investments where
current investor enthusiasm is low, as reflected in their valuations. Exposure
is reduced when the investment community's perceptions improve and the company
approaches fair valuation.
The Adviser takes a long-term investment approach by placing a strong
emphasis on its ability to determine attractive values and does not try to
determine short-term changes in the general market level. The Portfolio will
maintain diversity among industries by not investing more than 25% of its total
assets in equity securities of issuers in any one industry. The Portfolio may
invest up to 25% of its total assets in the equity securities of foreign
issuers, including Depositary Receipts.
THE BALANCED PORTFOLIO
The investment objective of the Balanced Portfolio is to achieve high total
return while preserving capital by investing in a combination of undervalued
equity securities and fixed income securities. The Portfolio seeks strong total
returns in all market conditions, with a special emphasis on minimizing interim
declines during falling equity markets. It primarily invests in large
capitalization equity securities, intermediate-maturity bonds and cash
equivalents.
The Adviser uses a valuation-driven balanced portfolio philosophy which
combines separate equity, fixed income and asset allocation strategies. The
equity investment approach is the same as that used for the Value Equity
Portfolio. This produces a portfolio of stocks with low price-to-earnings and
price-to-book ratios and high dividend yields. The fixed income strategy values
bonds using historical yield differentials. Short and intermediate government,
corporate and mortgage bonds are used exclusively to implement the Portfolio's
fixed income strategy. The asset allocation strategy shifts the stock/bond/cash
equivalent mix relative to calculated risk and return levels. All three
strategies use historical capital market behavior to reach conclusions.
The Portfolio will typically maintain between 35% and 65% of its total
assets invested in equity securities, depending upon the Adviser's assessment of
market conditions. With respect to the Portfolio, equity securities include
common and preferred stocks, convertible securities, and rights and warrants to
purchase common
15
<PAGE>
stocks. In overvalued equity markets, the common stock exposure will be at the
low end of this range. It is expected that equity exposure will average
approximately 55% over time. Up to 25% of the Portfolio's total assets may be
invested in the securities of foreign issuers.
Fixed income securities in which the Portfolio may invest include U.S.
Government securities, mortgage-backed securities, corporate bonds, bank
obligations and other short-term money market instruments. The average maturity
of the fixed income securities in the Portfolio will, under normal
circumstances, be approximately five years, although this will vary with
changing market conditions.
THE GLOBAL FIXED INCOME PORTFOLIO
The Global Fixed Income Portfolio seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities of
U.S. and foreign issuers denominated in U.S. dollars and in other currencies.
The Portfolio seeks to achieve its objectives by investing in U.S. government
securities, foreign government securities, securities of supranational entities,
Eurobonds, and corporate bonds with varying maturities. In selecting portfolio
securities, the Adviser evaluates the currency, market, and individual features
of the securities being considered for investment. At least 65% of the total
assets of the Portfolio will be invested in fixed income securities under normal
circumstances.
The Adviser seeks to minimize investment risk by investing only in high
quality debt securities. U.S. Government securities that the Portfolio may
invest in include obligations issued by the U.S. Government, such as U.S.
Treasury securities, as well as those guaranteed or backed by the full faith and
credit of the United States, such as obligations of the Government National
Mortgage Association and The Export-Import Bank. The Portfolio may also invest
in obligations issued or guaranteed by U.S. Government agencies or
instrumentalities where the Portfolio must look principally to the issuing or
guaranteeing agency for ultimate repayment. The Portfolio may invest in
obligations issued or guaranteed by foreign governments and their political
subdivisions, authorities, agencies or instrumentalities, and by supranational
entities (such as the World Bank, The European Economic Community, The Asian
Development Bank and the European Coal and Steel Community). Investment in
foreign government securities will be limited to those of developed nations
which the Adviser believes pose limited credit risk. These countries currently
include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Ireland,
Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Spain, Sweden,
Switzerland, The United Kingdom and Germany. Corporate and supranational
obligations which the Portfolio will invest in will be limited to those rated A
or better by Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's
Ratings Group ("S&P") or IBCA Ltd., or if unrated, to those that are of
comparable quality in the determination of the Board of Directors and the
Adviser.
The Adviser's approach to multicurrency fixed income management is strategic
and value-based and designed to produce an attractive real rate of return. The
Adviser's assessment of the bond markets and currencies is based on an analysis
of real interest rates. Current nominal yields of securities are adjusted for
inflation prevailing in each currency sector using an analysis of past and
projected inflation rates. The Portfolio's aim is to invest in bond markets
which offer the most attractive real returns relative to inflation.
The Portfolio will have a neutral investment position in medium-term
securities (i.e., those with a remaining maturity of between three and seven
years) and will respond to changing interest rate levels by shortening or
lengthening portfolio maturity through investment in longer- or shorter-term
instruments. For example, the Portfolio will respond to high levels of real
interest rates through a lengthening in portfolio maturity. Current
16
<PAGE>
and historical yield spreads among the three main market segments -- the
Government, Foreign and Euro markets -- guide the Adviser's selection of markets
and particular securities within those markets. The analysis of currencies is
made independent of the analysis of markets. Value in foreign exchange is
determined by relative purchasing power parity of a given currency. The
Portfolio seeks to invest in currencies currently undervalued based on
purchasing power parity. The Adviser analyzes current account and capital
account performance and real interest rates to adjust for shorter-term currency
flows.
THE HIGH YIELD PORTFOLIO
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 of the recognized rating services. The Portfolio normally invests
between 80% and 100% of its total assets in these higher yielding securities,
which generally entails increased credit and market risk. To mitigate these
risks the Portfolio will diversify its holdings by issuer, industry and credit
quality, but investors should carefully review the section below entitled "Risk
Factors Relating to Investing in High Yield Securities."
Appendix A to this Prospectus sets forth a description of the corporate bond
rating categories of Moody's and S&P. Corporate bonds rated below Baa by Moody's
or BBB by S&P are considered speculative. Securities in the lowest rating
categories may have predominantly speculative characteristics or may be in
default. Ratings of S&P and Moody's represent their opinions of the quality of
bonds and other debt securities they undertake to rate at the time of issuance.
However, ratings are not absolute standards of quality and may not reflect
changes in an issuer's creditworthiness. Accordingly, although the Adviser will
consider ratings, it will perform its own analysis and will not rely principally
on ratings. The Adviser will consider, among other things, the price of the
security and the financial history and condition, the prospects and the
management of an issuer in selecting securities for the Portfolio. The Portfolio
may buy unrated securities that the Adviser believes are comparable to rated
securities and are consistent with the Portfolio's objective and policies. The
Adviser may vary the average maturity of the securities in the Portfolio without
limit and there is no restriction on the maturity of any individual security.
The Portfolio may acquire fixed income securities of both U.S. and foreign
issuers, including debt obligations (e.g., bonds, debentures, notes, equipment
lease certificates, equipment trust certificates, conditional sales contracts,
commercial paper and obligations issued or guaranteed by the U.S. Government,
any foreign government with which the United States maintains relations or any
of their respective political subdivisions, agencies or instrumentalities) and
preferred stock. The Portfolio may not invest more than 5% of its total assets
at time of acquisition in either (1) equipment lease certificates, equipment
trust certificates and conditional sales contracts or (2) limited partnership
interests. The Portfolio may neither invest more than 10% of its total assets in
foreign securities nor invest more than 5% of its total assets in foreign
governmental issuers in any one country. The Portfolio's fixed income securities
may have equity features, such as conversion rights or warrants, and the
Portfolio may invest up to 10% of its total assets in equity securities other
than preferred stock (e.g., common stocks, warrants and rights and limited
partnership interests). The Portfolio may invest up to 20% of its total assets
in fixed income securities that are investment grade (i.e., rated in one of the
top four categories or comparable) and have maturities of one year or less. The
Portfolio may invest in or own securities of companies in various stages of
financial restructuring, bankruptcy or reorganization which are not currently
paying interest or dividends. The total value, at time of purchase, of the sum
of all such securities will not exceed 10% of the value of the Portfolio's total
assets.
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<PAGE>
The Portfolio may also invest in zero coupon, pay-in-kind or deferred
payment securities. Zero coupon securities are securities that are sold at a
discount to par value and securities on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled to
receive the par value of the security. While interest payments are not made on
such securities, holders of such securities are deemed to have received "phantom
income" annually. Because the Portfolio will distribute its "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares of the Portfolio, it
will have fewer assets with which to purchase income producing securities. The
Portfolio accrues income with respect to these securities prior to the receipt
of cash payments. Pay-in-kind securities are securities that have interest
payable by delivery of additional securities. Upon maturity, the holder is
entitled to receive the aggregate par value of the securities. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. Zero coupon, pay-in-kind and
deferred payment securities may be subject to greater fluctuation in value and
lesser liquidity in the event of adverse market conditions than comparably rated
securities paying cash interest at regular interest payment periods.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES. Fixed income
securities are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligations (credit risk), and may also be subject
to price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer and general market liquidity
(market risk). Lower rated or unrated (i.e., high yield) securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react to movements in the general level of
interest rates primarily. The market values of fixed-income securities tend to
vary inversely with the level of interest rates. Yields and market values of
high yield securities will fluctuate over time, reflecting not only changing
interest rates, but the market's perception of credit quality and the outlook
for economic growth. When economic conditions appear to be deteriorating, medium
to lower rated securities may decline in value due to heightened concern over
credit quality, regardless of prevailing interest rates. Fluctuations in the
value of the Portfolio's investments will be reflected in the Portfolio's net
asset value per share. The Adviser considers both credit risk and market risk in
making investment decisions for the Portfolio. Investors should carefully
consider the relative risks of investing in high yield securities and understand
that such securities are not generally meant for short-term investing.
The high yield market is still relatively new and its recent growth
parallels a long period of economic expansion and an increase in merger,
acquisition and leveraged buyout activity. Adverse economic developments may
disrupt the market for high yield securities, and severely affect the ability of
issuers, especially highly leveraged issuers, to service their debt obligations
or to repay their obligations upon maturity. In addition, the secondary market
for high yield securities, which is concentrated in relatively few market
makers, may not be as liquid as the secondary market for more highly rated
securities. As a result, the Adviser could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of lower rated
or unrated securities, under these circumstances, may be less than the prices
used in calculating the Portfolio's net asset value.
Prices for high yield securities may be affected by legislative and
regulatory developments. These developments could adversely affect the
Portfolio's net asset value and investment practices, the secondary market for
high yield securities, the financial condition of issuers of these securities
and the value of outstanding high yield
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<PAGE>
securities. For example, federal legislation requiring the divestiture by
federally insured savings and loan associations of their investments in high
yield bonds and limiting the deductibility of interest by certain corporate
issuers of high yield bonds adversely affected the market in recent years.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Portfolio
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Portfolio's investment portfolio
and increasing the exposure of the Portfolio to the risks of high yield
securities.
The table below provides a summary of ratings assigned by S&P to debt
obligations in the High Yield Portfolio. These figures are dollar-weighted
averages of month-end portfolio holdings during the fiscal year ended December
31, 1996, presented as a percentage of total investments. These percentages are
historical and are not necessarily indicative of the quality of current or
future portfolio holdings, which may vary.
<TABLE>
<CAPTION>
S&P
- ----------------
AVERAGE
PERCENT
OF
PORTFOLIO
RATING HOLDINGS
- ------- -------
<S> <C>
AAA 0.00%
-------
AA 0.00%
-------
A 0.21%
-------
BBB 1.53%
-------
BB 39.73%
-------
B 37.48%
-------
CCC 2.14%
-------
CC 0.00%
-------
Unrated 18.91%
-------
</TABLE>
ADDITIONAL INVESTMENT INFORMATION
DEPOSITARY RECEIPTS. Each Portfolio, except the Global Fixed Income and
High Yield Portfolios, is permitted to invest in Depositary Receipts, including
American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"),
European Depositary Receipts ("EDRs") and other Depositary Receipts (which,
together with ADRs, GDRs and EDRs, are hereinafter collectively referred to as
"Depositary Receipts"), to the extent that such Depositary Receipts are or
become available. ADRs are securities, typically issued by a U.S. financial
institution (a "depositary"), that evidence ownership interests in a security or
a pool of securities issued by a foreign issuer (the "underlying issuer") and
deposited with the depositary. ADRs include American Depositary Shares and New
York Shares and may be "sponsored" or "unsponsored." Sponsored ADRs are
established jointly by a depositary and the underlying issuer, whereas
unsponsored ADRs may be established by a depositary without participation by the
underlying issuer. The issuers of the stock of unsponsored ADRs are not
obligated to disclose material information in the United States and therefore,
there may not be a correlation between such information and the market value of
the ADR. GDRs, EDRs and other types of Depositary
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Receipts are typically issued by foreign depositaries, although they may also be
issued by U.S. depositaries, and evidence ownership interests in a security or
pool of securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. The Portfolios may invest in
sponsored and unsponsored Depositary Receipts. For purposes of the Portfolios'
investment policies, the Portfolios' investments in Depositary Receipts will be
deemed to be investments in the underlying securities.
FOREIGN CURRENCY FORWARD CONTRACTS. Each Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolios
may use such contracts to protect against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells securities, lock in the U.S. dollar value of
dividends and interest on securities held by the Portfolio, and generally to
protect the U.S. dollar value of securities held by the Portfolio against
exchange rate fluctuation. Forward contracts may also be used as a protective
measure against the effects of fluctuating rates of currency exchange and
exchange control regulations. While forward contracts may limit losses as a
result of exchange rate fluctuations, they will also limit any gains that might
otherwise have been realized. The Portfolio's Custodian may be required to place
cash or liquid securities in a segregated account in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will be at least equal to the amount of
the Portfolio's commitments with respect to such contracts.
FOREIGN INVESTMENT. Investment in obligations of foreign issuers involves
somewhat different investment risks than those affecting obligations of U.S.
issuers. There may be limited publicly available information with respect to
foreign issuers, and foreign issuers are not generally subject to uniform
accounting, auditing and financial standards and requirements comparable to
those applicable to U.S. companies. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and listed
companies than in the United States. Many foreign securities markets have
substantially less volume than U.S. national securities exchanges, and
securities of some foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the United States. Dividends and interest paid by foreign issuers may be subject
to withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid to the Portfolios
by domestic companies, and it is not expected that a Portfolio or its
shareholders would be able to claim a credit for U.S. tax purposes with respect
to any such foreign taxes. Additional risks include future political and
economic developments, the possibility that a foreign jurisdiction might impose
or change withholding taxes on income payable with respect to foreign
securities, possible seizure, nationalization or expropriation of the foreign
issuer or foreign deposits and the possible adoption of foreign governmental
restrictions such as exchange controls. Also, it may be more difficult to obtain
a judgment in a court outside the United States.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies and the Portfolios may temporarily hold uninvested reserves
in bank deposits in foreign currencies. Therefore, the value of each Portfolio's
assets as measured in U.S. dollars may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and the
Portfolios may incur costs in connection with conversions between various
currencies.
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FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolios may
purchase and sell futures contracts and options on futures contracts, including
but not limited to financial futures, securities index futures, foreign currency
exchange futures, and interest rate futures contracts. Futures contracts provide
for the sale by one party and purchase by another party of a specified amount of
a specific security, instrument or basket thereof, at a specific future date and
at a specified price. An option on a futures contract is a legal contract that
gives the holder the right to buy or sell a specified amount of futures
contracts at a fixed or determinable price upon the exercise of the option.
The Portfolios may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or purchase securities
index futures in order to gain market exposure. Subject to applicable laws, the
Portfolios may engage in transactions in securities index futures contracts (and
options thereon) which are traded on a recognized securities or futures
exchange, or may purchase or sell such instruments in the over-the-counter
market. There currently are limited securities index futures and options on such
futures in many countries, particularly emerging countries. The nature of the
strategies adopted by the Adviser, and the extent to which those strategies are
used, may depend on the development of such markets.
The Portfolios may engage in transactions involving foreign currency
exchange futures contracts. Such contracts involve an obligation to purchase or
sell a specific currency at a specified future date and at a specified price.
The Portfolios may engage in such transactions to hedge their respective
holdings and commitments against changes in the level of future currency rates
or to gain exposure to a particular currency.
The Portfolios may engage in transactions in interest rate futures
transactions. Interest rate futures contracts involve an obligation to purchase
or sell a specific debt security, instrument or basket thereof at a specified
future date at a specified price. The value of the contract rises and falls
inversely with changes in interest rates. The Portfolios may engage in such
transactions to hedge their holdings of debt instruments against future changes
in interest rates.
Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies, and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures contracts, the value of financial futures
contracts rises and falls inversely with changes in interest rates. The
Portfolios may engage in financial futures contracts for hedging and non-hedging
purposes.
Under rules adopted by the Commodity Futures Trading Commission, each
Portfolio may enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of such Portfolios'
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to
activities that do not constitute "bona-fide" hedging. No Portfolio, except the
Global Fixed Income Portfolio, will enter into futures contracts to the extent
that its outstanding obligations to purchase securities under such contracts, in
combination with its outstanding obligations with respect to options
transactions (including options to purchase securities or instruments) would
exceed 20% of its total assets.
Gains and losses on futures contracts and options thereon depend on the
Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments
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held by a Portfolio and the prices of futures and options relating to
investments purchased or sold by the Portfolio, and (ii) possible lack of a
liquid secondary market for a futures contract and the resulting inability to
close a futures position. The risk that a Portfolio will be unable to close out
a futures position or options contract will be minimized by only entering into
futures contracts or options transactions for which there appears to be a liquid
exchange or secondary market. The risk of loss in trading on futures contracts
in some strategies can be substantial, due both to the low margin deposits
required and the extremely high degree of leverage involved in futures pricing.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. Each Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets. Securities lending entails certain risks of delay in recovery or
loss of rights in collateral in the event of the insolvency of the borrower.
MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money
market instruments, although the Portfolios intend to stay invested in
securities satisfying their primary investment objective to the extent
practical. Each Portfolio may make money market investments pending other
investment or settlement for liquidity, or in adverse market conditions. See
"Temporary Investments." The money market investments permitted for the
Portfolios include: obligations of the U.S. Government and its agencies and
instrumentalities; other debt securities; commercial paper; bank obligations;
certificates of deposit (including Eurodollar certificates of deposit); and
repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The High Yield Portfolio may invest in securities that are neither
listed on a stock exchange nor traded over-the-counter, including privately
placed securities. Such unlisted equity securities may involve a higher degree
of business and financial risk that can result in substantial losses. As a
result of the absence of a public trading market for these securities, they may
be less liquid than publicly traded securities. Although these securities may be
resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by the Portfolio or less than
what may be considered the fair value of such securities. Further, companies
whose securities are not publicly traded may not be subject to the disclosure
and other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration.
As a general matter, the Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Nor as a general matter, may the Portfolio
invest more than 10% of its total assets in securities that are restricted from
sale to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act"). However, the Portfolio may
invest up to 20% of its total assets in liquid Restricted Securities that can be
offered and sold to qualified institutional buyers under Rule 144A under the
1933 Act ("Rule 144A Securities"). The Board of Directors has adopted guidelines
and delegated to the Adviser, subject to the supervision of the Board of
Directors, the daily function of determining and monitoring the liquidity of
Rule 144A Securities. Rule 144A Securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities.
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OPTIONS TRANSACTIONS. Each Portfolio, except the High Yield Portfolio, may
seek to increase its returns or may hedge its portfolio investments through
options transactions with respect to securities, instruments, indices or baskets
thereof in which such Portfolios may invest, as well as with respect to foreign
currency. Purchasing a put option gives a Portfolio the right to sell a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the option. Purchasing a call option
gives a Portfolio the right to purchase a specified security, currency or basket
of securities or currencies at the exercise price until the expiration of the
option. A Portfolio may not purchase call and put options to the extent that the
value of its aggregate investment in options, excluding options on futures
contracts, exceeds 5% of its total assets.
The Portfolios also may write (i.e., sell) put and call options on
investments held in its portfolio, as well as with respect to foreign currency.
A Portfolio that has written an option receives a premium, which increases the
Portfolio's return on the underlying security or instrument in the event the
option expires unexercised or is closed out at a profit. However, by writing a
call option, a Portfolio will limit its opportunity to profit from an increase
in the market value of the underlying security or instrument above the exercise
price of the option for as long as the Portfolio's obligation as writer of the
option continues. The Portfolios may only write options that are "covered." A
covered call option means that so long as the Portfolio is obligated as the
writer of the option, it will own (i) the underlying security or instrument
subject to the option or (ii) securities or instruments convertible or
exchangeable without the payment of any consideration into the security or
instrument subject to the option.
By writing (or selling) a put option, a Portfolio incurs an obligation to
buy the security or instrument underlying the option from the purchaser of the
put at the option's exercise price at any time during the option period, at the
purchaser's election. Options written by a Portfolio may be exercisable by the
purchaser only on a specific date. A Portfolio that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option.
The Portfolios may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Adviser and
the extent to which those strategies are used will depend on the development of
such option markets. The primary risks associated with the use of options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by a Portfolio and the prices of options relating to
such investments, and (ii) possible lack of a liquid secondary market for an
option.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. Each Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolios may not enter into
repurchase agreements with more
23
<PAGE>
than seven days to maturity if, as a result, more than 15% of the market value
of the Portfolio's net assets are invested in these agreements and other
investments for which market quotations are not readily available or which are
otherwise illiquid.
TEMPORARY INVESTMENTS. For temporary defensive purposes, when the Adviser
determines that market conditions warrant, each Portfolio may invest up to 100%
of its assets in dollar and non-dollar denominated money market instruments and
short- and medium-term debt securities that the Adviser believes to be of high
quality, or hold cash. The short- and medium-term debt securities in which a
Portfolio may invest consist of (a) obligations of the U.S. or foreign country
governments, their respective agencies or instrumentalities; (b) bank deposits
and bank obligations (including certificates of deposit, time deposits and
bankers' acceptances) of U.S. or foreign country banks denominated in any
currency; (c) floating rate securities and other instruments denominated in any
currency issued by international development agencies; (d) finance company and
corporate commercial paper and other short-term corporate debt obligations of
U.S. and foreign country corporations meeting the Portfolio's credit quality
standards; and (e) repurchase agreements with banks and broker-dealers with
respect to such securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment, but will
take place no more than 120 days after the trade date. Each Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of or
cash or liquid securities in an amount at least equal to these commitments. The
payment obligation and the interest rates that will be received are each fixed
at the time a Portfolio enters into the commitment and no interest accrues to
the Portfolio until settlement. Thus, it is possible that the market value at
the time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. It is a current policy of each
Portfolio not to enter into when-issued commitments and delayed delivery
commitments exceeding in the aggregate 15% of the market value of the
Portfolio's total assets less liabilities other than the obligations created by
these commitments.
INVESTMENT LIMITATIONS
As a diversified investment company, each Portfolio, except the Global Fixed
Income Portfolio, is subject to the following limitations: (a) as to 75% of its
total assets, a Portfolio may not invest more than 5% of its total assets in the
securities of any one issuer, except obligations of the United States Government
and its agencies and instrumentalities, and (b) a Portfolio may not own more
than 10% of the outstanding voting securities of any one issuer.
The Global Fixed Income Portfolio is a non-diversified investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), which
means the Global Fixed Income Portfolio is not limited by the 1940 Act in the
proportion of its total assets that may be invested in the obligations of a
single issuer. Thus, the Global Fixed Income Portfolio may invest a greater
proportion of its total assets in the securities of a smaller number of issuers
and, as a result, will be subject to greater risk with respect to its portfolio
securities. Nevertheless, the Global Fixed Income Portfolio intends to comply
with the more limited diversification requirements imposed by the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company.
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<PAGE>
Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each Portfolio. The Adviser provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages each Portfolio's
investments. Set forth below as an annual percentage of average daily net assets
are the management fees payable to the Adviser quarterly by each Portfolio
pursuant to the terms of the Investment Advisory Agreement. The Adviser has
agreed to a reduction in the fees payable to it and to reimburse the Portfolios,
if necessary, if such fees would cause total annual operating expenses of the
Portfolios to exceed the maximums set forth in the table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING
EXPENSES
AFTER FEE WAIVERS
MANAGEMENT ----------------------------
PORTFOLIO FEE CLASS A CLASS B
- ------------------------------------ ------------ ------------- -------------
<S> <C> <C> <C>
Small Cap Value Equity Portfolio 0.85% 1.00% 1.25%
Value Equity Portfolio 0.50% 0.70% 0.95%
Balanced Portfolio 0.50% 0.70% 0.95%
Global Fixed Income 0.40% 0.50% 0.65%
High Yield 0.375% 0.75% 1.00%
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. On February 5, 1997, Morgan Stanley Group Inc. and
Dean Witter, Discover & Co. announced that they had entered into an Agreement
and Plan of Merger to form Morgan Stanley, Dean Witter, Discover & Co. Morgan
Stanley Group Inc. is the direct parent of the Adviser and Morgan Stanley.
Subject to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, the Adviser and Morgan Stanley
will be subsidiaries of Morgan Stanley, Dean Witter, Discover & Co. At February
28, 1997, the Adviser, together with its affiliated asset management companies,
had approximately $176.9 billion in assets under management as an investment
manager or as a Named Fiduciary or Fiduciary Adviser. See "Management of the
Fund" in the Statement of Additional Information.
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<PAGE>
PORTFOLIO MANAGERS. The following individuals have primary portfolio management
responsibility for the Portfolios noted below:
SMALL CAP VALUE EQUITY PORTFOLIO -- CHRISTIAN K. STADLINGER. Mr. Stadlinger
is a Vice President of the Adviser and manages the small-cap value equity
product of the Adviser's Chicago affiliate. He became a member of the Adviser's
Chicago large cap value portfolio management team, specializing in quantitative
and fundamental research, upon completion of his doctoral dissertation at
Northwestern University in April 1989. Mr. Stadlinger was the catalyst in the
development of the Adviser's small-cap value product, and he continues to
research and develop structured valuation techniques in the area of small cap
investing. Mr. Stadlinger has a degree in Computer Science and Economics from
the University of Vienna, a Ph.D. in Economics from Northwestern University, and
is a Certified Financial Analyst.
VALUE EQUITY AND BALANCED PORTFOLIOS -- STEPHEN C. SEXAUER AND ALFORD E.
ZICK, JR. Mr. Sexauer is a Principal of Morgan Stanley and is a member of the
investment management team of the Adviser's Chicago affiliate as well as Vice
President of the Adviser. In addition to portfolio management, his equity
research responsibilities include aerospace, industrials, capital goods,
transportation, and diversified financial companies. Mr. Sexauer joined the firm
in July 1989 after three years as a Vice President at Salomon Brothers.
Previously, he was with Merrill Lynch Economics and Wharton Econometrics. Mr.
Sexauer received a B.S. in Economics from the University of Illinois and an
M.B.A. in Economics and Statistics from the University of Chicago. Mr. Zick is a
Principal of Morgan Stanley and is a member of the investment management team of
the Adviser's Chicago affiliate. In addition to portfolio management, his equity
research responsibilities include consumer staples, retail and insurance
companies. He became a member of the Adviser's Chicago investment management
team in August 1989, after an extensive career in asset management with Chicago
Pacific Corporation, Staley Continental, Inc., and A.E. STALEY Manufacturing
Company. Mr. Zick has a degree in accounting from the University of Illinois.
Mr. Sexauer and Mr. Zick have had primary responsibility for managing the Value
Equity and Balanced Portfolios since their inception in January and February,
1990, respectively.
GLOBAL FIXED INCOME PORTFOLIO -- J. DAVID GERMANY, MICHAEL B. KUSHMA, PAUL
F. O'BRIEN AND ROBERT M. SMITH. J. David Germany shares primary responsibility
for managing the Portfolio's assets. He joined the Adviser in 1996 and has been
a portfolio manager with the Adviser's affiliate, Miller Anderson & Sherrerd,
LLP ("MAS") since 1991. He was Vice President & Senior Economist for Morgan
Stanley from 1989 to 1991. He assumed responsibility for the Global Fixed Income
and International Fixed Income Portfolios of the MAS-advised MAS Funds in 1993
and the MAS Fund's Multi-Asset-Class Portfolio in 1994. Mr. Germany was Senior
Staff Economist (International Finance and Macroeconomics) to the Council of
Economic Advisors -- Executive Office of the President from 1986 through 1987
and an Economist with the Board of Governors of the Federal Reserve System --
Division of International Finance from 1983 through 1987. He holds an A.B.
degree (Valedictorian) from Princeton University and a Ph.D. in Economics from
the Massachusetts Institute of Technology. Michael B. Kushma, a Principal at
Morgan Stanley, joined the firm in 1987. He shares primary responsibility for
managing the Portfolio's assets. He was a member of Morgan Stanley's Global
fixed income strategy group in the fixed income division from 1987-1995 where he
became the divisions' senior government bond strategist. He joined the Adviser
in 1995 where he took responsibility for the global fixed income portfolios. Mr.
Kushma received an A.B. in economics from Princeton University in 1979, and M.
Sc. in economics from the London School of Economics in 1981 and an M.Phil. in
economics from Columbia University in 1983. Paul F. O'Brien shares primary
responsibility for managing the Portfolio's assets. He joined
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<PAGE>
the Adviser and MAS in 1996. He was head of European Economics from 1993 through
1995 for JP Morgan and as Principal Administrator from 1991 through 1992 for the
Organization for Economic Cooperation and Development. He assumed responsibility
for the MAS-advised MAS Funds' Global Fixed Income and International Fixed
Income Portfolios in 1996. Mr. O'Brien holds a B.S. degree from the
Massachusetts Institute of Technology and a Ph.D. in Economics from the
University of Minnesota. Robert Smith, a Principal of Morgan Stanley, joined the
Adviser in June 1994 and has shared primary responsibility for managing the
Portfolio's assets since July 1994. Prior to joining the Adviser he spent eight
years as Senior Portfolio Manager -- Fixed Income at the State of Florida
Pension Fund. Mr. Smith's responsibilities included active total-rate-of-return
management of long term portfolios and supervision of other fixed income
managers. A graduate of Florida State University with a B.S. in Business, Mr.
Smith also received an M.B.A. -- Finance from Florida State and holds a
Chartered Financial Analyst (CFA) designation.
HIGH YIELD PORTFOLIO -- ROBERT ANGEVINE, THOMAS L. BENNETT AND STEPHEN F.
ESSER. ROBERT ANGEVINE is a Principal of the Adviser and the Portfolio Manager
for high yield investments. He shares primary responsibility for managing the
Portfolio's assets. Prior to joining the Adviser in October 1988, he spent over
eight years at Prudential Insurance where he was responsible for the largest
open-end high yield mutual fund in the country. Mr. Angevine also manages high
yield assets for one of the largest corporate pension funds in the country. His
other experience includes international treasury operations at a major
pharmaceutical company and commercial banking. Mr. Angevine received an M.B.A
from Fairleigh Dickinson University and a B.A. in Economics from Lafayette
College. He served two years as a Lieutenant in the U.S. Army. Thomas L. Bennett
shares responsibility for managing the Portfolio's assets. He joined the Adviser
in 1996 and has been a portfolio manager with MAS since 1984. Mr. Bennett
assumed responsibility for the MAS-advised MAS Funds' Fixed Income Portfolio in
1984, the Domestic Fixed Income Portfolio in 1987, the High Yield Portfolio in
1985, the Fixed Income Portfolio II in 1990, the Special Purpose Fixed Income
and Balanced Portfolios in 1992 and the Multi-Asset-Class Portfolio in 1994. Mr.
Bennett also is the Chairman of the MAS Funds and has a B.S degree (Chemistry)
and an M.B.A. from the University of Cincinnati. Stephen F. Esser shares primary
responsibility for managing the Portfolio's assets. He joined the Adviser in
1996 and has been a portfolio manager with MAS since 1988. He assumed
responsibility for the MAS-advised MAS Funds' High Yield Portfolio in 1989. Mr.
Esser is a member of the New York Society of Security Analysts and has a B.S.
degree (Summa Cum Laude; Phi Beta Kappa) from the University of Delaware.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the Officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of each Portfolio.
27
<PAGE>
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The Officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each Portfolio pursuant to Rule 12b-1 under the 1940 Act (each, a
"Plan"). Under each Plan, the Distributor is entitled to receive from each
Portfolio a distribution fee, which is accrued daily and paid quarterly, of
0.25% of the Class B shares' average daily net assets on an annualized basis.
The Distributor expects to reallocate most of its fee to its investment
representatives. The Distributor may, in its discretion, voluntarily waive from
time to time all or any portion of its distribution fee and each of the
Distributor and the Adviser is free to make additional payments out of its own
assets to promote the sale of Fund shares, including payments that compensate
financial institutions for distribution services or shareholder services.
Each Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund. The Distributor has agreed to waive 0.10% of the 0.25% distribution
fee it is entitled to receive from the Global Fixed Income Portfolio.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountant's fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of each Portfolio may be purchased at the net
asset value per share next determined after receipt of the purchase order by the
Portfolios. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio account opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares of each Portfolio. Certain
advisory or asset allocation accounts, such as Total Funds Management accounts,
managed by
28
<PAGE>
Morgan Stanley or its affiliates, including the Adviser ("Managed Accounts") may
purchase Class A shares without being subject to a minimum initial investment or
minimum account size requirements for a Portfolio account. Employees of the
Adviser and certain of its affiliates may purchase Class A shares subject to
conditions, including a lower minimum initial investment, established by
Officers of the Fund.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based solely upon changes in the market that reduce the net asset value of
shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remained Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B Account") converted to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution.
The minimum investment levels may be waived at the discretion of the Adviser
for (i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planners,
financial services firms, or investment advisers that have entered into an
agreement with Morgan Stanley or its affiliates; and (ii) retirement and
deferred compensation plans and trusts used to fund such plans, including, but
not limited to, those defined in Section 401(a), 403(b) or 457 of the Code and
"rabbi trusts". The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days
notice to shareholders.
The Adviser reserves the right in its sole discretion to determine which of
such advisory or asset allocation accounts shall be Managed Accounts. For
information regarding Managed Accounts, please contact your Morgan Stanley
account representative or the Fund at the telephone number provided on the cover
of this Prospectus.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
29
<PAGE>
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption. The Fund reserves the right
to modify or terminate the involuntary redemption features of the shares as
stated above at any time upon 60-days notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of each Portfolio and $100,000 minimum for Class B shares of
each Portfolio, with certain exceptions for Morgan Stanley employees and
select customers) payable to "Morgan Stanley Institutional Fund, Inc. --
[portfolio name]," to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment in other currencies is given by the Fund. The Portfolio(s) to be
purchased should be designated on the Account Registration Form. For purchases
by check, the Fund is ordinarily credited with Federal Funds within one
business day. Thus, your purchase of shares by check is ordinarily credited to
your account at the net asset value per share of the relevant Portfolio
determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
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B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
The purchase price of the Class A and Class B shares of each Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the close of the New York Stock Exchange
("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the
price computed on the date of receipt; an order received after the regular
close of the NYSE will be executed at the price computed the next day the NYSE
is open as long as the Transfer Agent receives payment by check or in Federal
Funds prior to the regular close of the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested
and, therefore, will not be earning dividends. Your bank may charge a service
fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000 for each Portfolio, except for automatic reinvestment of dividends and
capital gains distributions for which there are no minimums) by purchasing
shares at net asset value by mailing a check to the Fund (payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]") at the above address or
by wiring monies to the Custodian Bank as outlined above. It is very important
that your account name, the portfolio name and the class selected be specified
in the letter or wire to assure proper crediting to your account. In order to
help to ensure that your wire orders are invested promptly, you are requested to
notify one of the Fund's representatives (toll free 1-800-548-7786) prior to the
wire date. Additional investments will be applied to purchase additional shares
in the same class held by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will
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generally be lower than the net asset value of Class A shares as a result of the
distribution expense charged to Class B shares. It is expected, however, that
the net asset value per share of the two classes will tend to converge
immediately after the recording of dividends which will differ by approximately
the amount of the distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolios will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of each Portfolio and each Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging
shares of Portfolio A for shares of Portfolio B, then exchanging shares of
Portfolio B for shares of Portfolio C and again exchanging shares of Portfolio C
for shares of Portfolio B within a 120-day period. Two types of transactions are
exempt from these excessive trading restrictions: (1) trades exclusively between
money market portfolios; and (2) trades done in connection with an asset
allocation service, such as TFM Accounts, managed or advised by the Adviser
and/or any of its affiliates.
INVESTMENT IN FUNDS THROUGH A TOTAL FUNDS MANAGEMENT ("TFM") ACCOUNT
In addition to the considerable diversification among individual securities
you receive by investing in a particular Portfolio, you can further reduce risk
by spreading your assets among several different Portfolios that each have
different risk and return characteristics. TFM is an active investment
management service managed by Morgan Stanley or its affiliates, including Morgan
Stanley Asset Management Inc. (each, a "TFM Adviser"), that allocates your
investments across a combination of either Class A or Class B shares of certain
of the Portfolios selected to meet your long-term investment objectives as well
as, in certain circumstances, your current income objectives.
The TFM Adviser has developed investment strategies for TFM Accounts to meet
the diverse financial needs of different investors. You can open a TFM Account
by meeting with one of the investment professionals of a Participating Dealer
who will review your situation and help you identify your long-term investment
and/or
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current income objectives. After using TFM criteria to determine your long-term
investment and/or current income objectives, you can choose one of several TFM
investment strategies. Based on your chosen strategy, your initial investment
will be allocated among a number of the Class A or Class B shares of the
Portfolios. Depending on market conditions, the TFM Adviser periodically
reallocates the combination of Portfolios or the percentage amounts invested in
the shares of each Portfolio to implement your TFM investment strategy. In
addition, your TFM Account will be periodically rebalanced to maintain your TFM
strategy's current asset allocation mix, if and when the performance of one or
more of the Portfolios unbalances the strategy's mix. You will pay the TFM
Adviser a fee for the TFM Account service that is in addition to and separate
from the fees and expenses you will pay directly or indirectly as an investor in
the Portfolios. See "Fund Expenses."
From time to time, one or more of the Portfolios used for investment by the
TFM Accounts may experience relatively large investments or redemptions due to
the TFM Account allocations or rebalancings recommended by the TFM Adviser.
These transactions will affect the Portfolios, since Portfolios that experience
redemptions as a result of reallocations or rebalancings may have to sell
portfolio securities and Portfolios that receive additional cash will have to
invest it in additional portfolio securities. While it is impossible to predict
the overall impact of these transactions over time, there could be adverse
effects on portfolio management to the extent that Portfolios may be required to
sell securities or invest cash at times when they would not otherwise do so.
These transactions could also have tax consequences if sales of securities
resulted in gains and could also increase transaction costs. The Adviser,
representing the interests of the Portfolios, is committed to minimizing the
impact of TFM Account transactions on the Portfolios. The Adviser, however, will
have a conflict in fulfilling this responsibility in that it also serves as a
TFM Adviser. In that capacity, the Adviser, representing the interests of the
TFM Accounts, also is committed to minimizing the impact of TFM Account
transactions on the Portfolios to the extent consistent with pursuing the
investment objectives of the TFM Accounts. In addition, an affiliate of the TFM
Adviser, the Distributor is compensated on the sale, and may be compensated for
distribution or shareholder services on the sale of shares of the Portfolios.
See "Purchase of Shares" and "Shareholder Services -- Exchange Features." The
Adviser will monitor the impact of TFM Account transactions on the Portfolios.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares or Class B shares of each Portfolio at the next determined net
asset value of shares of their applicable class. On days that both the NYSE and
the Custodian Bank are open for business, the net asset value per share of each
of the Portfolios is determined at the regular close of trading of the NYSE
(currently 4:00 p.m. Eastern Time). Shares of each Portfolio may be redeemed by
mail or telephone. No charge is made for redemption. Any redemption proceeds may
be more or less than the purchase price of your shares depending on, among other
factors, the market value of the investment securities held by a Portfolio.
BY MAIL
Each Portfolio will redeem its Class A or Class B shares at the net asset
value determined on the date the request is received, if the request is received
in "good order" before the regular close of the NYSE. Your request
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should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798, except that deliveries by overnight courier
should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global
Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. In times of drastic market conditions, the telephone redemption option
may be difficult to implement. If you experience difficulty in making a
telephone redemption, your request may be made by regular mail or express mail
and it will be implemented at the net asset value next determined after it is
received. Redemption requests sent to the Fund through express mail must be
mailed to the address of the Dividend Disbursing and Transfer Agent listed under
"General Information." The Fund and the Transfer Agent will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
These procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to provide
additional telecopied written instructions regarding transaction requests.
Neither the Fund nor the Transfer Agent will be responsible for any loss,
liability, cost or expense for following instructions received by telephone that
either of them reasonably believes to be genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
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If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by a Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in any Portfolio for shares of any
other available portfolio(s) of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege may be modified or terminated by the Fund at any time
upon 60-days notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the names(s) of the portfolio(s) and class(es) of shares into which you intend
to exchange shares, and the signatures of all registered account holders. Send
the exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current Portfolio, the name(s) of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the class of
the portfolios involved in the exchange of shares at the close of business.
Requests received after 4:00 p.m. are processed the next business day based on
the net asset value determined at the close of business on such day. For
additional information regarding responsibility for the authenticity of
telephoned instructions, see "Redemption of Shares -- By Telephone" above.
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TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolio's shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of each of the Portfolios
is determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such a class, less any liabilities attributable
to such a class, by the total number of outstanding shares of each class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. 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 a
price within a range not exceeding the current asked price nor less than the
current bid price. The current bid and asked prices are determined based on the
average of the bid and asked prices quoted on such valuation date by reputable
brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices, but take into account institutional size, trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recently quoted bid price or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted securities and unlisted foreign
securities) and those securities the prices for which it is inappropriate to
determine the prices in accordance with the above-stated procedures are
determined in good faith at fair value using methods determined by the Board of
Directors. For purposes of calculating net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be translated into
U.S. dollars at the mean of the bid and asked price of such currencies against
the U.S. dollar last quoted by any major bank.
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Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise "total return" for each class of
the Small Cap Value Equity, Value Equity and Balanced Portfolios. In addition,
from time to time the Fund may advertise "yield" for the Global Fixed Income and
High Yield Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE
NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
Each Portfolio may advertise "total return" which shows what an investment
in a class of a Portfolio would have earned over a specified period of time
(such as one, five or ten years) assuming that all distributions and dividends
by the Portfolio were reinvested in the same class on the reinvestment dates
during the period. Total return does not take into account any federal or state
income taxes that may be payable on dividends and distributions or on
redemption. The "yield" of the Global Fixed Income and High Yield Portfolios
refers to the income generated by an investment in the Portfolio over a month or
30-day period. This income is then annualized. That is, the amount of income
generated by the investment during that 30-day period is assumed income
generated each 30-day period for twelve periods, and is shown as a percentage of
the investment. The Fund may also include comparative performance information in
advertising or marketing the Portfolios' shares, including data from Lipper
Analytical Services, Inc., other industry publications, business periodicals,
rating service and market indices. For further information concerning these
figures, see "Calculation of Yield and Total Return"in the Statement of
Additional Information.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
that, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
may elect to receive income dividends and capital gains distributions in cash.
Each Portfolio expects to distribute substantially all of its taxable net
investment income in the form of quarterly dividends. Net realized capital
gains, if any, after reduction for any available tax loss carryforwards will
also be distributed annually.
Undistributed net investment income is included in a Portfolio's net assets
for the purpose of calculating net asset value per share. Therefore, on the
"ex-dividend" date, the net asset value per share excludes the dividend (i.e.,
is reduced by the per share amount of the dividend). Dividends paid shortly
after the purchase of shares by an investor, although in effect a return of
capital, are taxable to shareholders subject to tax.
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Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolios will differ at times.
Expenses of the Portfolios allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
Each Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from a Portfolio's net investment income are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Such dividends paid by a Portfolio, except the High Yield and Global
Equity Portfolios, will generally qualify for the 70% dividends-received
deduction for corporate shareholders to the extent of the aggregate qualifying
dividend income received by the Portfolio from U.S. corporations. Dividends paid
by the High Yield and Global Equity Portfolios will generally not qualify for
the 70% dividends-received deduction for corporate shareholders.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. Each
Portfolio will send reports annually to shareholders of the federal income tax
status of all distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
loss, including any available capital loss carry-forwards), prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (1) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Application Form, (2) who is subject to
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backup withholding by the Internal Revenue Service, or (3) who has not certified
to the Fund that such shareholder is not subject to backup withholding. This
backup withholding is not an additional tax, and any amounts withheld may be
credited against the shareholder's ultimate U.S. tax liability.
The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceed or are
less than the shareholder's adjusted basis in the sold, exchanged or redeemed
shares. If capital gain distributions have been made with respect to shares that
are sold at a loss after being held for six months or less, then the loss is
treated as a long-term capital loss to the extent of the capital gain
distributions.
Conversion of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolios generally do not invest for short-term trading purposes,
however, when circumstances warrant, each Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolios will not consider portfolio turnover rate
a limiting factor in making investment decisions consistent with their
respective objectives and policies. For the fiscal year ended December 31, 1996,
the Global Fixed
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Income and High Yield Portfolios had portfolio turnover rates of 258% and 117%,
respectively. As portfolio turnover increases, the Portfolios may expect to pay
correspondingly increased brokerage and trading costs. In addition to
transaction costs, higher portfolio turnover may result in the realization of
capital gains. As discussed under "Taxes," to the extent net short-term capital
gains are realized, any distributions resulting from such gains are considered
ordinary income for federal income tax purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 35 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
portfolio are currently classified into two classes, the Class A shares and the
Class B shares, except for the International Small Cap, Money Market and
Municipal Money Market Portfolio which offer only Class A shares.
The shares of each Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative rights, which means that the holders of more than 50% of the
shares voting for the election of Directors can elect 100% of the Directors if
they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of a Portfolio may be presumed to "control" (as that term is
defined in the 1940 Act) such Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data are also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
40
<PAGE>
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
41
<PAGE>
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE CORPORATE BOND RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers 1, 2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks at a higher end of
the rating category, modifier 2 indicates a mid-range rating and the modifier 3
indicates that the issue ranks at the lower end of the rating category.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
42
<PAGE>
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS:
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation and indicate an extremely strong capacity to pay principal
and interest.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only to a small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC -- Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C -- The rating C is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
43
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
SMALL CAP VALUE EQUITY, VALUE EQUITY, BALANCED, GLOBAL FIXED INCOME
AND HIGH YIELD PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, please contact your Morgan Stanley representative
or call us toll free 1-800-548-7786. Please print all items except
signature, and mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First Name Initial Last Name
2.
First Name Initial Last Name
First Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely,
including telephone number(s).
<CAPTION>
B)
<CAPTION>
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien:
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor
OR
1. TAXPAYER IDENTIFICATION SOCIAL SECURITY
NUMBER ("TIN") NUMBER ("SSN")
OR
2. TIN
SSN
OR
TIN
SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your
correct TIN(s) or SSN(s). Accounts that have a missing or incorrect
TIN(s) or SSN(s) will be subject to backup withholding at a 31% rate on
dividends, distributions and other payments. If you have not provided us
with your correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of
persons subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained.
You may be notified that you are subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code because you have
underreported interest or dividends or you were required to, but failed
to, file a return which would have included a reportable interest or
dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following / / Class A Shares $ / / Class B Shares $
CLASS SELECTION Portfolio(s): / / Class A Shares $ / / Class B Shares $
(Class A shares minimum $500,000 Small Cap Value Equity / / Class A Shares $ / / Class B Shares $
for each Portfolio and Class B Portfolio / / Class A Shares $ / / Class B Shares $
shares minimum $100,000 for each Value Equity Portfolio / / Class A Shares $ / / Class B Shares $
Portfolio. Please indicate Balanced Portfolio
Portfolio, class and amount. Global Fixed Income Portfolio
High Yield Portfolio
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate
portfolio, manner of
payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the account
statement sent to my/our registered
address, I/we hereby authorize the Address
Fund to mail duplicate statements
to the name and address provided at City State Zip Code
right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative No. Branch
No.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE ARE
SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE
APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL SECURITY
ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND THAT IF
I/ WE DO NOT PROVIDE EITHER NUMBER TO CHASE GLOBAL FUNDS
SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE DATE OF THIS
APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR CORRECT SSN(S)
OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP
WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION PROCEEDS. (PLEASE
PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU MAY REQUEST SUCH
FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 10
Investment Objectives and Policies................ 14
Additional Investment Information................. 19
Investment Limitations............................ 24
Management of the Fund............................ 25
Purchase of Shares................................ 28
Redemption of Shares.............................. 33
Shareholder Services.............................. 35
Valuation of Shares............................... 36
Performance Information........................... 37
Dividends and Capital Gains Distributions......... 37
Taxes............................................. 38
Portfolio Transactions............................ 39
General Information............................... 40
Account Registration Form
</TABLE>
SMALL CAP VALUE EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
BALANCED PORTFOLIO
GLOBAL FIXED INCOME PORTFOLIO
HIGH YIELD PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
twenty-nine portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the Active Country Allocation Portfolio (the "Portfolio"). The Class A and Class
B shares currently offered by the Portfolio have different minimum investment
requirements and fund expenses. Shares of the portfolios are offered with no
sales charge, exchange fee or redemption fee, (except that the International
Small Cap Portfolio may impose a transaction fee).
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity,
Technology, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield, and Municipal Bond Portfolios; and (v)
MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional
information about the Fund is contained in a "Statement of Additional
Information," dated May 1, 1997, which is incorporated herein by reference. The
Statement of Additional Information and the prospectuses pertaining to the other
portfolios of the Fund are available upon request and without charge by writing
or calling the Fund at the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Active Country Allocation Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A................................................................................. None
Class B................................................................................. None
Maximum Sales Load Imposed on Reinvested Dividends
Class A................................................................................. None
Class B................................................................................. None
Deferred Sales Load
Class A................................................................................. None
Class B................................................................................. None
Redemption Fees
Class A................................................................................. None
Class B................................................................................. None
Exchange Fees
Class A................................................................................. None
Class B................................................................................. None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------------------------------------
<S> <C>
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (Net of Fee Waiver)*
Class A................................................................................. 0.36%
Class B................................................................................. 0.36%
12b-1 Fees
Class A................................................................................. None
Class B................................................................................. 0.25%
Other Expenses
Class A................................................................................. 0.44%
Class B................................................................................. 0.44%
-----------
Total Operating Expenses (Net of Fee Waivers)*
Class A................................................................................. 0.80%
Class B................................................................................. 1.05%
-----------
-----------
</TABLE>
- ------------------------
*The Adviser has agreed to waive its management fees and/or to reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolio to exceed a specified percentage of its respective
average daily net assets. Absent the fee waiver, the management fee would be
0.65%. Absent the fee waiver and/or expense reimbursement, the Portfolio's
total operating expenses would be 1.09% of the average daily net assets of the
Class A shares and 1.33% of the average daily net assets of the Class B shares.
As a result of this reduction, the Management Fee stated above is lower than
the contractual fee stated under "Management of the Fund." The Adviser reserves
the right to terminate any of its fee waivers and/or expense reimbursements at
any time in its sole discretion. For further information on Fund expenses, see
"Management of the Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. Expenses and fees are based on actual figures for the fiscal year
ended December 31, 1996. Due to the continuous nature of Rule 12b-1 fees, long
term Class B shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by the National Association of
Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Fund charges no
redemption fees of any kind. The following example is based on the total
operating expenses of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Active Country Allocation Portfolio
Class A.......................................................... $ 8 $ 26 $ 44 $ 99
Class B.......................................................... 11 33 58 128
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A and Class
B shares of the Portfolio for each of the periods presented. The audited
financial highlights for the Portfolio's shares for each of the periods
presented are part of the Fund's financial statements which appear in the Fund's
December 31, 1996 Annual Report to Shareholders and which are incorporated by
reference in the Fund's Statement of Additional Information. The Portfolio's
financial highlights for each of the periods presented have been audited by
Price Waterhouse LLP, whose unqualified report thereon is also incorporated by
reference in the Statement of Additional Information. Additional performance
information is included in the Annual Report. The Annual Report and the
financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. After October 31, 1992 (the
Fund's prior fiscal year end), the Fund changed its fiscal year end to December
31. The following information should be read in conjunction with the financial
statements and notes thereto.
4
<PAGE>
ACTIVE COUNTRY ALLOCATION PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------------
PERIOD FROM
TWO MONTHS JANUARY 17,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD............................ $ 11.63 $ 11.65 $ 12.21 $ 9.59 $ 9.37 $ 10.00
------------- ------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)........ 0.24 0.17 0.19 0.13 0.02 0.11
Net Realized and Unrealized Gain
(Loss) on Investments........... 0.88 1.00 (0.25) 2.75 0.20 (0.74)
------------- ------------- ------------- ------------- ------------- -------------
Total from Investment
Operations.................... 1.12 1.17 (0.06) 2.88 0.22 (0.63)
------------- ------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income............ (0.81) (0.25) (0.14) (0.09) -- --
In Excess of Net Investment
Income.......................... (0.02) (0.10) -- (0.08) -- --
Net Realized Gain................ (0.48) (0.84) (0.36) -- -- --
In Excess of Net Realized Gain... -- -- -- (0.09) -- --
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions............ (1.31) (1.19) (0.50) (0.26) -- --
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD..... $ 11.44 $ 11.63 $ 11.65 $ 12.21 $ 9.59 $ 9.37
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
TOTAL RETURN....................... 9.71% 10.57% (0.52)% 30.72% 2.35% (6.30)%
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)..................... $183,193 $170,663 $182,977 $150,854 $50,234 $47,534
Ratio of Expenses to Average Net
Assets (1)...................... 0.80% 0.80% 0.80% 0.80% 0.80%** 0.88%**
Ratio of Net Investment Income to
Average Net Assets (1).......... 1.22% 1.26% 1.43% 1.29% 1.22%** 2.32%**
Portfolio Turnover Rate.......... 65% 72% 51% 53% 2% 62%
Average Commission Rate #........ $ 0.0028 N/A N/A N/A N/A N/A
- ------------------------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income............ $0.03 $0.05 $0.03 $0.05 $0.01 $0.03
Ratios before expense
limitation:
Expenses to Average Net
Assets....................... 1.09% 1.18% 1.00% 1.33% 1.70%** 1.58%**
Net Investment Income to
Average Net Assets........... 0.94% 0.88% 1.23% 0.76% 0.32%** 1.62%**
<CAPTION>
CLASS B
-------------
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
-------------
<S> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD............................ $ 11.66
-------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)........ 0.06
Net Realized and Unrealized Gain
(Loss) on Investments........... 1.00
-------------
Total from Investment
Operations.................... 1.06
-------------
DISTRIBUTIONS
Net Investment Income............ (0.78)
In Excess of Net Investment
Income.......................... (0.02)
Net Realized Gain................ (0.48)
In Excess of Net Realized Gain... --
-------------
Total Distributions............ (1.28)
-------------
NET ASSET VALUE, END OF PERIOD..... $ 11.44
-------------
-------------
TOTAL RETURN....................... 9.22%
-------------
-------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)..................... $633
Ratio of Expenses to Average Net
Assets (1)...................... 1.05%**
Ratio of Net Investment Income to
Average Net Assets (1).......... 1.09%**
Portfolio Turnover Rate.......... 65%
Average Commission Rate #........ $0.0028
- ------------------------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income............ $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets....................... 1.33%**
Net Investment Income to
Average Net Assets........... 0.82%**
</TABLE>
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.11% of the trade amount.
5
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-nine portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except the International
Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class
B shares. Each portfolio has its own investment objective and policies designed
to meet its specific goals. The investment objective of the Portfolio described
in this Prospectus is as follows:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The investment objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in the equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
6
<PAGE>
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
-The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Portfolio's investment adviser, are expected to benefit from their
involvement in technology and technology-related industries.
-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.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-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 three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
7
<PAGE>
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing primarily in
municipal obligations, the interest on which is exempt from federal income
tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at February 28, 1997 had approximately $176.9 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. The minimum initial investment, generally, is $500,000 for Class A
shares of the Portfolio and $100,000 for Class B shares of the Portfolio. The
minimum initial investment amount is reduced for certain categories of
investors. For additional information on how to purchase shares and minimum
initial investments, see "Purchase of Shares".
HOW TO REDEEM
Shares of the Portfolio may be redeemed at any time, without cost, at the
net asset value per share of shares of the applicable class next determined
after receipt of the redemption request. The redemption price may be more or
less than the purchase price. Certain redemptions that cause the value of an
account to remain for a continuous 60-day period below the minimum investment
amount for Class A shares or for Class B shares may result in involuntary
redemption or automatic conversion. For additional information on how to redeem
shares and involuntary redemption or conversion, see "Purchase of Shares --
Minimum Account Sizes and Involuntary Redemption of Shares" and "Redemption of
Shares."
8
<PAGE>
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. The Portfolio will invest
in securities of foreign issuers, including issuers in emerging countries, which
are subject to certain risks not typically associated with domestic securities,
including (1) restrictions on foreign investment and on repatriation of capital
invested in foreign countries, (2) currency fluctuations, (3) the cost of
converting foreign currency into U.S. dollars, (4) potential price volatility
and lesser liquidity of shares traded on foreign country securities markets or
lack of a secondary trading market for such securities and (5) political and
economic risks, including the risk of nationalization or expropriation of assets
and the risk of war. In addition, accounting, auditing, financial and other
reporting standards in foreign countries are not equivalent to U.S. standards
and therefore, disclosure of certain material information may not be made and
less information may be available to investors investing in foreign countries
than in the United States. There is also generally less governmental regulation
of the securities industry in foreign countries than the United States.
Moreover, it may be more difficult to obtain a judgment in a court outside the
United States. The Portfolio may invest in certain derivatives, including
options, futures and options on futures. These investments entail certain costs
and risks, including imperfect correlation between the value of securities held
by the Portfolio and the value of the particular derivative instrument, and the
risk that the Portfolio could not close out a derivatives position when it would
be most advantageous to do so. In addition, the Portfolio may invest in
repurchase agreements, lend its portfolio securities, purchase securities on a
when-issued basis and invest in foreign currency forward contracts to hedge
currency risk associated with investment in non-U.S. dollar denominated
securities. Each of these investment strategies involves specific risks which
are described under "Investment Objective and Policies" and "Additional
Investment Information."
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio is to provide long-term capital
appreciation by investing in accordance with country weightings determined by
the Adviser in equity securities of non-U.S. issuers which, in the aggregate,
replicate broad country indices. The Adviser utilizes a top-down approach in
selecting investments for the Portfolio that emphasizes country selection and
weighting rather than individual stock selection. This approach reflects the
Adviser's philosophy that a diversified selection of securities representing
exposure to world markets, based upon the economic outlook and current valuation
levels for each country, is an effective way to maximize the return and minimize
the risk associated with international investment. The Portfolio's investment
objective is a fundamental policy which may not be changed without the approval
of a majority of the Portfolio's outstanding voting securities. There is no
assurance that the Portfolio will attain its objective.
The Portfolio invests primarily in equity securities, which include common
and preferred stock, convertible securities and rights and warrants to purchase
common stocks. In addition to the investments and strategies described below,
the Portfolio may invest in certain securities and obligations as set forth in
"Additional Investment Information" below. The investment policies described
below are not fundamental policies and may be changed without shareholder
approval.
The Adviser determines country allocations for the Portfolio on an ongoing
basis within policy ranges dictated by each country's market capitalization and
liquidity. The Portfolio will invest in the industrialized countries throughout
the world that comprise the Morgan Stanley Capital International EAFE (Europe,
Australia and the Far East) Index. The Portfolio will also invest in emerging
country equity securities. With respect to the Portfolio, the term "emerging
country" applies to any country which, in the opinion of the Adviser, is
generally considered to be an emerging country by the international financial
community, including the International Bank for Reconstruction and Development
(more commonly known as the World Bank) and the International Finance
Corporation. There are currently over 130 countries which, in the opinion of the
Adviser, are generally considered to be emerging countries by the international
financial community, approximately 40 of which currently have stock markets.
These countries generally include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe. Currently, investing in many emerging countries is not feasible
or may involve unacceptable risks. The Portfolio will focus its investments on
those emerging market countries in which it believes the economies are
developing strongly and in which the markets are becoming more sophisticated.
With respect to the portion of the Portfolio that is invested in emerging
country equity securities, the Portfolio currently intends to invest primarily
in some or all of the following countries:
<TABLE>
<S> <C>
Argentina Portugal
Brazil Philippines
India South Africa
Indonesia South Korea
Malaysia Thailand
Mexico Turkey
</TABLE>
As markets in other countries develop, the Portfolio expects to expand and
further diversify the emerging countries in which it invests. The Portfolio does
not intend to invest in any security in a country where the currency is not
freely convertible to U.S. dollars, unless the Portfolio has obtained the
necessary governmental
10
<PAGE>
licensing to convert such currency or other appropriately licensed or sanctioned
contractual guarantee to protect such investment against loss of that currency's
external value, or the Portfolio has a reasonable expectation at the time the
investment is made that such governmental licensing or other appropriately
licensed or sanctioned guarantee would be obtained or that the currency in which
the security is quoted would be freely convertible at the time of any proposed
sale of the security by the Portfolio.
By analyzing a variety of macroeconomic and political factors, the Adviser
develops fundamental projections on interest rates, currencies, corporate
profits and economic growth for each country. These country projections are used
then to determine what the Adviser believes to be a fair value for the stock
market of each country. Discrepancies between actual value and fair value as
determined by the Adviser provide an expected return for each stock market. The
expected return is adjusted by currency return expectations derived from the
Adviser's purchasing-power parity exchange rate model to arrive at an expected
total return in U.S. dollars. The final country allocation decision is then
arrived at by considering the expected total return in light of various country
specific considerations such as market size, volatility, liquidity and country
risk.
Within a particular country, investments are made through the purchase of
equity securities which, in aggregate, replicate a broad market index, which in
most cases will be the Morgan Stanley Capital International index for the given
country. The Adviser may overweight or underweight an industry segment of a
particular index if it concludes this would be advantageous to the Portfolio. An
issuer may be considered to be from a particular country if, in the opinion of
the Adviser, it has one or more of the following characteristics: (i) its
principal securities trading market is in that country, (ii) alone or on a
consolidated basis it derives 50% or more of its annual revenue from either
goods produced, sales made or services performed in that country; or (iii) it is
organized under the laws of, and has a principal office in, that country. The
Adviser will base determinations as to eligibility on publicly available
information and inquiries made to the companies. Indexation of the Portfolio's
stock selection reduces stock-specific risk through diversification and
minimizes transaction costs, which can be substantial in foreign markets.
Common stocks purchased for the Portfolio normally will be listed on a major
stock exchange in the subject country. The Portfolio will not invest in the
stocks of U.S. issuers. For a description of special considerations and certain
risks associated with investments in foreign issuers, see "Additional Investment
Information." The Portfolio may temporarily reduce its equity holdings in
response to adverse market conditions and invest in domestic, Eurodollar and
foreign short-term money market instruments for defensive purposes.
11
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
FOREIGN CURRENCY FORWARD CONTRACTS. The Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolio may
use such contracts to protect against a decline in a foreign currency against
the U.S. dollar between the trade date and settlement date when the Portfolio
purchases or sells securities, lock in the U.S. dollar value of dividends and
interest on securities held by the Portfolio, and generally to protect the U.S.
dollar value of securities held by the Portfolio against exchange rate
fluctuation. While forward contracts may limit losses as a result of exchange
rate fluctuations, they will also limit any gains that might otherwise have been
realized. The Portfolio's Custodian may be required to place cash or liquid
securities in a segregated account in an amount equal to the value of the
Portfolio's total assets committed to the consummation of forward contracts. If
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will be at least equal to the amount of the
Portfolio's commitments with respect to such contracts.
FOREIGN INVESTMENT. Investment in obligations of foreign issuers involves
somewhat different investment risks than those affecting obligations of U.S.
issuers. There may be limited publicly available information with respect to
foreign issuers, and foreign issuers are not generally subject to uniform
accounting, auditing and financial standards and requirements comparable to
those applicable to domestic companies. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and listed
companies than in the United States. Many foreign securities markets have
substantially less volume than U.S. national securities exchanges, and
securities of some foreign issuers are less liquid and more volatile than
securities of comparable U.S. issuers. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the United States. Dividends and interest paid by foreign issuers may be subject
to withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid to the Portfolios
by domestic companies. Additional risks include future political and economic
developments, the possibility that a foreign jurisdiction might impose or change
withholding taxes on income payable with respect to foreign securities, possible
seizure, nationalization or expropriation of the foreign issuer or foreign
deposits, and the possible adoption of foreign governmental restrictions such as
exchange controls. Many emerging countries may have less stable political
environments than more developed countries. Also, it may be more difficult to
obtain a judgment in a court outside the United States.
Such investments in securities of foreign issuers are frequently denominated
in foreign currencies, and since the Portfolio may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the value of the Portfolio's
assets as measured in U.S. dollars may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and the Portfolio
may incur costs in connection with conversions between various currencies.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may
purchase and sell futures contracts and options on futures contracts, including
but not limited to financial futures, securities index futures, foreign currency
exchange futures, and interest rate futures contracts. Futures contracts provide
for the sale by one party and purchase by another party of a specified amount of
a specified security, instrument or basket
12
<PAGE>
thereof, at a specific future date and at a specified price. An option on a
futures contract is a legal contract that gives the holder the right to buy or
sell a specified amount of futures contracts at a fixed or determinable price
upon the exercise of the option.
The Portfolio may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or purchase securities
index futures in order to gain market exposure. Subject to applicable laws, the
Portfolio may engage in transactions in securities index futures contracts (and
options thereon) which are traded on a recognized securities or futures
exchange, or may purchase or sell such instruments in the over-the-counter
market. There currently are limited securities index futures and options on such
futures in many countries, particularly emerging countries. The nature of the
strategies adopted by the Adviser, and the extent to which those strategies are
used, may depend on the development of such markets.
The Portfolio may engage in transactions involving foreign currency exchange
futures contracts. Such contracts involve an obligation to purchase or sell a
specific currency at a specified future date and at a specified price. The
Portfolio may engage in such transactions to hedge their respective holdings and
commitments against changes in the level of future currency rates or to gain
exposure to a particular currency.
The Portfolio may engage in transactions in interest rate futures
transactions. Interest rate futures contracts involve an obligation to purchase
or sell a specific debt security, instrument or basket thereof at a specified
future date at a specified price. The value of the contract rises and falls
inversely with changes in interest rates. The Portfolio may engage in such
transactions to hedge their holdings of debt instruments against future changes
in interest rates.
Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies, and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures contracts, the value of financial futures
contracts rises and falls inversely with changes in interest rates. The
Portfolio may engage in financial futures contracts for hedging and non-hedging
purposes.
Under rules adopted by the Commodity Futures Trading Commission, the
Portfolio may enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of the Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to
activities that do not constitute "bona fide" hedging. The Portfolio will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under such contracts, in combination with its outstanding
obligations with respect to options transactions (including options to purchase
securities or instruments) would exceed 20% of its total assets.
Gains and losses on futures contracts and options thereon depend on the
Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by the Portfolio and the prices of futures and
options relating to investments purchased or sold by the Portfolio, and (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position. The risk that the Portfolio
will be unable to close out a futures position or options contract will be
minimized by only entering into futures contracts or options transactions for
which there
13
<PAGE>
appears to be a liquid exchange or secondary market. The risk of loss in trading
on futures contracts in some strategies can be substantial, due both to the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will not enter into securities loan transactions
exceeding in the aggregate 33 1/3% of the market value of the Portfolio's total
assets.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
The Portfolio may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. The money market
investments permitted for the Portfolio include obligations of the U.S.
Government and its agencies and instrumentalities; obligations of foreign
sovereignties; other debt securities; commercial paper; bank obligations;
certificates of deposit (including Eurodollar certificates of deposit); and
repurchase agreements.
OPTIONS TRANSACTIONS. The Portfolio may seek to increase its return or may
hedge its portfolio investments through options transactions with respect to
securities, instruments, indices or baskets thereof in which the Portfolio may
invest, as well as with respect to foreign currency. Purchasing a put option
gives the Portfolio the right to sell a specified security, currency or basket
of securities or currencies at the exercise price until the expiration of the
option. Purchasing a call option gives the Portfolio the right to purchase a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the option. The Portfolio may not
purchase call and put options to the extent that the value of its aggregate
investment in options exceeds 5% of its total assets.
The Portfolio also may write (i.e., sell) put and call options on
investments held in its portfolio, as well as with respect to foreign currency.
A Portfolio that has written an option receives a premium, which increases the
Portfolio's return on the underlying security or instrument in the event the
option expires unexercised or is closed out at a profit. However, by writing a
call option, the Portfolio will limit its opportunity to profit from an increase
in the market value of the underlying security or instrument above the exercise
price of the option for as long as the Portfolio's obligation as writer of the
option continues. The Portfolio may only write options that are "covered." A
covered call option means that so long as the Portfolio is obligated as the
writer of the option, it will own (i) the underlying security or instrument
subject to the option or (ii) securities or instruments convertible or
exchangeable without the payment of any consideration into the security or
instrument subject to the option.
By writing (or selling) a put option, the Portfolio incurs an obligation to
buy the security or instrument underlying the option from the purchaser of the
put at the option's exercise price at any time during the option period, at the
purchaser's election. Options written by the Portfolio may be exercisable by the
purchaser only on a specific date. A Portfolio that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option.
14
<PAGE>
The Portfolio may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Adviser and
the extent to which those strategies are used will depend on the development of
such option markets. The primary risks associated with the use of options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by the Portfolio and the prices of options relating to
such investments; and (ii) possible lack of a liquid secondary market for an
option.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines adopted by the
Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolio may not enter into
repurchase agreements with more than seven days to maturity if, as a result,
more than 10% of the market value of the Portfolio's net assets would be
invested in such repurchase agreements and other investments for which market
quotations are not readily available or which are otherwise illiquid.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of
cash or liquid securities in an amount at least equal to these commitments. The
payment obligation and the interest rates that will be received are each fixed
at the time the Portfolio enters into the commitment and no interest accrues to
the Portfolio until settlement. Thus, it is possible that the market value at
the time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. It is a current policy of the
Portfolio not to enter into when-issued commitments exceeding, in the aggregate,
15% of the market value of the Portfolio's total assets less liabilities other
than the obligations created by these commitments.
INVESTMENT LIMITATIONS
As a diversified investment company, the Portfolio is subject to the
following limitations: (a) as to 75% of its total assets, the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government and its agencies and
instrumentalities, and (b) the Portfolio may not own more than 10% of the
outstanding voting securities of any one issuer.
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The Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in Statement of Additional
Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and the Portfolio. The Adviser provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each of the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the Portfolio's
investments. The Adviser is entitled to receive from the Active Country
Allocation Portfolio an annual management fee, payable quarterly, equal to 0.65%
of the average daily net assets of the Portfolio.
The fees of the Portfolio are higher than those of most investment
companies' because the Portfolio invests internationally. The Adviser believes
that the fees are comparable to those of other investment companies that invest
internationally. The Adviser has agreed to a reduction in the fees payable to it
and to reimburse the Portfolio, if necessary, if such fees would cause total
annual operating expenses of the Portfolio to exceed 0.80% of the average daily
net assets of the Class A shares of the Portfolio and 1.05% of the average daily
net assets of the Class B shares of the Portfolio.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. On February 5, 1997, Morgan Stanley Group Inc. and
Dean Witter, Discover & Co. announced that they had entered into an Agreement
and Plan of Merger to form Morgan Stanley, Dean Witter, Discover & Co. Morgan
Stanley Group Inc. is the direct parent of the Adviser and Morgan Stanley.
Subject to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, the Adviser and Morgan Stanley
will be subsidiaries of Morgan Stanley, Dean Witter, Discover & Co. At February
28, 1997, the Adviser, together with its affiliated asset management companies,
had approximately $176.9 billion in assets under management as an investment
manager or as a Named Fiduciary or Fiduciary Adviser. See "Management of the
Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. BARTON M. BIGGS, MADHAV DHAR, FRANCINE J. BOVICH AND
ANN D. THIVIERGE. Barton M. Biggs has been Chairman and a director of the
Adviser since 1980 and a Managing Director of Morgan Stanley since 1975. He is
also a director of Morgan Stanley Group Inc. and a director and chairman of
various registered investment companies to which the Adviser and certain of its
affiliates provide investment advisory services. Mr. Biggs holds a B.A. from
Yale University and an M.B.A. from New York University. Madhav Dhar is a
Managing Director of Morgan Stanley. He joined the Adviser in 1984 to focus on
global asset allocation and investment strategy and now is a co-head of the
Adviser's emerging markets group. He is the portfolio manager of the Fund's
Emerging Markets Portfolio, the Emerging Markets and Global Equity Allocation
Funds of the Morgan Stanley Fund, Inc., and the Morgan Stanley Emerging Markets
Fund, Inc. (a closed-end investment company listed on the New York Stock
Exchange). He holds a B.S. (honors) from St. Stephens College, Delhi University
(India), and an M.B.A. from Carnegie-Mellon University. Francine Bovich joined
the Adviser as a Principal in 1993. She is responsible for product development,
portfolio management and communication of the Adviser's asset allocation
strategy to institutional investor clients. Previously, Ms. Bovich was a
Principal and
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Executive Vice President of Westwood Management Corp. ("Westwood"), a registered
investment adviser. Before joining Westwood, she was a Managing Director of
Citicorp Investment Management, Inc. (now Chancellor Capital Management), where
she was responsible for the Institutional Investment Management Group. Ms.
Bovich began her investment career with Banker's Trust Company. She holds a B.A.
in Economics from Connecticut College and an M.B.A. in Finance from New York
University. Ann Thivierge is a Principal of the Adviser. She is a member of the
Adviser's asset allocation committee, primarily representing the Total Fund
Management team since its inception in 1991. Prior to joining the Adviser in
1986, she spent two years at Edgewood Management Company, a privately held
investment management firm. Ms. Thivierge holds a B.A. in International
Relations from James Madison College, Michigan State University, and an M.B.A.
in Finance from New York University.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the Officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of the Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
LOCAL ADMINISTRATOR FOR THE PORTFOLIO. The Portfolio has, as required by
local law, entered into an administration agreement with a local administrator
in Brazil. A local administrator provides certain services for the Portfolio
with respect to the Portfolio's investments in that country, including services
relating to foreign exchange, local taxes, remittance of income and capital
gains, and repatriation of investments. The Portfolio's local adminstrator in
Brazil, Unibanco-Uniao, a Brazilian corporation, is paid by the Fund an annual
fee of 0.125% of the Portfolio's average weekly net assets invested in Brazil.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and review the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The Officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Fund upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Portfolio.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
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The Fund has adopted a Plan of Distribution with respect to the Class B
shares pursuant to Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act") (the "Plan"). Under the Plan, the Distributor is
entitled to receive from the Portfolio a distribution fee, which is accrued
daily and paid quarterly, of 0.25% of the Class B shares' average daily net
assets on an annualized basis. The Distributor expects to reallocate most of its
fee to its investment representatives. The Distributor may, in its discretion,
voluntarily waive from time to time all or any portion of its distribution fee
and each of the Distributor and the Adviser is free to make additional payments
out of its own assets to promote the sale of Fund shares, including payments
that compensate financial institutions for distribution services or shareholder
services.
The Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of the Portfolio may be purchased at the net
asset value per share next determined after receipt of the purchase order by the
Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio account opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares. Certain advisory or asset
allocation accounts, such as Total Funds Management accounts, managed by Morgan
Stanley or its affiliates, including the Adviser ("Managed Accounts") may
purchase Class A shares without being subject to such minimum initial investment
or minimum account size requirements for a Portfolio account. Employees of the
Adviser and certain of its affiliates may purchase Class A Shares subject to
conditions, including a lower minimum investment, established by Officers of the
Fund.
If the value of a New Account, containing Class A shares falls below
$500,000 (but remains at or above $100,000) because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $500,000 (but remains at or above $100,000) for a continuous
60-day period, the Class A shares in such account will convert to Class B shares
and will be subject to the distribution fee and other features applicable to the
Class B shares. The Fund, however, will not convert Class A shares to Class B
shares based solely upon changes in the market that reduce the net asset value
of shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remained Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B Account") converted to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
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Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution.
The minimum investment levels may be waived at the discretion of the Adviser
for (i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planners,
financial services firms, or investment advisers that have entered into an
agreement with Morgan Stanley or its affiliates; and (ii) retirement and
deferred compensation plans and trusts used to fund such plans, including, but
not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal
Revenue Code of 1986, as amended (the "Code") and "rabbi trusts." The Fund
reserves the right to modify or terminate the conversion features of the shares
as stated above at any time upon 60-days notice to shareholders.
The Adviser reserves the right in its sole discretion to determine which of
such advisory or asset allocation accounts shall be Managed Accounts. For
information regarding Managed Accounts, please contact your Morgan Stanley
account representative or the Fund at the telephone number provided on the cover
of this Prospectus.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption. The Fund reserves the right
to modify or terminate the involuntary redemption features of the shares as
stated above at any time upon 60-days notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A Shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
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<PAGE>
INITIAL INVESTMENTS
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of the Portfolio and $100,000 for Class B shares of the
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio
name]", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The class(es) of shares of
the Portfolio to be purchased should be designated on the Account Registration
Form. For purchases by check, the Fund is ordinarily credited with Federal
Funds within one business day. Thus your purchase of shares by check is
ordinarily credited to your account at the net asset value per share of the
Portfolio determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
The purchase price of the Class A and Class B shares of the Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the close of the New York Stock Exchange
("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the
price
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computed on the date of receipt; an order received after the close of the NYSE
will be executed at the price computed on the next day the NYSE is open as
long as the Transfer Agent receives payment by check or in Federal Funds prior
to the regular close of the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested
and, therefore, will not be earning dividends. Your bank may charge a service
fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000, except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund, Inc. -- [portfolio name]") at the above address or by wiring monies to the
Custodian Bank as outlined above. It is very important that your account name,
the portfolio name and the class selected be specified in the letter or wire to
assure proper crediting to your account. In order to ensure that your wire
orders are invested promptly, you are requested to notify one of the Fund's
representatives (toll-free 1-800-548-7786) prior to the wire date. Additional
investments will be applied to purchase additional shares in the same class held
by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
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EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolio and the Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging
shares of Portfolio A for shares of Portfolio B, then exchanging shares of
Portfolio B for shares of Portfolio C and again exchanging shares of Portfolio C
for shares of Portfolio B within a 120-day period. Two types of transactions are
exempt from these excessive trading restrictions: (1) trades exclusively between
money market portfolios; and (2) trades done in connection with an asset
allocation service, such as TFM Accounts or accounts managed or advised by the
Adviser and/or any of its affiliates.
INVESTMENT IN FUNDS THROUGH A TOTAL FUNDS MANAGEMENT ("TFM") ACCOUNT
In addition to the considerable diversification among individual securities
you receive by investing in a particular Portfolio, you can further reduce risk
by spreading your assets among several different Portfolios that each have
different risk and return characteristics. TFM is an active investment
management service managed by Morgan Stanley or its affiliates, including Morgan
Stanley Asset Management Inc. (each, a "TFM Adviser"), that allocates your
investments across a combination of either Class A or Class B shares of certain
of the Portfolios selected to meet your long-term investment objectives as well
as, in certain circumstances, your current income objectives.
The TFM Adviser has developed investment strategies for TFM Accounts to meet
the diverse financial needs of different investors. You can open a TFM Account
by meeting with one of the investment professionals of a Participating Dealer
who will review your situation and help you identify your long-term investment
and/or current income objectives. After using TFM criteria to determine your
long-term investment and/or current income objectives, you can choose one of
several TFM investment strategies. Based on your chosen strategy, your initial
investment will be allocated among a number of the Class A or Class B shares of
the portfolios. Depending on market conditions, the TFM Adviser periodically
reallocates the combination of portfolios or the percentage amounts invested in
the shares of each portfolio to implement your TFM investment strategy. In
addition, your TFM Account will be periodically rebalanced to maintain your TFM
strategy's current asset allocation mix, if and when the performance of one or
more of the portfolios unbalances the strategy's mix. You will pay the TFM
Adviser a fee for the TFM Account service that is in addition to and separate
from the fees and expenses you will pay directly or indirectly as an investor in
the portfolios. See "Fund Expenses."
From time to time, one or more of the portfolios used for investment by the
TFM Accounts may experience relatively large investments or redemptions due to
the TFM Account allocations or rebalancings recommended by the TFM Adviser.
These transactions will affect the portfolios, since portfolios that experience
redemptions as a result of reallocations or rebalancings may have to sell
portfolio securities and portfolios that receive additional cash will have to
invest it in additional portfolio securities. While it is impossible to predict
the overall impact of these transactions over time, there could be adverse
effects on portfolio management to the extent that portfolios may be required to
sell securities or invest cash at times when they would not otherwise do so.
These transactions could also have tax consequences if sales of securities
resulted in gains and could also increase
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transaction costs. The Adviser, representing the interests of the portfolios, is
committed to minimizing the impact of TFM Account transactions on the
portfolios. The Adviser, however, will have a conflict in fulfilling this
responsibility in that it also serves as a TFM Adviser. In that capacity, the
Adviser, representing the interests of the TFM Accounts, also is committed to
minimizing the impact of TFM Account transactions on the portfolios to the
extent consistent with pursuing the investment objectives of the TFM Accounts.
In addition, an affiliate of the TFM Adviser, the Distributor is compensated on
the sale,and may be compensated for distribution or shareholder services on the
sale of shares of the portfolios. See "Purchase of Shares" and "Shareholder
Services -- Exchange Features." The Adviser will monitor the impact of TFM
Account transactions on the Portfolios.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares or Class B shares of the Portfolio at the next determined net
asset value of shares of the applicable class. On days that both the NYSE and
the Custodian Bank are open for business, the net asset value per share of the
Portfolio is determined at the close of trading of the NYSE (currently 4:00 p.m.
Eastern Time). Shares of the Portfolio may be redeemed by mail or telephone. No
charge is made for redemption. Any redemption proceeds may be more or less than
the purchase price of your shares depending on, among other factors, the market
value of the investment securities held by the Portfolio.
BY MAIL
The Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your request
should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798, except that deliveries by overnight courier
should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global
Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
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BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. In times of drastic market conditions, the telephone redemption option
may be difficult to implement. If you experience difficulty in making a
telephone redemption, your request may be made by mail or express mail and will
be implemented at the net asset value next determined after it is received.
Redemption requests sent to the Fund through express mail must be mailed to the
address of the Dividend Disbursing and Transfer Agent listed under "General
Information." The Fund and the Fund's transfer agent (the "Transfer Agent") will
employ reasonable procedures to confirm that the instructions communicated by
telephone are genuine. These procedures include requiring the investor to
provide certain personal identification information at the time an account is
opened and prior to effecting each transaction requested by telephone. In
addition, all telephone transaction requests will be recorded and investors may
be required to provide additional telecopied written instructions regarding
transaction requests. Neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-Kind will be made in readily marketable securities.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information.
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SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in the Portfolio for shares of any
other available portfolio(s) of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege is only available with respect to portfolios that are
registered for sale in a shareholder's state of residence. The exchange
privilege may be modified or terminated by the Fund at any time upon 60-days
notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the name(s) of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, MA 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current portfolio, the names of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the class of
the portfolios involved in the exchange of shares at the close of business.
Requests received after 4:00 p.m. are processed the next business day based on
the net asset value determined at the close of business on such day. For
additional information regarding responsibility for the authenticity of
telephoned instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolio's shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of each class of the
Portfolio. Net asset value is calculated
25
<PAGE>
separately for each class of the Portfolio. Net asset value per share is
determined as of the close of the NYSE on each day that the NYSE is open for
business. Price information on listed securities is taken from the exchange
where the security is primarily traded. Securities listed on a U.S. securities
exchange for which market quotations are available are valued at the last quoted
sale price on the day the valuation is made. 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 a price that is considered to best represent
fair value within a range not exceeding the current asked price nor less than
the current bid price. The current average bid and asked prices are determined
based on the bid and asked prices quoted on such valuation date by reputable
brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices, but take into account institutional size, trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recently quoted bid price or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine prices in accordance
with the above-stated procedure are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid and asked
price of such currencies against the U.S. dollar last quoted by any major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE.
The Portfolio may advertise "total return" which shows what an investment in
a class of the Portfolio would have earned over a specified period of time (such
as one, five or ten years), assuming that all distributions and dividends by the
Portfolio were reinvested in the same class on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes that may be payable on dividends and
26
<PAGE>
distributions or on redemption. The Fund may also include comparative
performance information in advertising or marketing the Portfolio's shares,
including data from Lipper Analytical Services, Inc., other industry
publications, business periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash.
The Portfolio expects to distribute substantially all of its taxable net
investment income in the form of annual dividends. Net realized capital gains,
if any, after reduction for any available tax loss carryforwards will also be
distributed annually.
Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
27
<PAGE>
The Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from the Portfolio's net investment income are taxable
to shareholders as ordinary income, whether received in cash or reinvested in
additional shares. Such dividends paid by the Portfolio will generally not
qualify for the 70% dividends-received deduction for corporate shareholders. The
Portfolio will report annually to its shareholders the amount of dividend income
qualifying for such treatment.
Distributions of net capital gain (i.e., net long-term capital gain in
excess of net short-term capital losses) are taxable to shareholders as
long-term capital gain, regardless of how long the shareholder has held the
Portfolio's shares. The Portfolio will send reports annually to shareholders of
the federal income tax status of all distributions made during the preceding
year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
loss, including any available capital loss carryforwards) prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any taxable dividends, capital gains distributions and redemption proceeds paid
to any individual or certain other non-corporate shareholder (1) who has failed
to provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Application Form, (2) who is subject to backup withholding by the Internal
Revenue Service, or (3) who has not certified to the Fund that such shareholder
is not subject to backup withholding. This backup withholding is not an
additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceed or are
less than the shareholder's adjusted basis in the sold, exchanged or redeemed
shares. If capital gain distributions have been made with respect to shares that
are sold at a loss after being held for six months or less, then the loss is
treated as a long-term capital loss to the extent of the capital gain
distributions.
Conversion of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
28
<PAGE>
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that the Portfolio is liable for foreign income taxes so withheld, the
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although the
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that the Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolio generally does not invest for short-term trading purposes,
however, when circumstances warrant, the Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolio will not consider portfolio turnover rate a
limiting factor in making investment decisions consistent with their respective
objective and policies. As portfolio turnover increases, the Portfolio
necessarily will experience increased transaction costs and additional
realization of capital gains.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 35 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of
29
<PAGE>
Directors has the power to designate one or more classes of shares of common
stock and to classify and reclassify any unissued shares with respect to such
classes. The shares of common stock of each portfolio are currently classified
into two classes, the Class A shares and the Class B shares, except for the
International Small Cap, Money Market and Municipal Money Market Portfolios
which offer only Class A shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no pre-emptive rights. The shares of the Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of a portfolio may be presumed to "control" (as that term is
defined in the 1940 Act) that portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
30
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
ACTIVE COUNTRY ALLOCATION PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
If you need assistance in filling out this form for the
ACCOUNT INFORMATION Morgan Stanley Institutional Fund, please contact your
Fill in where applicable Morgan Stanley representative or call us toll free
1-800-548-7786. Please print all items except signature, and
mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First Name Initial Last Name
2.
First Name Initial Last Name
First Name Initial Last Name
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<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
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<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
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<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien:
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
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<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor
OR
1. TAXPAYER IDENTIFICATION SOCIAL SECURITY NUMBER
NUMBER ("TIN") ("SSN")
OR
2. TIN SSN
OR
TIN SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your
correct TIN(s) or SSN(s). Accounts that have a missing or incorrect
TIN(s) or SSN(s) will be subject to backup withholding at a 31% rate on
dividends, distributions and other payments. If you have not provided us
with your correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of
persons subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained.
You may be notified that you are subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code because you have
underreported interest or dividends or you were required to, but failed
to, file a return which would have included a reportable interest or
dividend payment.
</TABLE>
<PAGE>
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<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following
CLASS SECTION Portfolio: / / Class A Shares $ / / Class B Shares $
(Class A shares minimum Active Country Allocation
$500,000 for the Portfolio
Portfolio and Class B
shares minimum $100,000
for the Portfolio).
Please indicate class and
amount.
Total Initial Investment $
</TABLE>
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<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate
portfolio, manner of
payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
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<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
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<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
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<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
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<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the
account statement sent to
my/our registered Address
address, I/we hereby
authorize the Fund to City State Zip Code
mail duplicate statements
to the name and address
provided at right.
</TABLE>
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<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative
No. Branch
No.
</TABLE>
<PAGE>
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<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE
ARE SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE
HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL
SECURITY ADMINISTRATION FOR A TIN OR A SSN AND I/WE
UNDERSTAND THAT IF I/WE DO NOT PROVIDE EITHER NUMBER TO CHASE
GLOBAL FUNDS SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE
DATE OF THIS APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR
CORRECT SSN(S) OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY
AND A 31% BACKUP WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION
PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU
MAY REQUEST SUCH FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S. CITIZENS
OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY THE
INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
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<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 6
Investment Objective and Policies................. 10
Additional Investment Information................. 12
Investment Limitations............................ 15
Management of the Fund............................ 16
Purchase of Shares................................ 18
Redemption of Shares.............................. 23
Shareholder Services.............................. 25
Valuation of Shares............................... 25
Performance Information........................... 26
Dividends and Capital Gains Distributions......... 27
Taxes............................................. 27
Portfolio Transactions............................ 29
General Information............................... 29
Account Registration Form
</TABLE>
ACTIVE COUNTRY ALLOCATION PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
GOLD PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
twenty-nine portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the Gold Portfolio (the "Portfolio"). The Class A and Class B shares currently
offered by the Portfolio have different minimum investment requirements and fund
expenses. Shares of the portfolios are offered with no sales charge, exchange
fee or redemption fee, (except that the International Small Cap Portfolio may
impose a transaction fee).
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity,
Technology, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield and Municipal Bond Portfolios; and (v)
MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional
information about the Fund is contained in a "Statement of Additional
Information," dated May 1, 1997, which is incorporated herein by reference. The
Statement of Additional Information and the prospectuses pertaining to the other
portfolios of the Fund are available upon request and without charge by writing
or calling the Fund at the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Gold Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A................................................................................... None
Class B................................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
Class A................................................................................... None
Class B................................................................................... None
Deferred Sales Load
Class A................................................................................... None
Class B................................................................................... None
Redemption Fees
Class A................................................................................... None
Class B................................................................................... None
Exchange Fees
Class A................................................................................... None
Class B................................................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- --------------------------------------------------------------------------------------------
<S> <C>
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (Net of Fee Waiver)*
Class A................................................................................... 0.52%
Class B................................................................................... 0.52%
12b-1 Fees
Class A................................................................................... None
Class B................................................................................... 0.25%
Other Expenses
Class A................................................................................... 0.73%
Class B................................................................................... 0.73%
---------
Total Operating Expenses (Net of Fee Waivers)*
Class A................................................................................... 1.25%
Class B................................................................................... 1.50%
---------
---------
</TABLE>
- ------------------------------
*The Adviser has agreed to waive its management fees and/or to reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolio to exceed a specified percentage of its respective
average daily net assets. Absent the fee waiver, the management fee would be
1.00%. Absent the fee waiver and/or expense reimbursement, the Portfolio's
total operating expenses would be 1.73% of the average daily net assets of the
Class A shares and 1.94% of the average daily net assets of the Class B shares.
As a result of this reduction, the Management Fee stated above is lower than
the contractual fee stated under "Management of the Fund." The Adviser reserves
the right to terminate any of its fee waivers and/or expense reimbursements at
any time in its sole discretion. For further information on Fund expenses, see
"Management of the Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. Expenses and fees are based on actual figures for the fiscal year
ended December 31, 1996. Due to the continuous nature of Rule 12b-1 fees, long
term Class B shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by the National Association of
Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted above, the Portfolio charges no redemption
fees of any kind. The example is based on total operating expenses of the
Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gold Portfolio
Class A.......................................................... $ 13 $ 40 $ 69 $ 151
Class B.......................................................... 15 47 82 179
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A and Class
B shares of the Portfolio for each of the periods presented. The audited
financial highlights for the Portfolio's shares for each of the periods
presented are part of the Fund's financial statements which appear in the Fund's
December 31, 1996 Annual Report to Shareholders and which are incorporated by
reference in the Fund's Statement of Additional Information. The Portfolio's
financial highlights for each of the periods presented have been audited by
Price Waterhouse LLP, whose unqualified report thereon is also incorporated by
reference in the Statement of Additional Information. Additional performance
information is included in the Annual Report. The Annual Report and the
financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. The following information
should be read in conjunction with the financial statements and notes thereto.
4
<PAGE>
GOLD PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
PERIOD FROM
FEBRUARY 1, 1994*
YEAR ENDED YEAR ENDED TO DECEMBER 31,
DECEMBER 31, 1996 DECEMBER 31, 1995 1994
--------------------- ----------------- -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............. $ 8.55 $ 9.13 $ 10.00
------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1)................ 0.05 (0.07) 0.03
Net Realized and Unrealized Gain (Loss) on
Investments++.................................. 1.41 1.22 (0.88)
------- ------ -------
Total from Investment Operations.............. 1.46 1.15 (0.85)
------- ------ -------
DISTRIBUTIONS
Net Investment Income........................... (0.05) (0.01) (0.02)
In Excess of Net Investment Income.............. (0.01) -- --
Net Realized Gain............................... -- -- (1.72)
In Excess of Net Realized Gain.................. (0.65) -- --
------- ------ -------
Total Distributions........................... (0.71) (1.73) (0.02)
------- ------ -------
NET ASSET VALUE, END OF PERIOD.................... $ 9.30 $ 8.55 $ 9.13
------- ------ -------
------- ------ -------
TOTAL RETURN...................................... 16.94% 13.21% (8.49)%
------- ------ -------
------- ------ -------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)........... $27,810 $7,409 $ 30,243
Ratio of Expenses to Average Net Assets (1)..... 1.25%** 1.25% 1.25%
Ratio of Net Investment Income (Loss) to Average
Net Assets (1)................................. 0.57% (0.31)% 0.41%**
Portfolio Turnover Rate......................... 94% 47% 56%
Average Commission Rate#........................ $0.0246 N/A N/A
<CAPTION>
CLASS B
-------------------
PERIOD FROM
JANUARY 2, 1996***
TO DECEMBER 31,
1996
-------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............. $ 8.81
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1)................ 0.03
Net Realized and Unrealized Gain (Loss) on
Investments++.................................. 1.14
-------
Total from Investment Operations.............. 1.17
-------
DISTRIBUTIONS
Net Investment Income........................... (0.04)
In Excess of Net Investment Income.............. (0.01)
Net Realized Gain............................... --
In Excess of Net Realized Gain.................. (0.65)
-------
Total Distributions........................... (0.70)
-------
NET ASSET VALUE, END OF PERIOD.................... $ 9.28
-------
-------
TOTAL RETURN...................................... 13.21%
-------
-------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)........... $ 1,370
Ratio of Expenses to Average Net Assets (1)..... 1.50%**
Ratio of Net Investment Income (Loss) to Average
Net Assets (1)................................. 0.30%**
Portfolio Turnover Rate......................... 94%
Average Commission Rate#........................ $0.0246
</TABLE>
- ------------------------------
<TABLE>
<C> <S> <C> <C> <C> <C>
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income.......... $0.04 $0.11 $0.04 $0.04
Ratios before expense
limitation:
Expenses to Average Net
Assets..................... 1.73% 1.76% 1.72%** 1.94%**
Net Investment Loss to
Average Net Assets......... 0.10 % (0.82 )% (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. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.47% of the trade amount.
++ The amounts shown for the year ended December 31, 1996 for a share
outstanding throughout the year does not accord with aggregate net losses on
investments for the year because of the timing of sales and repurchases of
the portfolio shares in relation to fluctuating market value of the
investments in the Portfolio.
5
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-nine portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except the International
Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class
B shares. Each portfolio has its own investment objective and policies designed
to meet its specific goals. The investment objective of the Gold Portfolio is as
follows:
- The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in the equity securities of foreign and domestic issuers engaged
in gold-related activities.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and telephone number noted on the
cover page of this Prospectus. The investment objectives of these other
portfolios are listed below:
GLOBAL AND INTERNATIONAL EQUITY:
- The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
- The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
- The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
- The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
- The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.
6
<PAGE>
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
- The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
- The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of
small-to-medium-sized corporations.
- The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
- The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
- The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small-to-medium-sized
companies.
- The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Portfolio's investment adviser, are expected to benefit from their
involvement in technology and technology-related industries.
- 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.
- The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
- The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers in emerging countries.
- The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio
of fixed income securities.
- The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
7
<PAGE>
- 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 three
highest rating categories of the recognized rating services.
- The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
- The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing primarily in
municipal obligations, the interest on which is exempt from federal income
tax.
MONEY MARKET:
- The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one
year or less.
- The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at February 28, 1997 had approximately $176.9 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. Sun Valley Gold
Company (the "Sub-Adviser"), which at February 28, 1997, had in excess of $32
million in assets under management, acts as sub-adviser to the Portfolio. See
"Management of the Fund -- Investment Adviser and Sub-Adviser" and "Management
of the Fund -- Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. The minimum initial investment, generally, is $500,000 for Class A
shares of the Portfolio and $100,000 for Class B shares of the Portfolio. The
minimum initial investment amount is reduced for certain categories of
investors. For additional information on how to purchase shares and minimum
initial investments, see "Purchase of Shares."
8
<PAGE>
HOW TO REDEEM
Shares of the Portfolio may be redeemed at any time, without cost, at the
net asset value per share of shares of the applicable class next determined
after receipt of the redemption request. The redemption price may be more or
less than the purchase price. Certain redemptions that cause the value of an
account to remain for a continuous 60-day period below the minimum investment
amount for the Class A shares or for Class B shares may result in involuntary
redemption or automatic conversion. For additional information on how to redeem
shares and involuntary redemption or conversion, see "Purchase of Shares --
Minimum Account Sizes and Involuntary Redemption of Shares" and "Redemption of
Shares."
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. The Portfolio's investments
may be subject to greater risk and market fluctuation than a fund that invests
in securities representing a broader range of investment alternatives.
Historically, stock prices of companies involved in precious metals-related
industries have been volatile. In addition, prices of gold and other precious
metals and minerals may fluctuate sharply over short periods of time due to
various world-wide economic, financial and political factors. The Portfolio may
also invest in securities of foreign issuers which are subject to certain risks
not typically associated with domestic securities. In addition, the Portfolio
may invest in repurchase agreements, lend its portfolio securities and purchase
securities on a when-issued basis. The Portfolio may invest in foreign currency
forward contracts to hedge currency risk associated with investment in non-U.S.
dollar denominated securities. The Portfolio may invest in certain derivatives,
including options, futures and options on futures. These investments entail
certain costs and risks, including imperfect correlation between the value of
securities held by the Portfolio and the value of the particular derivative
instrument, and the risk that the Portfolio could not close out a derivatives
position when it would be most advantageous to do so. The Portfolio may also
invest in securities that are neither listed on a stock exchange nor traded
over-the-counter, including private placement securities. Each of these
investment strategies involves specific risks which are described under
"Investment Objective and Policies" and "Additional Investment Information."
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Gold Portfolio is long-term capital
appreciation. The production of any current income is incidental to this
objective. The Portfolio seeks to achieve its objective by investing primarily
in the equity securities of foreign and domestic issuers engaged in gold-related
activities. There can be no assurance that the Portfolio's investment objective
will be achieved. The Portfolio's investment objective is a fundamental policy
which may not be changed without the approval of a majority of the Portfolio's
outstanding voting securities. In addition to the investments and strategies
described below, the Portfolio may invest in certain securities and obligations
as set forth in "Additional Investment Information" below. The investment
policies described below are not fundamental policies and may be changed without
shareholder approval. Because the securities in which the Portfolio invests may
involve risks not associated with more traditional investments, an investment in
the Portfolio, by itself, should not be considered a balanced investment
program.
Under normal circumstances, the Portfolio will invest at least 70% of its
total assets in equity securities of companies principally engaged in the
exploration, mining, fabrication, processing, distribution or trading of gold
(or, to a lesser degree, silver, platinum or other precious metals or minerals)
or the financing, managing, controlling or operating of companies engaged in
such activities. (Such activities and the activities of such related financing,
managing, controlling or operating companies are referred to herein as
"gold-related" or "precious-metals-related" activities.) For these purposes, a
company will be considered to be principally engaged in such activities if it
derives more than 50% of its income, or devotes 50% or more of its assets, to
such activities. With respect to the Portfolio, equity securities include common
and preferred stocks, convertible securities, and rights and warrants to
purchase common stocks. The Portfolio will invest more than 25% of its total
assets in securities of companies in the group of industries involved in
gold-related or precious-metals-related activities, as described above, and may
invest more than 25% of its total assets in one or more of the industries, such
as mining, that are a part of such group of industries, as described above.
Potential investors in the Portfolio should consider the possibly greater risk
arising from the concentration of the Portfolio's investments in one such
industry or the group of industries.
Because most of the world's gold production is outside of the United States,
the Portfolio expects that a significant portion of its assets may be invested
in securities of foreign issuers. The percentage of assets invested in
particular countries or regions will change from time to time in accordance with
the judgment of Morgan Stanley Asset Management Inc. (the "Adviser") and Sun
Valley Gold Company (the "Sub-Adviser", and collectively with the Adviser, the
"Advisers"), which may be based on, among other things, consideration of the
political stability and economic outlook of these countries or regions. It is
currently anticipated, however, that the Portfolio's assets will be principally
invested in the equity securities of companies located in the United States,
Canada and Australia, and the Portfolio's assets may be invested in equity
securities of companies located in South Africa.
The Portfolio expects to invest in foreign securities by buying the foreign
securities themselves, but the Portfolio may also invest in American Depositary
Receipts ("ADRs") and other Depositary Receipts, or similar securities that are
convertible into securities of foreign issuers and that evidence ownership of
the underlying foreign security when the Advisers believe that it is in the best
interest of the Portfolio to do so.
10
<PAGE>
The Portfolio may also invest up to 10% of its total assets in gold bullion.
Bullion will only be bought from and sold to U.S. and foreign banks, regulated
U.S. commodities exchanges, exchanges affiliated with a regulated U.S. stock
exchange, and dealers who are members of, or affiliated with, a regulated U.S.
commodities exchange, in accordance with applicable investment laws. Investors
should note that bullion offers the potential for capital appreciation or
depreciation, but unlike other investments does not generate income. In bullion
transactions, the Portfolio may encounter higher custody costs and other costs
(including shipping and insurance) than those costs that are normally associated
with ownership of securities. The Fund may attempt to minimize the costs
associated with the actual custody of bullion by the use of receipts or
certificates representing ownership interests in bullion. The Advisers currently
intend to use the Portfolio's investments in gold bullion as a short-term
investment for portfolio management purposes.
The Portfolio may also invest up to 30% of its assets in money market
instruments under normal circumstances, although the Portfolio intends to stay
invested in securities satisfying its primary investment objective to the extent
practicable. Money market instruments include obligations of the U.S. Government
and its agencies and instrumentalities, commercial paper including bank
obligations, certificates of deposit (including Eurodollar certificates of
deposit) and repurchase agreements.
For hedging purposes only, the Portfolio may enter into foreign currency
forward contracts, covered call and put options (listed on a U.S. securities
exchange or written in the over-the-counter market), futures contracts and
options on futures. The Portfolio may also enter into repurchase agreements,
purchase securities on a when-issued or delayed delivery basis and lend its
portfolio securities.
ADDITIONAL INVESTMENT INFORMATION
DEPOSITARY RECEIPTS. The Portfolio is permitted to invest indirectly in
securities of foreign companies through sponsored or unsponsored ADRs, European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and other
types of Depositary Receipts (which, together with ADRs, EDRs and GDRs, are
hereinafter collectively referred to as "Depositary Receipts"), to the extent
such Depositary Receipts are or become available. Depositary Receipts are not
necessarily denominated in the same currency as the underlying securities. In
addition, the issuers of the securities underlying unsponsored Depositary
Receipts are not obligated to disclose material information in the United States
and, therefore, there may be less information available regarding such issuers
and there may not be a correlation between such information and the market value
of the Depositary Receipts. ADRs are securities typically issued by a U.S.
financial institution (a "depositary"), that evidence ownership interests in a
security or pool or securities issued by a foreign issuer (the "underlying
issuer") and deposited with the depositary. GDRs and other types of Depositary
Receipts are typically issued by foreign depositaries, although they also may be
issued by U.S. financial institutions, and evidence ownership interests in a
security or pool of securities issued by either a foreign or a U.S. corporation.
Generally, Depositary Receipts in registered form are designed for use in the
U.S. securities market and Depositary Receipts in bearer form are designed for
use in securities markets outside the United States. For purposes of the
Portfolio's investment policies, the Portfolio's investments in Depositary
Receipts will be deemed to be investments in the underlying securities. The
issuers of the stock of unsponsored ADRs are not obligated to disclose material
information in the United States and therefore, there may not be a correlation
11
<PAGE>
between such information and the market value of the ADR. In the event that ADRs
or EDRs are not available for a particular security, the Portfolio may invest in
that security, which may or may not be listed on a foreign securities exchange.
FOREIGN CURRENCY FORWARD CONTRACTS. The Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolio may
use such contracts to protect against a decline in a foreign currency against
the U.S. dollar between the trade date and settlement date when the Portfolio
purchases or sells securities, lock in the U.S. dollar value of dividends and
interest on securities held by the Portfolio, and generally to protect the U.S.
dollar value of securities held by the Portfolio against exchange rate
fluctuation. While forward contracts may limit losses as a result of exchange
rate fluctuations, they will also limit any gains that might otherwise have been
realized. The Portfolio's Custodian may be required to place cash or liquid
securities in a segregated account in an amount equal to the value of the
Portfolio's total assets committed to the consummation of forward contracts. If
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will be at least equal to the amount of the
Portfolio's commitments with respect to such contracts.
FOREIGN INVESTMENT. Investment in securities of foreign issuers involves
somewhat different investment risks than those affecting U.S. investments. There
may be limited publicly available information with respect to foreign issuers,
and foreign issuers are not generally subject to uniform accounting, auditing
and financial standards and requirements comparable to those applicable to
domestic companies. There may also be less government supervision and regulation
of foreign securities exchanges, brokers and listed companies than in the United
States. Many foreign securities markets have substantially less volume than U.S.
national securities exchanges, and securities of some foreign issuers are less
liquid and more volatile than securities of comparable domestic issuers.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. Dividends and interest
paid by foreign issuers may be subject to withholding and other foreign taxes,
which may decrease the net return on foreign investments as compared to
dividends and interest paid to the Portfolio by domestic companies. It is not
expected that the Portfolio or its shareholders would be able to claim a credit
for U.S. tax purposes with respect to any such foreign taxes. Additional risks
include future political and economic developments, the possibility that a
foreign jurisdiction might impose or change withholding taxes on income payable
with respect to foreign securities, possible seizure, nationalization or
expropriation of the foreign issuer or foreign deposits and the possible
adoption of foreign governmental restrictions such as exchange controls. Current
developments in South Africa have raised the threat of political instability and
uncertainty concerning the impact of such instability on South Africa's economy
and businesses. Accordingly, the risk of investing in securities of issuers in
South Africa may be greater than the risk of investing in more stable foreign
countries.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies, and the Portfolio may temporarily hold uninvested reserves
in bank deposits in foreign currencies, the value of the Portfolio's assets as
measured in U.S. dollars may be affected favorably or unfavorably by changes in
currency rates and exchange control regulations, and the Portfolio may incur
costs in connection with conversions between various currencies.
12
<PAGE>
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may
purchase and sell futures contracts and options on futures contracts, including
but not limited to financial futures, securities index futures, foreign currency
exchange futures, and interest rate futures contracts. Futures contracts provide
for the sale by one party and purchase by another party of a specified amount of
a specific security, instrument or basket thereof, at a specific future date and
at a specified price. An option on a futures contract is a legal contract that
gives the holder the right to buy or sell a specified amount of futures
contracts at a fixed or determinable price upon the exercise of the option.
The Portfolio may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or purchase securities
index futures in order to gain market exposure. Subject to applicable laws, the
Portfolio may engage in transactions in securities index futures contracts (and
options thereon) which are traded on a recognized securities or futures
exchange, or may purchase or sell such instruments in the over-the-counter
market. There currently are limited securities index futures and options on such
futures in many countries, particularly emerging countries. The nature of the
strategies adopted by the Adviser, and the extent to which those strategies are
used, may depend on the development of such markets.
The Portfolio may engage in transactions involving foreign currency exchange
futures contracts. Such contracts involve an obligation to purchase or sell a
specific currency at a specified future date and at a specified price. The
Portfolio may engage in such transactions to hedge their respective holdings and
commitments against changes in the level of future currency rates or to gain
exposure to a particular currency.
The Portfolio may engage in transactions in interest rate futures
transactions. Interest rate futures contracts involve an obligation to purchase
or sell a specific debt security, instrument or basket thereof at a specified
future date at a specified price. The value of the contract rises and falls
inversely with changes in interest rates. The Portfolio may engage in such
transactions to hedge their holdings of debt instruments against future changes
in interest rates.
Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies, and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures contracts, the value of financial futures
contracts rises and falls inversely with changes in interest rates. The
Portfolio may engage in financial futures contracts for hedging and non-hedging
purposes.
Under rules adopted by the Commodity Futures Trading Commission, the
Portfolio may enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of the Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to
activities that do not constitute "bona fide" hedging. The Portfolio will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under such contracts, in combination with its outstanding
obligations with respect to options transactions (including options to purchase
securities or instruments) would exceed 20% of its total assets.
Gains and losses on futures contracts and options thereon depend on the
Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by the Portfolio and the prices of futures and
options relating to investments purchased or sold by the
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Portfolio, and (ii) possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures position. The risk that
the Portfolio will be unable to close out a futures position or options contract
will be minimized by only entering into futures contracts or options
transactions for which there appears to be a liquid exchange or secondary
market. The risk of loss in trading on futures contracts in some strategies can
be substantial, due both to the low margin deposits required and the extremely
high degree of leverage involved in futures pricing.
GOLD RELATED INVESTMENTS. The Portfolio intends to invest at least 70% of
its total assets in securities of companies engaged in gold-related activities.
As a result of this policy, which is a fundamental policy of the Portfolio, the
Portfolio's investments may be subject to greater risk and market fluctuation
than a fund that invests in securities representing a broader range of
investment alternatives. Historically, stock prices of companies involved in
precious-metals-related industries have been volatile. Investment related to
gold and other precious metals and minerals are considered speculative and are
impacted by a variety of world-wide economic, financial and political factors.
Prices of gold and other precious metals may fluctuate sharply over short
periods of time due to changes in inflation or expectations regarding inflation
in various countries, the availability of supplies of precious metals, changes
in industrial and commercial demand, metal sales by governments, central banks
or international agencies, investment speculation, monetary and other economic
policies of various governments and government restrictions on private ownership
of certain precious metals and minerals.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of its total assets.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
The Portfolio may make money market investments pending other investments or
settlement for liquidity, or in adverse market conditions. See "Temporary
Investments." The money market investments permitted for the Portfolio include
obligations of the U.S. Government and its agencies and instrumentalities;
obligations of foreign sovereignties; other debt securities; commercial paper;
bank obligations; certificates of deposit (including Eurodollar certificates of
deposit); and repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolio may invest in securities that are neither listed on a
stock exchange nor traded over-the-counter, including privately placed
securities. Such unlisted equity securities may involve a higher degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Portfolio or less than what may be
considered the fair value of such securities. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which might be
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<PAGE>
applicable if their securities were publicly traded. If such securities are
required to be registered under the securities laws of one or more jurisdictions
before being resold, the Portfolio may be required to bear the expenses of
registration.
As a general matter, the Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Nor as a general matter, may the Portfolio
invest more than 10% of its total assets in securities that are restricted from
sale to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act"). However, each Portfolio may
invest up to 20% of its total assets in liquid Restricted Securities that can be
offered and sold to qualified institutional buyers under Rule 144A under the
1933 Act ("Rule 144A Securities"). The Board of Directors has adopted guidelines
and delegated to the Adviser, subject to the supervision of the Board of
Directors, the daily function of determining and monitoring the liquidity of
Rule 144A Securities. Rule 144A Securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities.
OPTIONS TRANSACTIONS. The Portfolio may seek to increase its return or may
hedge its portfolio investments through options transactions with respect to
securities, instruments, indices or baskets thereof in which the Portfolio may
invest, as well as with respect to foreign currency. Purchasing a put option
gives the Portfolio the right to sell a specified security, currency or basket
of securities or currencies at the exercise price until the expiration of the
option. Purchasing a call option gives the Portfolio the right to purchase a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the option. The Portfolio may not
purchase call and put options to the extent that the value of its aggregate
investment in options exceeds 5% of its total assets.
The Portfolio also may write (i.e., sell) put and call options on
investments held in its portfolio, as well as with respect to foreign currency.
A Portfolio that has written an option receives a premium, which increases the
Portfolio's return on the underlying security or instrument in the event the
option expires unexercised or is closed out at a profit. However, by writing a
call option, the Portfolio will limit its opportunity to profit from an increase
in the market value of the underlying security or instrument above the exercise
price of the option for as long as the Portfolio's obligation as writer of the
option continues. The Portfolio may only write options that are "covered." A
covered call option means that so long as the Portfolio is obligated as the
writer of the option, it will own (i) the underlying security or instrument
subject to the option or (ii) securities or instruments convertible or
exchangeable without the payment of any consideration into the security or
instrument subject to the option.
By writing (or selling) a put option, the Portfolio incurs an obligation to
buy the security or instrument underlying the option from the purchaser of the
put at the option's exercise price at any time during the option period, at the
purchaser's election. Options written by the Portfolio may be exercisable by the
purchaser only on a specific date. A Portfolio that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option.
The Portfolio may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Adviser and
the extent to which those strategies are used will depend on the development of
such option markets. The primary risks associated with the use of options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by the Portfolio and the prices of options relating to
such investments; and (ii) possible lack of a liquid secondary market for an
option.
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PRECIOUS METALS FORWARD AND FUTURES CONTRACTS. The Portfolio may enter into
futures contracts on precious metals as a hedge against changes in the prices of
precious metals held or intended to be acquired by the Portfolio, but not for
speculation or for achieving leverage. The Portfolio's hedging activities may
include purchases of futures contracts as an offset against the effect of
anticipated increases in the price of a precious metal which the Portfolio
intends to acquire or sales of futures contracts as an offset against the effect
of anticipated declines in the price of precious metal which the Portfolio owns.
The Portfolio may enter into precious metals forward contracts, which are
similar to precious metals futures contracts in that they both provide for the
purchase or sale of precious metals at an agreed price with delivery to take
place at an agreed future time. However, unlike futures contracts, forward
contracts are negotiated contracts which are primarily used in the dealer
market. The Portfolio will use forward contracts for the same hedging purposes
as those applicable to futures contracts, as described above. Precious metals
futures and forward contract prices can be volatile and are influenced
principally by changes in spot market prices, which in turn are affected by a
variety of political and economic factors. While the correlation between changes
in prices of futures and forward contracts and prices of the precious metals
being hedged by such contracts has historically been very strong, the
correlation may be imperfect at times, and even a well conceived hedge may be
unsuccessful to some degree because of market behavior or unexpected precious
metals price trends.
The Portfolio may also purchase and write covered call or put options on
precious metals futures contracts. Such options would be purchased solely for
hedging purposes. Call options might be purchased to hedge against an increase
in the price of precious metals the Portfolio intends to acquire, and put
options may be purchased to hedge against a decline in the price of precious
metals owned by the Portfolio. As is the case with futures contracts, options on
precious metals futures may facilitate the Portfolio's acquisition of precious
metals or permit the Portfolio to defer disposition of precious metals for tax
or other purposes.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines of the Fund's
Directors. In a repurchase agreement, the Portfolio buys a security from a
seller that has agreed to repurchase it at a mutually agreed upon date and
price, reflecting the interest rate effective for the term of the agreement. The
term of these agreements is usually from overnight to one week and never exceeds
one year. Repurchase agreements may be viewed as a fully collateralized loan of
money by the Portfolio to the seller. The Portfolio always receives securities
with a market value at least equal to the purchase price (including accrued
interest) as collateral, and this value is maintained during the term of the
agreement. If the seller defaults and the collateral value declines, the
Portfolio might incur a loss. If bankruptcy proceedings are commenced with
respect to the seller, the Portfolio's realization upon the collateral may be
delayed or limited. The Portfolio may not enter into repurchase agreements with
more than seven days to maturity if, as a result, more than 15% of the market
value of the Portfolio's net assets are invested in these agreements and other
investments for which market quotations are not readily available or which are
otherwise illiquid.
TEMPORARY INVESTMENTS. For temporary defensive purposes, when the Advisers
determine that market conditions warrant, the Portfolio may invest up to 100% of
its assets in dollar and non-dollar denominated money market instruments and
short- and medium-term debt securities that the Advisers believe to be of high
quality, or hold cash. The short- and medium-term debt securities in which the
Portfolio may invest consist of (a) obligations of the U.S. or foreign country
governments, their respective agencies or instrumentalities; (b) bank deposits
and bank obligations (including certificates of deposit, time deposits and
bankers' acceptances) of
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<PAGE>
U.S. or foreign country banks denominated in any currency; (c) floating rate
securities and other instruments denominated in any currency issued by
international development agencies; (d) finance company and corporate commercial
paper and other short-term corporate debt obligations of U.S. and foreign
country corporations meeting the Portfolio's credit quality standards; and (e)
repurchase agreements with banks and broker-dealers with respect to such
securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of
cash or liquid securities in an amount at least equal to these commitments. The
payment obligation and the interest rates that will be received are each fixed
at the time the Portfolio enters into the commitment and no interest accrues to
the Portfolio until settlement. Thus, it is possible that the market value at
the time of settlement could be higher or lower than the purchase price if,
among other factors, the general level of interest rates has changed. It is a
current policy of the Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of the Portfolio's total
assets less liabilities, other than the obligations created by these
commitments.
INVESTMENT LIMITATIONS
As a diversified investment company, the Gold Portfolio is subject to the
following limitations: (a) as to 75% of its total assets, the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government and its agencies and
instrumentalities, and (b) the Portfolio may not own more than 10% of the
outstanding voting securities of any one issuer.
The Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares and under certain
non-fundamental investment limitation that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER AND SUB-ADVISER. Morgan Stanley Asset Management Inc. is
the Adviser and Administrator of the Fund and the Portfolio. The Adviser
provides investment advice and portfolio management services, pursuant to an
Investment Advisory Agreement and, subject to the supervision of the Fund's
Board of Directors, makes each of the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages each of the Portfolio's investments. With respect to the Portfolio, the
Adviser has delegated these responsibilities, subject to its supervision, to the
Sub-Adviser. The Adviser is entitled to receive from the Portfolio an annual
investment advisory fee, payable quarterly, in an amount equal to 1.00% of the
average daily net assets of the Portfolio.
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Sun Valley Gold Company is sub-adviser of the Portfolio. Pursuant to a
Sub-Advisory Agreement, and subject at all times to the supervision of the
Adviser and the Board of Directors of the Fund, the Sub-Adviser provides
investment advice and portfolio management services, makes the Portfolio's
day-to-day investment decisions, arranges for the execution of portfolio
transactions and generally manages the Portfolio's investments. The Sub-Adviser
is entitled to receive from the Adviser an annual sub-advisory fee, payable
quarterly, in an amount equal to 0.40% of the average daily net assets of the
Portfolio.
The Adviser has agreed to a reduction in the fees payable to it and to
reimburse the Portfolio, if necessary, if such fees would cause the total annual
operating expenses for Class A and Class B shares to exceed 1.25% and 1.50%,
respectively, of its average daily net assets. The Sub-Adviser has agreed to a
proportionate reduction in its fees from the Adviser if the Adviser is required
to waive its fees or to reimburse the Portfolio so that the Portfolio's total
operating expenses for Class A and Class B shares do not exceed 1.25% and 1.50%,
respectively, of its average daily net assets.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business, and
provides a broad range of portfolio management services to customers in the
United States and abroad. On February 5, 1997, Morgan Stanley Group Inc. and
Dean Witter, Discover & Co. announced that they had entered into an Agreement
and Plan of Merger to form Morgan Stanley, Dean Witter, Discover & Co. Morgan
Stanley Group Inc. is the direct parent of the Adviser and Morgan Stanley.
Subject to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, the Adviser and Morgan Stanley
will be subsidiaries of Morgan Stanley, Dean Witter, Discover & Co. At February
28, 1997 the Adviser, together with its affiliated asset management companies,
had approximately $176.9 billion in assets under management as an investment
manager or as a Named Fiduciary or Fiduciary Adviser. See "Management of the
Fund" in the Statement of Additional Information.
The Sub-Adviser, with principal offices at 620 Sun Valley Road, Sun Valley,
Idaho 83340, specializes in the management of gold-related investments. At
February 28, 1997, the Sub-Adviser managed investments totaling in excess of $32
million.
PORTFOLIO MANAGER. Peter F. Palmedo, the President of the Sub-Adviser since
its inception in January, 1992, has had primary portfolio management
responsibility for the Portfolio since its inception. He has also served as
President of Sun Valley Gold Trading, Inc., a registered broker-dealer, since
its inception in January, 1992, and of Mad River Management since September,
1989. Prior thereto, Mr. Palmedo worked at Morgan Stanley in the institutional
equity department and specialized in portfolio risk management, derivatives and
the development and analysis of long-dated options, synthetic options and
options embedded in securities. He received a BA in Business and Finance from
Hampshire College in 1979.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the Officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of report, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will
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<PAGE>
provide dividend disbursing and transfer agent services to the Fund. For its
services under the Administration Agreement, the Fund pays the Adviser a monthly
fee which on an annual basis equals 0.15% of the average daily net assets of the
Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The Officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Portfolio upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Portfolio.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of the Portfolio pursuant to Rule 12b-1 under the 1940 Act (the "Plan").
Under the Plan, the Distributor is entitled to receive from the Portfolio a
distribution fee, which is accrued daily and paid quarterly, of 0.25% of the
Class B shares' average daily net assets on an annualized basis. The Distributor
expects to reallocate most of its fee to its investment representatives. The
Distributor may, in its discretion, voluntarily waive from time to time all or
any portion of its distribution fee and each of the Distributor and the Adviser
is free to make additional payments out of its own assets to promote the sale of
Fund shares, including payments that compensate financial institutions for
distribution services or shareholder services.
The plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountant's fees, custodial fees, and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of the Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolio. See "Valuation of Shares."
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MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio account opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares. Certain advisory or asset
allocation accounts, such as Total Funds Management accounts, managed by Morgan
Stanley or its affiliates, including the Adviser ("Managed Accounts") purchase
Class A shares without being subject to any minimum initial investment or
minimum account size requirements for a Portfolio account. Employees of the
Adviser and certain of its affiliates may purchase Class A shares subject to
conditions, including a lower minimum initial investment, established by
Officers of the Fund.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based solely upon changes in the market that reduce the net asset value of
shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remained Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B Account") converted to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution.
The minimum investment levels may be waived at the discretion of the Adviser
for (i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planners,
financial services firms, or investment advisers that have entered into an
agreement with Morgan Stanley or its affiliates; and (ii) retirement and
deferred compensation plans and trusts used to fund such plans, including, but
not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal
Revenue Code of 1986, as amended (the "Code") and "rabbi trusts". The Fund
reserves the right to modify or terminate the conversion features of the shares
as stated above at any time upon 60-days notice to shareholders.
The Adviser reserves the right in its sole discretion to determine which of
such advisory or asset allocation accounts shall be Managed Accounts. For
information regarding Managed Accounts, please contact your Morgan Stanley
account representative or the Fund at the telephone number provided on the cover
of this Prospectus.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the
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shares in such account are subject to redemption by the Fund and, if redeemed,
the net asset value of such shares will be promptly paid to the shareholder. The
Fund, however, will not redeem shares based solely upon changes in the market
that reduce the net asset value of shares.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption. The Fund reserves the right
to modify or terminate the involuntary redemption features of the shares as
stated above at any time upon 60-days notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form, and mailing it, together with a check ($500,000 minimum
for Class A shares of the Portfolio and $100,000 minimum for Class B shares
of the Portfolio, with certain exceptions for Morgan Stanley employees and
select customers) payable to "Morgan Stanley Institutional Fund, Inc. --
[portfolio name]", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for payment
by other currencies is given by the Fund. The class(es) of shares of the
Portfolio to be purchased should be designated on the Account Registration Form.
For purchases by check, the Fund is ordinarily credited with Federal Funds
within one business day. Thus, your purchase of shares by check is ordinarily
credited to your account at the net asset value per share of the Portfolio
determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
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B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
The purchase price of the Class A and Class B shares of the Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the regular close of the New York Stock
Exchange ("NYSE"), which is currently 4:00 p.m. (Eastern Time), will be
executed at the price computed on the date of receipt; an order received after
the regular close of the NYSE will be executed at the price computed on the
next day the NYSE is open as long as the Transfer Agent receives payment by
check or in Federal Funds prior to the regular close of the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested.
Your bank may charge a service fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000, except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund, Inc. -- [portfolio name]") at the above address or by wiring monies to the
Custodian Bank as outlined above. It is very important that your account name,
the portfolio name and the class selected be specified in the letter or wire to
ensure proper crediting to your account. In order to ensure that your wire
orders are invested promptly, you are requested to notify one of the Fund's
representatives (toll free: 1-800-548-7786) prior to the wire date. Additional
investments will be applied to purchase additional shares in the same class held
by a shareholder in a Portfolio account.
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OTHER PURCHASE INFORMATION
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is canceled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of the Portfolio and raise its expenses. Consequently, in the
interest of all the stockholders of the Portfolio and the Portfolio's
performance, the Fund may in its discretion bar a stockholder that engages in
excessive trading of shares of any class of a portfolio from further purchases
of shares of the Fund for an indefinite period. The Fund considers excessive
trading to be more than one purchase and sale involving shares of the same class
of a portfolio of the Fund within any 120-day period. As an example, exchanging
shares of portfolios of the Fund as follows amounts to excessive trading:
exchanging shares of Portfolio A for shares of Portfolio B, then exchanging
shares of Portfolio B for shares of Portfolio C and again exchanging shares of
Portfolio C for shares of Portfolio B within a 120-day period. Two types of
transactions are exempt from these excessive trading restrictions; (1) trades
exclusively between money market portfolios; and (2) trades done in connection
with an asset allocation service, such as TFM Accounts or accounts managed or
advised by the Adviser and/or any of its affiliates.
INVESTMENT IN FUNDS THROUGH A TOTAL FUNDS MANAGEMENT ("TFM") ACCOUNT
In addition to the considerable diversification among individual securities
you receive by investing in a particular Portfolio, you can further reduce risk
by spreading your assets among several different Portfolios that each have
different risk and return characteristics. TFM is an active investment
management service managed by Morgan Stanley or its affiliates, including Morgan
Stanley Asset Management Inc. (each, a "TFM Adviser"), that allocates your
investments across a combination of either Class A or Class B shares of certain
of the Portfolios selected to meet your long-term investment objectives as well
as, in certain circumstances, your current income objectives.
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<PAGE>
The TFM Adviser has developed investment strategies for TFM Accounts to meet
the diverse financial needs of different investors. You can open a TFM Account
by meeting with one of the investment professionals of a Participating Dealer
who will review your situation and help you identify your long-term investment
and/or current income objectives. After using TFM criteria to determine your
long-term investment and/or current income objectives, you can choose one of
several TFM investment strategies. Based on your chosen strategy, your initial
investment will be allocated among a number of the Class A or Class B shares of
the Portfolios. Depending on market conditions, the TFM Adviser periodically
reallocates the combination of Portfolios or the percentage amounts invested in
the shares of each Portfolio to implement your TFM investment strategy. In
addition, your TFM Account will be periodically rebalanced to maintain your TFM
strategy's current asset allocation mix, if and when the performance of one or
more of the Portfolios unbalances the strategy's mix. You will pay the TFM
Adviser a fee for the TFM Account service that is in addition to and separate
from the fees and expenses you will pay directly or indirectly as an investor in
the Portfolios. See "Fund Expenses."
From time to time, one or more of the Portfolios used for investment by the
TFM Accounts may experience relatively large investments or redemptions due to
the TFM Account allocations or rebalancings recommended by the TFM Adviser.
These transactions will affect the Portfolios, since Portfolios that experience
redemptions as a result of reallocations or rebalancings may have to sell
portfolio securities and Portfolios that receive additional cash will have to
invest it in additional portfolio securities. While it is impossible to predict
the overall impact of these transactions over time, there could be adverse
effects on portfolio management to the extent that Portfolios may be required to
sell securities or invest cash at times when they would not otherwise do so.
These transactions could also have tax consequences if sales of securities
resulted in gains and could also increase transaction costs. The Adviser,
representing the interests of the Portfolios, is committed to minimizing the
impact of TFM Account transactions on the Portfolios. The Adviser, however, will
have a conflict in fulfilling this responsibility in that it also serves as a
TFM Adviser. In that capacity, the Adviser, representing the interests of the
TFM Accounts, also is committed to minimizing the impact of TFM Account
transactions on the Portfolios to the extent consistent with pursuing the
investment objectives of the TFM Accounts. In addition, an affiliate of the TFM
Adviser, the Distributor is compensated on the sale, and may be compensated for
distribution or shareholder services on the sale of shares of the Portfolios.
See "Purchase of Shares" and "Shareholder Services -- Exchange Features." The
Adviser will monitor the impact of TFM Account transactions on the Portfolios.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares or Class B shares of the Portfolio at the next determined net
asset value of shares of the applicable class. On days that both the NYSE and
the Custodian Bank are open for business, the net asset value per share of the
Portfolio is determined at the regular close of trading of the NYSE (currently
4:00 p.m. Eastern Time). Shares of the Portfolio may be redeemed by mail or
telephone. No charge is made for redemption. Any redemption proceeds may be more
or less than the purchase price of your shares depending on, among other
factors, the market value of the investment securities held by the Portfolio.
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<PAGE>
BY MAIL
The Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your request
should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798, except that deliveries by overnight courier
should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global
Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. In times of drastic market conditions, the telephone redemption option
may be difficult to implement. If you experience difficulty in making a
telephone redemption, your request may be made by mail or express mail and will
be implemented at the net asset value next determined after it is received.
Redemption requests sent to the Fund through express mail must be mailed to the
address of the Dividend Disbursing and Transfer Agent listed under "General
Information." The Fund and the Fund's transfer agent (the "Transfer Agent") will
employ reasonable procedures to confirm that the instructions communicated by
telephone are genuine. These procedures include requiring the investor to
provide certain personal identification information at the time an account is
opened and prior to effecting each transaction requested by telephone. In
addition, all telephone transaction requests will be recorded and investors may
be required to provide additional telecopied written instructions regarding
transaction requests. Neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase.
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<PAGE>
The Fund may suspend the right of redemption or postpone the date upon which
redemptions are effected at times when the NYSE is closed, or under any
emergency circumstances as determined by the Securities and Exchange Commission
(the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in the Portfolio for shares of any
other available portfolio(s) of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege may be modified or terminated by the Fund at any time
upon 60-days notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the name(s) of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current portfolios, the name(s) of the portfolio(s)
and class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the
class(es) of the portfolio(s) involved in the exchange of shares at the close of
business. Requests
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<PAGE>
received after 4:00 p.m. (Eastern Time) are processed the next business day
based on the net asset value determined at the close of business on such day.
For additional information regarding responsibility for the authenticity of
telephoned instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolio's shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of each class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. 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 a
price within a range not exceeding the current asked price nor less than the
current bid price. The current bid and asked prices are determined based on the
average of the bid and asked prices quoted on such valuation date by reputable
brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices but take into account institutional size, trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recently quoted bid price or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine prices in accordance
with the above-stated procedures are determined in good faith at fair value
using methods determined by the Board of Directors. For purposes of calculating
net asset value per share, all assets and liabilities initially expressed in
foreign currencies will be translated into U.S. dollars at the mean of the bid
and asked price of such currencies against the U.S. dollar last quoted by any
major bank.
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Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise "total return" for each class of
the Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE.
The Portfolio may advertise "total return" which shows what an investment in
a class of the Portfolio would have earned over a specified period of time (such
as one, five or ten years) assuming that all distributions and dividends by the
Portfolio were reinvested in the same class on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes that may be payable on dividend and distributions or upon redemption. The
Fund may also include comparative performance information in advertising or
marketing the Portfolio's shares. Such performance information may include data
from Lipper Analytical Services, Inc., other industry publications, business
periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash.
The Portfolio expects to distribute substantially all of its taxable net
investment income in the form of quarterly dividends. Net realized capital
gains, if any, after reduction for any available tax loss carryforwards will
also be distributed annually.
Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
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TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
The Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from the Portfolio's net investment income are taxable
to shareholders as ordinary income, whether received in cash or in additional
shares. Such dividends will generally qualify for the 70% dividends-received
deduction for corporate shareholders only to the extent of the aggregate
qualifying dividend income received by the Portfolio from U.S. corporations. The
Portfolio will report annually to its shareholders the amount of dividend income
qualifying for such treatment.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. The
Portfolio will send reports annually to shareholders of the federal income tax
status of all distributions made during the preceding year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
losses, including any available capital loss carryforwards) prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (1) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Application Form, (2) who is subject to backup withholding by the Internal
Revenue Service, or (3) who has not certified to the Fund that such shareholder
is not subject to backup withholding. This backup withholding is not an
additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
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The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the redemption proceeds exceed or are less than the
shareholder's adjusted basis in the sold, exchanged or redeemed shares. If
capital gain distributions have been made with respect to shares that are sold
at a loss after being held for six months or less, then the loss is treated as a
long-term capital loss to the extent of the capital gain distributions.
Conversion of shares between classes are not taxable events to the
Shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that the Portfolio is liable for foreign income taxes so withheld, the
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although the
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that the Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolio generally does not invest for short-term trading purposes,
however, when circumstances warrant, the Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the
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Portfolio will not consider portfolio turnover rate a limiting factor in making
investment decisions consistent with its respective objective and policies. As
portfolio turnover increases, the Portfolio necessarily will experience
increased transaction costs and additional realization of capital gains.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 35 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
portfolio are currently classified into two classes, the Class A shares and the
Class B shares, except for the International Small Cap, Money Market and
Municipal Money Market Portfolios which offer only Class A shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no pre-emptive rights. The shares of the Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of a portfolio may be presumed to "control" (as that term is
defined in the 1940 Act) that Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York, ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
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DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
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MORGAN STANLEY INSTITUTIONAL FUND, INC.
GOLD PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
If you need assistance in filling out this form for the
ACCOUNT INFORMATION Morgan Stanley Institutional Fund, please contact your
Fill in where applicable Morgan Stanley representative or call us toll free
1-800-548-7786. Please print all items except signature, and
mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF
SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First
Name Initial Last Name
2.
First
Name Initial Last Name
First
Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund
for additional documents
that may be required to
set up account and to
authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien:
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<S> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF
SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
<PAGE>
<TABLE>
<S> <S> <C> <C>
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor
OR
1. TAXPAYER SOCIAL SECURITY NUMBER
IDENTIFICATION NUMBER ("SSN")
("TIN")
OR
2. TIN SSN
OR
TIN SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer)
with your correct TIN(s) or SSN(s). Accounts that have a
missing or incorrect TIN(s) or SSN(s) will be subject to
backup withholding at a 31% rate on dividends, distributions
and other payments. If you have not provided us with your
correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability
of persons subject to backup withholding will be reduced by
the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
You may be notified that you are subject to backup withholding
under Section 3406(a)(1)(C) of the Internal Revenue Code
because you have underreported interest or dividends or you
were required to, but failed to, file a return which would
have included a reportable interest or dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following / / Class A Shares $ / / Class B Shares $
CLASS SECTION Portfolio:
(Class A shares minimum Gold Portfolio
$500,000 for the
Portfolio and Class B
shares minimum $100,000
for the Portfolio).
Please indicate class and
amount.
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate
portfolio, manner of
payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the
account statement sent to
my/our registered Address
address, I/we hereby
authorize the Fund to City State Z
mail duplicate statements Code
to the name and address
provided at right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative
No. Branch
No.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE
ARE SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE
HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL
SECURITY ADMINISTRATION FOR A TIN OR A SSN AND I/WE
UNDERSTAND THAT IF I/WE DO NOT PROVIDE EITHER NUMBER TO CHASE
GLOBAL FUNDS SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE
DATE OF THIS APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR
CORRECT SSN(S) OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY
AND A 31% BACKUP WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION
PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU
MAY REQUEST SUCH FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S):
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 6
Investment Objective and Policies................. 10
Additional Investment Information................. 11
Investment Limitations............................ 17
Management of the Fund............................ 17
Purchase of Shares................................ 19
Redemption of Shares.............................. 24
Shareholder Services.............................. 26
Valuation of Shares............................... 27
Performance Information........................... 28
Dividends and Capital Gains Distributions......... 28
Taxes............................................. 29
Portfolio Transactions............................ 30
General Information............................... 31
Account Registration Form
</TABLE>
GOLD PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Sub-Adviser
Sun Valley Gold Company
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
INTERNATIONAL SMALL CAP PORTFOLIO
ASIAN EQUITY PORTFOLIO
EUROPEAN EQUITY PORTFOLIO
JAPANESE EQUITY PORTFOLIO
LATIN AMERICAN PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
twenty-nine portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the Global Equity, International Equity, Asian Equity, European Equity, Japanese
Equity and Latin American Portfolios (each a "Multiclass Portfolio" and
collectively, the "Multiclass Portfolios") and to the Class A Shares of the
International Small Cap Portfolio (each, a "Portfolio" and collectively, the
"Portfolios"). The International Equity Portfolio is currently closed to new
investors with the exception of certain Morgan Stanley & Co. Incorporated
("Morgan Stanley") customers. The Class A and Class B shares currently offered
by the Portfolios have different minimum investment requirements and fund
expenses. Shares of the portfolios are offered with no sales charge, exchange
fee or redemption fee, (except that the International Small Cap Portfolio may
impose a transaction fee).
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley as Distributor, the Fund makes
available to institutional and high net worth individual investors a series of
portfolios which benefit from the investment expertise and commitment to
excellence associated with Morgan Stanley and its affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity,
Technology, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield and Municipal Bond Portfolios; and (v)
MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional
information about the Fund is contained in a "Statement of Additional
Information," dated May 1, 1997, which is incorporated herein by reference. The
Statement of Additional Information and the prospectuses pertaining to the other
portfolios of the Fund are available upon request and without charge by writing
or calling the Fund at the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
each Portfolio listed below will incur.
<TABLE>
<CAPTION>
GLOBAL EQUITY INTERNATIONAL EQUITY INTERNATIONAL SMALL ASIAN EQUITY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO CAP PORTFOLIO PORTFOLIO
- --------------------------------------------- --------------- --------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A.................................... None None None* None
Class B.................................... None None N/A None
Maximum Sales Load Imposed on Reinvested
Dividends
Class A.................................... None None None None
Class B.................................... None None N/A None
Deferred Sales Load
Class A.................................... None None None None
Class B.................................... None None N/A None
Redemption Fees
Class A.................................... None None 1.00%* None
Class B.................................... None None N/A None
Exchange Fees
Class A.................................... None None None None
Class B.................................... None None N/A None
<CAPTION>
EUROPEAN EQUITY JAPANESE EQUITY LATIN AMERICAN
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------- --------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A..................................................... None None None
Class B..................................................... None None None
Maximum Sales Load Imposed on Reinvested Dividends
Class A..................................................... None None None
Class B..................................................... None None None
Deferred Sales Load
Class A..................................................... None None None
Class B..................................................... None None None
Redemption Fees
Class A..................................................... None None None
Class B..................................................... None None None
Exchange Fees
Class A..................................................... None None None
Class B..................................................... None None None
</TABLE>
- --------------------------
* Shareholders of the International Small Cap Portfolio may be charged a 1.00%
transaction fee, which is payable directly to the International Small Cap
Portfolio, in connection with each purchase and redemption of shares of the
Portfolio. The transaction fee is intended to allocate transaction costs
associated with purchases and redemptions of shares of the Portfolio to
investors actually making such purchases and redemptions rather than to the
Portfolio's other shareholders. The 1.00% fee represents the Adviser's
estimate of such transaction costs, which include the costs of acquiring and
disposing of Portfolio securities. The transaction fee is not a sales charge
or load,
(continued)
2
<PAGE>
and is retained by the Portfolio. The fee does not apply to portfolios of the
Fund other than the International Small Cap Portfolio and is not charged in
connection with the reinvestment of dividends or capital gain distributions.
The fee will not be charged with respect to purchases and redemptions that do
not result in actual transaction costs to the Portfolio. Examples of such
transactions include offsetting purchases and redemptions by different
shareholders occurring at the same time and in-kind purchases and redemptions.
<TABLE>
<CAPTION>
INTERNATIONAL
GLOBAL EQUITY EQUITY INTERNATIONAL SMALL ASIAN EQUITY
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO CAP PORTFOLIO PORTFOLIO
- ------------------------------------------------ ------------- ------------------- ------------------- --------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C> <C> <C>
Management Fee (Net of Fee Waivers)**
Class A....................................... 0.65% 0.78% 0.87% 0.60%
Class B....................................... 0.65% 0.78% N/A 0.60%
12b-1 Fees
Class A....................................... None None None None
Class B....................................... 0.25% 0.25% N/A 0.25%
Other Expenses
Class A....................................... 0.35% 0.22% 0.28% 0.40%
Class B....................................... 0.35% 0.22% N/A 0.40%
------------- ------- ------- --------------
Total Operating Expenses (Net of Fee Waivers)
Class A....................................... 1.00% 1.00% 1.15% 1.00%
Class B....................................... 1.25% 1.25% N/A 1.25%
------------- ------- ------- --------------
------------- ------- ------- --------------
<CAPTION>
EUROPEAN EQUITY JAPANESE EQUITY LATIN AMERICAN
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------ ------------------- ------------------- --------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C> <C> <C>
Management Fee (Net of Fee Waivers)**
Class A...................................................... 0.64% 0.73% 0.62%
Class B...................................................... 0.64% 0.73% 0.62%
12b-1 Fees
Class A...................................................... None None None
Class B...................................................... 0.25% 0.25% 0.25%
Other Expenses
Class A...................................................... 0.36% 0.27% 1.08%
Class B...................................................... 0.36% 0.27% 1.08%
------- ------- --------------
Total Operating Expenses (Net of Fee Waivers)
Class A...................................................... 1.00% 1.00% 1.70%
Class B...................................................... 1.25% 1.25% 1.95%
------- ------- --------------
------- ------- --------------
</TABLE>
** The Adviser has agreed to waive its management fees and/or reimburse each
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolios to exceed a specified percentage of their
respective average daily net assets. As a result of these reductions, the
Management Fees stated above are lower than the contractual fees stated
under "Management of the Fund." The Adviser reserves the right to terminate
any of its fee waivers and/or expense reimbursements at any time in its sole
discretion. For further information on Fund expenses, see "Management
3
<PAGE>
of the Fund." Set forth below, for each Portfolio as applicable, are the
management fees and total operating expenses absent such fee waivers and/or
expense reimbursements as a percent of average daily net assets of the Class
A shares of the Portfolios and Class B Shares of the Multiclass Portfolios,
respectively.
<TABLE>
<CAPTION>
TOTAL
OPERATING EXPENSES
ABSENT
MANAGEMENT FEE WAIVERS
FEES ABSENT FEE --------------------------
PORTFOLIO WAIVERS CLASS A CLASS B
- -------------------------------------------------------------- --------------- ------------ ------------
<S> <C> <C> <C>
Global Equity................................................. 0.80% 1.15% 1.39%
International Equity.......................................... 0.80% 1.02% 1.27%
International Small Cap....................................... 0.95% 1.23% N/A
Asian Equity.................................................. 0.80% 1.25% 1.52%
European Equity............................................... 0.80% 1.16% 1.40%
Japanese Equity............................................... 0.80% 1.07% 1.31%
Latin American................................................ 1.10% 2.18% 2.43%
</TABLE>
The purpose of the table is to assist the investor in understanding the
various expenses that an investor in the Portfolios will bear directly or
indirectly. Expenses and fees are based on actual figures for the fiscal year
ended December 31, 1996. Due to the continuous nature of Rule 12b-1 fees, long
term Class B shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by the National Association of
Securities Dealers, Inc. ("NASD") Conduct Rules.
4
<PAGE>
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a
5% rate of return and (2) redemption at the end of each time period. As noted
above, the only fee charged by the Fund upon purchase or redemption of Fund
shares is the 1% transaction fee that may be assessed on purchases and
redemptions of shares of the International Small Cap Portfolio, which charges
are reflected in this example. The example is based on total operating expenses
of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
3 5 10
1 YEAR YEARS YEARS YEARS
------ ------ ------ -------
<S> <C> <C> <C> <C>
Global Equity Portfolio
Class A.......................... $ 10 $ 32 $ 55 $ 122
Class B.......................... 13 40 69 151
International Equity Portfolio
Class A.......................... 10 32 55 122
Class B.......................... 13 40 69 151
International Small Cap Portfolio
Class A.......................... 32 57 85 163
Asian Equity Portfolio
Class A.......................... 10 32 55 122
Class B.......................... 13 40 69 151
European Equity Portfolio
Class A.......................... 10 32 55 122
Class B.......................... 13 40 69 151
Japanese Equity Portfolio
Class A.......................... 10 32 55 122
Class B.......................... 13 40 69 151
Latin American Portfolio
Class A.......................... 17 54 92 201
Class B.......................... 20 61 105 227
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Class A and Class
B shares of the Multiclass Portfolios and the Class A shares of the
International Small Cap Portfolio for each of the periods presented. The audited
financial highlights for the Portfolios' shares for each of the periods
presented are part of the Fund's financial statements which appear in the Fund's
December 31, 1996 Annual Report to Shareholders and which are incorporated by
reference in the Fund's Statement of Additional Information. The Portfolios'
financial highlights for each of the periods presented have been audited by
Price Waterhouse LLP, whose unqualified report thereon is also incorporated by
reference in the Statement of Additional Information. Additional performance
information is included in the Annual Report. The Annual Report and the
financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. After October 31, 1992, the
Fund changed its fiscal year end to December 31. The following information
should be read in conjunction with financial statements and notes thereto.
6
<PAGE>
GLOBAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------------------------------------------------------- ------------
PERIOD FROM PERIOD FROM
TWO MONTHS JULY 15, JANUARY 2,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 1992* TO 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, DECEMBER 31,
1996 1995 1994 1993 1992 1992 1996
------------ ------------ ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................. $ 14.31 $ 13.40 $ 13.87 $ 9.75 $ 9.35 $ 10.00 $ 14.36
------------ ------------ ------------ ------------ ------------ ----------- ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)..................... 0.23 0.18 0.08 0.08 0.01 0.02 0.13
Net Realized and
Unrealized Gain (Loss)
on Investments.......... 3.02 2.26 0.79 4.18 0.39 (0.67) 3.02
------------ ------------ ------------ ------------ ------------ ----------- ------------
Total from Investment
Operations............ 3.25 2.44 0.87 4.26 0.40 (0.65) 3.15
------------ ------------ ------------ ------------ ------------ ----------- ------------
DISTRIBUTIONS
Net Investment Income.... (0.23) (0.22) (0.12) (0.02) -- -- (0.21)
In Excess of Net
Investment Income....... -- -- -- (0.03) -- -- --
Net Realized Gain........ (1.09) (1.31) (1.22) (0.09) -- -- (1.09)
------------ ------------ ------------ ------------ ------------ ----------- ------------
Total Distributions.... (1.32) (1.53) (1.34) (0.14) -- -- (1.30)
------------ ------------ ------------ ------------ ------------ ----------- ------------
NET ASSET VALUE, END OF
PERIOD.................... $ 16.24 $ 14.31 $ 13.40 $ 13.87 $ 9.75 $ 9.35 $ 16.21
------------ ------------ ------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ------------ ------------ ----------- ------------
TOTAL RETURN............... 22.83% 18.66% 6.95% 44.24% 4.28% (6.50)% 22.04%
------------ ------------ ------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ------------ ------------ ----------- ------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands)............. $80,297 $91,675 $78,935 $19,918 $11,739 $11,257 $3,928
Ratio of Expenses to
Average Net Assets
(1)..................... 1.00% 1.00% 1.00% 1.00% 1.00%** 1.00%** 1.25%**
Ratio of Net Investment
Income to Average Net
Assets (1).............. 1.38% 1.17% 0.87% 0.84% 0.69%** 1.00%** 1.29%**
Portfolio Turnover
Rate.................... 26% 28% 12% 42% 5% 10% 26%
Average Commission Rate
#....................... $0.0299 N/A N/A N/A N/A N/A $0.0299
</TABLE>
- ------------------------------
<TABLE>
<C><S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income............... $0.03 $0.02 $0.02 $0.01 $0.02 $0.08 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets... 1.15 % 1.13 % 1.24 % 1.66 % 2.49 %** 5.22 %** 1.39 %**
Net Investment Income (Loss) to
Average Net Assets.............. 1.23 % 1.04 % 0.63 % 0.18 % (0.80 )%** (3.22 )%** 1.15 %**
</TABLE>
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.25% of the trade amount.
7
<PAGE>
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS B
CLASS A ------------
-------------------------------------------------------------------------------------- PERIOD FROM
TWO MONTHS JANUARY 2,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, DECEMBER 31,
1996 1995 1994 1993 1992 1992 1996
------------ ------------ ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................. $ 15.15 $ 15.34 $ 14.09 $ 9.98 $ 9.83 $ 10.52 $ 15.24
------------ ------------ ------------ ------------ ------------ ----------- ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)..................... 0.25 0.16 0.16 0.15 0.01 0.12 0.23
Net Realized and
Unrealized Gain (Loss)
on Investments.......... 2.71 1.55 1.54 4.36 0.14 (0.59) 2.59
------------ ------------ ------------ ------------ ------------ ----------- ------------
Total from Investment
Operations............ 2.96 1.71 1.70 4.51 0.15 (0.47) 2.82
------------ ------------ ------------ ------------ ------------ ----------- ------------
DISTRIBUTIONS
Net Investment Income.... (0.36) (0.06) (0.18) (0.01) -- (0.17) (0.33)
In Excess of Net
Investment Income....... -- -- -- (0.13) -- -- --
Net Realized Gain........ (0.80) (1.84) (0.27) (0.26) -- (0.05) (0.80)
------------ ------------ ------------ ------------ ------------ ----------- ------------
Total Distributions.... (1.16) (1.90) (0.45) (0.40) -- (0.22) (1.13)
------------ ------------ ------------ ------------ ------------ ----------- ------------
NET ASSET VALUE, END OF
PERIOD.................... $ 16.95 $ 15.15 $ 15.34 $ 14.09 $ 9.98 $ 9.83 $ 16.93
------------ ------------ ------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ------------ ------------ ----------- ------------
TOTAL RETURN............... 19.64% 11.77% 12.39% 46.50% 1.53% (4.56)% 18.58%
------------ ------------ ------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ------------ ------------ ----------- ------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands)............. $2,264,424 $1,598,530 $1,304,770 $ 947,045 $ 510,727 $ 486,836 $ 5,393
Ratio of Expenses to
Average Net
Assets (1).............. 1.00% 1.00% 1.00% 1.00% 1.00%** 1.00% 1.25%**
Ratio of Net Investment
Income to Average Net
Assets (1).............. 1.64% 1.38% 1.12% 1.25% 0.68%** 1.46% 1.68%**
Portfolio Turnover
Rate.................... 18% 27% 16% 23% 5% 12% 18%
Average Commission
Rate#................... $0.0238 N/A N/A N/A N/A N/A $0.0238
</TABLE>
- ------------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment
income.......................... $0.00 $0.003 $0.004 $0.01 $0.00 $0.00 $0.00
Ratios before expense limitation:
Expenses to Average Net Assets... 1.02 % 1.03 % 1.03 % 1.06 % 1.14 %** 1.02 % 1.27 %**
Net Investment Income to Average
Net Assets...................... 1.61 % 1.35 % 1.09 % 1.19 % 0.54 %** 1.44 % 1.66 %**
</TABLE>
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.26% of the trade amount.
8
<PAGE>
INTERNATIONAL SMALL CAP PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 15,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993++ 1992
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 14.94 $ 15.15 $ 14.64 $ 10.09 $ 10.00
------------- ------------- ------------- ------------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).................. 0.21 0.24 0.14 0.09 0.01
Net Realized and Unrealized Gain on
Investments (2)........................... 2.29 0.15 0.62 4.48 0.08
------------- ------------- ------------- ------------- ------
Total from Investment Operations......... 2.50 0.39 0.76 4.57 0.09
------------- ------------- ------------- ------------- ------
DISTRIBUTIONS
Net Investment Income...................... (0.22) (0.23) (0.03) 0.00 --
In Excess of Net Investment Income......... -- -- -- (0.02) --
Net Realized Gain.......................... (0.39) (0.37) (0.22) -- --
------------- ------------- ------------- ------------- ------
Total Distributions...................... (0.61) (0.60) (0.25) (0.02) --
------------- ------------- ------------- ------------- ------
NET ASSET VALUE, END OF PERIOD $ 16.83 $ 14.94 $ 15.15 $ 14.64 $ 10.09
------------- ------------- ------------- ------------- ------
------------- ------------- ------------- ------------- ------
TOTAL RETURN................................. 16.82% 2.60% 5.25% 45.34% 0.90%
------------- ------------- ------------- ------------- ------
------------- ------------- ------------- ------------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $ 234,743 $ 198,669 $ 160,101 $ 52,834 $ 3,824
Ratio of Expenses to Average Net Assets
(1)....................................... 1.15% 1.15% 1.15% 1.15% 1.15%**
Ratio of Net Investment Income to
Average Net Assets (1).................... 1.29% 1.72% 1.18% 0.66% 1.37%**
Portfolio Turnover Rate.................... 35% 24% 8% 14% 0%
Average Commission Rate#................... $0.0159 N/A N/A N/A N/A
</TABLE>
- ------------------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income................................ $0.01 $0.01 $0.02 $0.10 $0.16
Ratios before expense limitation:
Expenses to Average Net Assets......... 1.23 % 1.24 % 1.29 % 1.86 % 21.67 %**
Net Investment Income/(Loss) to Average
Net Assets............................ 1.20 % 1.63 % 1.04 % (0.05 )% (19.15 )%**
(2) Reflects a 1% transaction fee on
purchases and redemptions of capital
shares.
</TABLE>
* Commencement of operations.
** Annualized
++Per share amounts for the year ended December 31, 1993 are based on average
outstanding shares.
#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.30% of the trade amount.
9
<PAGE>
ASIAN EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS B
CLASS A ------------
-------------------------------------------------------------------------------------- PERIOD FROM
TWO MONTHS JANUARY 2,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, DECEMBER 31,
1996 1995 1994 1993 1992 1992 1996
------------ ------------ ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 19.48 $ 21.54 $ 26.20 $ 13.11 $ 13.63 $ 9.67 $ 19.55
------------ ------------ ------------ ------------ ------------ ----------- ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)................... 0.17 0.18 0.11 0.10 0.01 0.14 0.11
Net Realized and
Unrealized Gain (Loss)
on Investments........ 0.50 1.11 (4.15) 13.38 (0.53) 3.86 0.46
------------ ------------ ------------ ------------ ------------ ----------- ------------
Total from Investment
Operations.......... 0.67 1.29 (4.04) 13.48 (0.52) 4.00 0.57
------------ ------------ ------------ ------------ ------------ ----------- ------------
DISTRIBUTIONS
Net Investment
Income................ (0.15) (0.34) (0.09) (0.01) -- (0.04) (0.11)
In Excess of Net
Investment Income..... (0.00)+ (0.00+ -- (0.13) -- -- --
Net Realized Gain...... (1.27) (3.01) (0.53) (0.12) -- -- (1.27)
In Excess of Net
Realized Gain......... -- -- -- (0.13) -- -- --
------------ ------------ ------------ ------------ ------------ ----------- ------------
Total
Distributions....... (1.42) (3.35) (0.62) (0.39) -- (0.04) (1.38)
------------ ------------ ------------ ------------ ------------ ----------- ------------
NET ASSET VALUE, END OF
PERIOD.................. $ 18.73 $ 19.48 $ 21.54 $ 26.20 $ 13.11 $ 13.63 $ 18.74
------------ ------------ ------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ------------ ------------ ----------- ------------
TOTAL RETURN............. 3.49% 6.87% (15.81)% 105.71% (3.82)% 41.50% 2.92%
------------ ------------ ------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ------------ ------------ ----------- ------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands).... $363,498 $314,884 $276,906 $287,136 $ 41,978 $41,017 $ 11,002
Ratio of Expenses to
Average Net Assets
(1)................... 1.00% 1.00% 1.00% 1.00% 1.00%** 1.00% 1.25%**
Ratio of Net Investment
Income to Average Net
Assets (1)............ 0.74% 0.97% 0.52% 0.83% 0.61%** 1.53% 0.58%**
Portfolio Turnover
Rate.................. 69% 42% 47% 18% 10% 33% 69%
Average Commission
Rate#................. $0.0111 N/A N/A N/A N/A N/A $0.0111
</TABLE>
- ------------------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income............... $0.05 $0.03 $0.04 $0.05 $0.02 $0.06 $0.04
Ratios before expense limitation:
Expenses to Average Net Assets... 1.25 % 1.18 % 1.20 % 1.38 % 2.02 %** 1.63 % 1.52 %**
Net Investment Income (Loss) to
Average Net Assets.............. 0.54 % 0.79 % 0.32 % 0.45 % (0.41) %** 0.90 % 0.37 %**
</TABLE>
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
#Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.52% of the trade amount.
10
<PAGE>
EUROPEAN EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------------- -------------
PERIOD FROM PERIOD FROM
APRIL 2, JANUARY 2,
YEAR ENDED YEAR ENDED YEAR ENDED 1993* TO 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 13.92 $ 13.94 $ 12.91 $ 10.00 $ 14.05
------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).................. 0.24 0.14 0.08 0.08 0.18
Net Realized and Unrealized Gain on
Investments............................... 2.85 1.37 1.29 2.83 2.73
------------- ------------- ------------- ------------- -------------
Total from Investment Operations......... 3.09 1.51 1.37 2.91 2.91
------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income...................... (0.25) (0.15) (0.09) -- (0.23)
In Excess of Net Investment Income......... (0.02) -- -- -- (0.02)
Net Realized Gain.......................... (0.04) (1.38) (0.25) -- (0.04)
------------- ------------- ------------- ------------- -------------
Total Distributions...................... (0.31) (1.53) (0.34) -- (0.29)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD............... $ 16.70 $ 13.92 $ 13.94 $ 12.91 $ 16.67
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
TOTAL RETURN................................. 22.29% 11.85% 10.88% 29.10% 20.76%
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $ 178,356 $ 69,583 $ 27,634 $ 12,681 $2,654
Ratio of Expenses to Average Net Assets
(1)....................................... 1.00% 1.00% 1.00% 1.00%** 1.25%**
Ratio of Net Investment Income to Average
Net Assets (1)............................ 1.83% 1.37% 0.87% 1.23%** 1.67%**
Portfolio Turnover Rate.................... 24% 13% 79% 15% 24%
Average Commission Rate#................... $0.0212 N/A N/A N/A $0.0212
</TABLE>
- ------------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income................................ $0.02 $0.03 $0.06 $0.09 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets......... 1.16 % 1.25 % 1.62 % 2.43 %** 1.40 %**
Net Investment Income (Loss) to Average
Net Assets............................ 1.67 % 1.12 % 0.25 % (0.21 )%** 1.52 %**
</TABLE>
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.23% of the trade amount.
11
<PAGE>
JAPANESE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------- -------------
PERIOD FROM PERIOD FROM
APRIL 25, JANUARY 2,
YEAR ENDED YEAR ENDED 1994* TO 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996++ 1995 1994 1996++
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 9.27 $ 9.83 $ 10.00 $ 9.25
------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1)........... -- 0.04 (0.01) (0.02)
Net Realized and Unrealized Loss on
Investments+.............................. (0.13) (0.40) (0.16) (0.14)
------------- ------------- ------------- -------------
Total from Investment Operations......... (0.13) (0.36) (0.17) (0.16)
------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income...................... (0.66) -- -- (0.64)
In Excess of Net Investment Income......... (0.52) (0.20) -- (0.51)
------------- ------------- ------------- -------------
Total Distributions...................... (1.18) (0.20) -- (1.15)
------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD............... $ 7.96 $ 9.27 $ 9.83 $ 7.94
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
TOTAL RETURN................................. (1.40)% (3.64)% (1.70)% (1.67)%
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $ 152,229 $ 119,278 $ 50,332 $3,431
Ratio of Expenses to Average Net Assets
(1)....................................... 1.00% 1.00% 1.00%** 1.25%**
Ratio of Net Investment Income (Loss) to
Average Net Assets (1).................... (0.04)% 0.15% (0.10)%** (0.26)%**
Portfolio Turnover Rate.................... 38% 52% 1% 38%
Average Commission Rate#................... $0.0561 N/A N/A $0.0561
</TABLE>
- ------------------------
<TABLE>
<C> <S> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income (loss)......................... $0.01 $0.06 $0.02 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets......... 1.07 % 1.20 % 1.27 %** 1.31 %**
Net Investment Income (Loss) to Average
Net Assets............................ (0.11 )% (0.05 )% (0.37 )%** (0.32 )%**
</TABLE>
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ The amount shown for the year ended December 31, 1995 for a share
outstanding throughout the year does not agree with the amount of aggregate
net gains on investments for the year because of the timing of sales and
repurchases of the Portfolio shares in relation to fluctuating market value
of the investments in the Portfolio.
++ Per share amounts for the year ended December 31, 1996 are based on average
outstanding shares.
# Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.43% of the trade amount.
12
<PAGE>
LATIN AMERICAN PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------
PERIOD FROM CLASS B
JANUARY 18, -------------------
YEAR ENDED 1995* TO DECEMBER PERIOD FROM JANUARY
DECEMBER 31, 31, 2, 1996*** TO
1996 1995 DECEMBER 31, 1996
------------------- ------------------- -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 9.06 $ 10.00 $ 9.44
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).................. 0.14 0.05 0.09
Net Realized and Unrealized Gain (Loss) on
Investments............................... 4.27 (0.92) 3.90
------- ------- -------
Total from Investment Operations......... 4.41 (0.87) 3.99
------- ------- -------
DISTRIBUTIONS
Net Investment Income...................... (0.13) (0.04) (0.10)
Net Realized Gain.......................... (2.02) -- (2.02)
Return of Capital.......................... -- (0.03) --
------- ------- -------
Total Distributions...................... (2.15) (0.07) (2.12)
------- ------- -------
NET ASSET VALUE, END OF PERIOD............... $ 11.32 $ 9.06 $ 11.31
------- ------- -------
------- ------- -------
TOTAL RETURN................................. 48.77% (8.68)% 42.44%
------- ------- -------
------- ------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $ 30,409 $ 15,376 $1,333
Ratio of Expenses to Average Net Assets
(1)....................................... 1.70% 1.70%** 1.95%**
Ratio of Net Investment Income to Average
Net Assets (1)............................ 1.21% 0.62%** 0.89%**
Portfolio Turnover Rate.................... 192% 137% 192%
Average Commission Rate#................... $0.0004 N/A $0.0004
</TABLE>
- ------------------------
<TABLE>
<C> <S> <C> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income................................ $0.05 $0.09 $0.05
Ratios before expense limitation:
Expenses to Average Net Assets......... 2.18 % 3.13 %** 2.43 %**
Net Investment Loss to Average Net
Assets................................ 0.75 % (0.48 )%** 0.42 %**
</TABLE>
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.30% of the trade amount.
13
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-nine portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except for the
International Small Cap, Money Market and Municipal Money Market Portfolios,
also offers Class B shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. The investment objective of each
Portfolio described in this Prospectus is as follows:
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $1 billion.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The investment objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
14
<PAGE>
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
-The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Portfolio's investment adviser, are expected to benefit from their
involvement in technology and technology-related industries.
-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.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-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 three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
15
<PAGE>
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing primarily in
municipal obligations, the interest on which is exempt from federal income
tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high-quality money market instruments with remaining maturities of one year
or less.
-
The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high-quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at February 28, 1997 had approximately $176.9 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Multiclass Portfolio are offered at net asset value with no sales commission,
but with a 12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25%
of the Class B shares' average daily net assets on an annualized basis.
Shareholders of the International Small Cap Portfolio may be charged a 1.00%
transaction fee, which is payable directly to the International Small Cap
Portfolio, in connection with each purchase and redemption of shares of the
Portfolio. Share purchases may be made by sending investments directly to the
Fund or through the Distributor. The minimum initial investment, generally, is
$500,000 for Class A shares of each Portfolio and $100,000 for Class B shares of
each Multiclass Portfolio. The minimum initial investment amount is reduced for
certain categories of investors. For additional information on how to purchase
shares and minimum initial investments, see "Purchase of Shares."
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HOW TO REDEEM
Shares of each Portfolio may be redeemed at any time, without cost, at the
net asset value per share of shares of the applicable class next determined
after receipt of the redemption request, (except that shareholders of the
International Small Cap Portfolio may be charged a 1.00% transaction fee, which
is payable directly to the International Small Cap Portfolio, in connection with
each purchase and redemption of shares of the Portfolio). The redemption price
may be more or less than the purchase price. Certain redemptions that cause the
value of an account to remain for a continuous 60-day period below the minimum
investment amount for Class A shares or for Class B shares may result in
involuntary redemption or automatic conversion. For additional information on
how to redeem shares and involuntary redemption or conversion, see "Purchase of
Shares -- Minimum Account Sizes and Involuntary Redemption of Shares" and
"Redemption of Shares."
RISK FACTORS
The investment policies of each of the Portfolios entail certain risks and
considerations of which an investor should be aware. Each Portfolio will invest
in securities of foreign issuers, which are subject to certain risks not
typically associated with domestic securities. Each Portfolio may invest in
securities of issuers located in emerging markets. These securities may impose
greater liquidity risks and other risks not typically associated with investing
in more established markets. The Latin American Portfolio may invest up to 20%
of its total assets in lower rated debt securities ("junk bonds"), which are
considered speculative with regard to the payment of interest and return of
principal. See "Investment Objectives and Policies" and "Additional Investment
Information." In addition, each Portfolio may invest in repurchase agreements,
lend its portfolio securities, purchase securities on a when-issued or delayed
delivery basis and invest in foreign currency forward contracts. The Latin
American Portfolio may invest in foreign currency exchange futures and options
to hedge currency risk associated with investment in non-U.S. dollar denominated
securities and may also invest in futures contracts and options on futures
contracts with respect to securities and indices. The Latin American Portfolio
may invest in certain derivatives, including options, futures and options on
futures. These investments entail certain costs and risks, including imperfect
correlation between the value of securities held by the Portfolio and the value
of the particular derivative instrument, and the risk that the Portfolio could
not close out a derivatives position when it would be most advantageous to do
so. The Asian Equity, International Small Cap and Latin American Portfolios may
invest in securities that are neither listed on a stock exchange nor traded
over-the-counter, including private placement securities. The Global Equity,
Japanese Equity, Latin American and Asian Equity Portfolios may also invest
indirectly in securities through sponsored or unsponsored Depositary Receipts.
Because the Latin American Portfolio is a non-diversified portfolio, the
Portfolio will invest a greater proportion of its assets in the securities of a
smaller number of issuers and, as a result, will be subject to greater risk with
respect to its portfolio securities. Each of these investment strategies
involves specific risks which are described under "Investment Objectives and
Policies" and "Additional Investment Information" herein and under "Investment
Objectives and Policies" in the Statement of Additional Information.
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies the Portfolios employ in their efforts to achieve these objectives.
Each Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolios will attain their
objectives. Each of the Portfolios invests in equity securities, which include
common and preferred stocks, convertible securities, rights and warrants to
purchase common stocks and, in the case of the Latin American Portfolio, equity
interests in trusts and partnerships. In addition to the investments and
strategies described below, the Portfolios may invest in certain securities and
obligations as set forth in "Additional Investment Information" below. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval.
THE GLOBAL EQUITY PORTFOLIO
The Global Equity Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers. At least 65% of the total assets of the Portfolio will
be invested in equity securities under normal circumstances. The Adviser expects
that, under normal circumstances, at least 20% of the Portfolio's total assets
will be invested in the common stocks of U.S. issuers. The remainder of the
Portfolio will be invested in issuers located throughout the world, including
those located in emerging markets. Securities of issuers located in emerging
markets may not be as liquid as those in developed markets and pose greater
risks. Although the Portfolio intends to invest primarily in securities listed
on stock exchanges, it will also invest in securities traded in over-the-counter
markets and may invest in equity securities in the form of Depositary Receipts.
The Adviser's approach in selecting investments for the Portfolio is
oriented to individual stock selection, and is value driven. In selecting stocks
for the Portfolio, the Adviser initially identifies those stocks which it
believes to be undervalued in relation to the issuer's assets, cash flow,
earnings and revenues, and then evaluates the future value of such stocks by
running the results of an in-depth study of the issuer through a dividend
discount model. The Adviser utilizes the research of a number of sources,
including Morgan Stanley Capital International, an affiliate of the Adviser
located in Geneva, Switzerland, in identifying attractive securities, and
applies a number of proprietary screening criteria to identify those securities
it believes to be undervalued. Portfolio holdings are regularly reviewed and
subjected to fundamental analysis to determine whether they continue to conform
to the Adviser's value criteria. Securities which no longer conform to such
value criteria are sold.
THE INTERNATIONAL EQUITY PORTFOLIO
The investment objective of the International Equity Portfolio is to provide
long-term capital appreciation. The production of any current income is
incidental to this objective. The Portfolio seeks to achieve its objective by
investing primarily in equity securities of non-U.S. issuers. At least 65% of
the total assets of the Portfolio will be invested in such equity securities
under normal circumstances.
The Adviser's orientation to individual stock selection and value driven
approach in selecting investments for the Portfolio are the same as those
described for the Global Equity Portfolio discussed above. While the Portfolio
is not subject to any specific geographic diversification requirements, it
currently intends to diversify investments among countries to reduce risk,
including currency risk. Investments will be made primarily in equity securities
of companies domiciled in developed countries, but may also be made in equity
securities of
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issuers domiciled in emerging markets. The Portfolio will not, under normal
circumstances, invest in equity securities of U.S. issuers. Although the
Portfolio intends to invest primarily in equity securities listed on stock
exchanges, it will also invest in equity securities traded in over-the-counter
markets. Securities of companies in emerging countries may pose liquidity risks.
For a description of special considerations and certain risks associated with
investments in foreign issuers, see "Additional Investment Information."
THE INTERNATIONAL SMALL CAP PORTFOLIO
The investment objective of the International Small Cap Portfolio is to
provide long-term capital appreciation. The production of any current income is
incidental to this objective. The Portfolio seeks to achieve its objective by
investing primarily in equity securities of non-U.S. issuers with equity market
capitalizations of less than $1 billion. At least 65% of the total assets of the
Portfolio will be invested in such equity securities under normal circumstances.
The Portfolio will invest a minimum of 80% of its total assets in companies with
market capitalizations of less than $1 billion. The Adviser's orientation to
individual stock selection and value driven approach in selecting investments
for the Portfolio are the same as those described for the Global Equity
Portfolio discussed above.
While the Portfolio is not subject to any specific geographic
diversification requirements, it currently intends to diversify investments
among countries to reduce risk, including currency risk. Investments will be
made primarily in equity securities of companies domiciled in developed
countries. Limited investments may also be made in the securities of companies
domiciled in emerging countries, but will not normally exceed 5% of the total
assets of the Portfolio. Although the Portfolio intends to invest primarily in
equity securities listed on stock exchanges, it may also invest in equity
securities traded in over-the-counter markets and in privately placed
securities. Small capitalization securities involve greater issuer risk and the
markets for such securities may be more volatile and less liquid. Securities of
companies in emerging countries may pose liquidity risks. The Portfolio will
not, under normal circumstances, invest in equity securities of U.S. issuers.
For a description of special considerations and certain risks associated with
investments in foreign issuers, see "Additional Investment Information."
THE ASIAN EQUITY PORTFOLIO
The investment objective of the Asian Equity Portfolio is to provide
long-term capital appreciation. The production of any current income is
incidental to this objective. The Portfolio seeks to achieve its objective by
investing primarily in equity securities which are traded on recognized stock
exchanges of the countries in Asia described below and in equity securities of
companies organized under the laws of an Asian country whose business is
conducted principally in Asia. The Portfolio does not intend to invest in equity
securities which are principally traded in markets in Japan or in companies
organized under the laws of Japan. The Portfolio may also invest in Depositary
Receipts of Asian issuers.
The Portfolio will invest primarily in the more established Asian markets,
including Hong Kong, Singapore, Malaysia, Thailand, the Philippines and
Indonesia. The Portfolio may also invest in common stocks traded on markets in
Taiwan, South Korea, India, Pakistan, Sri Lanka and other emerging markets that
are open to foreign investment. There is no requirement that the Portfolio, at
any given time, invest in any or all of the countries listed above or in any
other Asian countries. The Portfolio has no set policy for allocating
investments among the
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various Asian countries. Allocation of investments will depend on the relative
attractiveness of the stocks of issuers in the respective countries. Government
regulation and restrictions in many of the countries of interest may limit the
amount, mode and extent of investment in companies of such countries.
At least 65% of the total assets of the Portfolio will be invested in common
stocks of Asian countries under normal circumstances. The remaining portion of
the Portfolio will be kept in any combination of debt instruments, bills and
bonds of governmental entities in Asia and the United States, in notes,
debentures and bonds of companies in Asia and in money market instruments.
The Adviser's orientation to individual stock selection and value driven
approach in selecting investments for the Portfolio are similar to those
described for the Global Equity Portfolio discussed above. The Adviser will
analyze assets, revenues and earnings of an issuer. In selecting industries and
particular issuers, the Adviser will evaluate costs of labor and raw materials,
access to technology, export of products and government regulation. Although the
Portfolio seeks to invest in larger companies, it may invest in medium-sized and
small companies that, in the Adviser's view, have potential for growth.
The Portfolio's investments will include securities of issuers located in
emerging countries and traded in emerging markets. These securities pose greater
liquidity risks and other risks than securities of companies located in
developed countries and traded in more established markets. For a description of
special considerations and certain risks associated with investment in foreign
issuers, see "Additional Investment Information."
Although the Portfolio intends to invest primarily in equity securities
listed on stock exchanges, it will also invest in equity securities traded in
over-the-counter markets and in Depositary Receipts. Securities traded in
over-the-counter markets pose liquidity risks. Pending investment or settlement,
and for liquidity purposes, the Portfolio may invest in domestic, Eurodollar and
foreign short-term money market instruments. The Portfolio may also invest in
initial public offerings in the form of oversubscriptions or private placements.
Such investments generally entail short-term liquidity risks.
The Portfolio may enter into currency exchange contracts. Because of the
lack of hedging facilities in the currency markets of Asia, the Portfolio
currently does not actively engage in currency hedging strategies, although it
may do so in the future. Instead, each investment will be considered on a total
currency adjusted basis with the U.S. dollar as a base currency. See "Foreign
Currency Forward Contracts."
THE EUROPEAN EQUITY PORTFOLIO
The investment objective of the European Equity Portfolio is to provide
long-term capital appreciation. The Portfolio seeks to achieve this objective by
investing primarily in equity securities of European issuers, including those
located in Germany, France, Switzerland, Belgium, Italy, Finland, Sweden,
Denmark, Norway and the United Kingdom. Investments may also be made in equity
securities of issuers located in the smaller and emerging markets of Europe.
While the Portfolio is not subject to any specific geographic
diversification requirements, it currently intends to diversify investments
among countries to reduce currency risk. At least 65% of the total assets of the
Portfolio will be invested in equity securities of European issuers under normal
circumstances. The Portfolio will not, under normal circumstances, invest in
equity securities of U.S. issuers. The Adviser's orientation to individual stock
selection and value-driven approach in selecting investments for the Portfolio
are the same as those described for the Global Equity Portfolio discussed above.
Securities in emerging markets may not be as
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liquid as those in developed markets and pose greater risks. Although the
Portfolio intends to invest primarily in equity securities listed on stock
exchanges, it will also invest in equity securities traded in over-the-counter
markets. For a description of special considerations and certain risks
associated with investments in foreign issuers, see "Additional Investment
Information."
THE JAPANESE EQUITY PORTFOLIO
The investment objective of the Japanese Equity Portfolio is to provide
long-term capital appreciation. The Portfolio seeks to achieve this objective by
investing primarily in equity securities of Japanese issuers. Under normal
conditions, the Portfolio will invest at least 80% of its total assets in
securities of issuers that are organized under the laws of Japan, affiliates of
Japanese companies (wherever organized or traded) and issuers not organized
under the laws of Japan but deriving 50% or more of their revenues from Japan.
These securities may include debt securities (issued by the Japanese government
or by Japanese companies) when the Adviser believes that the potential for
capital appreciation from investment in debt securities equals or exceeds that
available from investment in equity securities. All debt securities in which the
Portfolio may invest will be rated no lower than BBB by Standard & Poor's
Ratings Group ("S&P"), Baa by Moody's Investors Service, Inc. ("Moody's") or BBB
by Mikuni Inc. ("Mikuni") (a Japanese rating agency) or, if unrated, of
comparable quality as determined by the Adviser. Securities rated BBB by S&P,
Baa by Moody's or BBB by Mikuni have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments on such securities than would
be the case with higher rated securities. The convertible securities in which
the Portfolio may invest include bonds, notes, debentures, preferred stocks and
other securities convertible into common stocks and may be fixed-income or zero
coupon debt securities. Prior to their conversion, convertible securities may
have characteristics similar to nonconvertible debt securities.
The Portfolio currently intends to focus its investments in Japanese
companies that have an active market for their shares and that the Adviser
believes show a potential for better than average growth. In making investment
decisions, the Adviser will consider, among other factors, the size of the
company, its financial condition, its marketing and technical strengths and its
competitiveness in its industry. The Portfolio anticipates that most equity
securities of Japanese companies in which it invests, either directly or
indirectly by means of Depositary Receipts or convertible debentures, will be
listed on securities exchanges in Japan. The Portfolio may also invest in equity
securities of Japanese companies that are traded in an over-the-counter market.
RISK FACTORS RELATING TO JAPANESE EQUITY PORTFOLIO. Investors should
consider the following factors inherent in investment in Japan.
TRADE ISSUES. Because of the concentration of Japanese exports in highly
visible products such as automobiles, machine tools and semiconductors, and the
large trade surpluses ensuing therefrom, Japan is in a difficult phase in its
relation with its trading partners, particularly the United States, where the
trade imbalance is the greatest. Retaliatory action taken by such trading
partners could affect the ability of Japanese companies to export goods to these
countries, which could negatively impact the value of securities in the
Portfolio.
CURRENCY FACTORS. Over time, the yen has generally appreciated in relation
to the U.S. dollar. The yen's appreciation would add to the returns of dollars
invested through the Portfolio in Japan. A decline in the value of the yen would
have the opposite effect, adversely affecting the value of the Portfolio in U.S.
dollar terms.
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THE JAPANESE STOCK MARKET. Like other stock markets, the Japanese stock
market can be volatile. A decline in the market may have an adverse effect on
the availability of credit and on the value of the substantial stock holdings of
Japanese companies, in particular, Japanese banks, insurance companies and other
financial institutions. A decline in the market may contribute to weakness in
Japan's economy. The common stocks of many Japanese companies continue to trade
at high price-earnings ratios even after the recent market decline. Differences
in accounting methods make it difficult to compare the earnings of Japanese
companies with those of companies in other countries, especially the United
States. In general, however, reported net income in Japan is understated
relative to U.S. accounting standards. In addition, Japanese companies have
tended historically to have higher growth rates than U.S. companies, and
Japanese interest rates have generally been lower than in the United States,
both of which factors tend to result in lower discount rates and higher
price-earnings ratios in Japan than in the United States.
THE LATIN AMERICAN PORTFOLIO
The investment objective of the Latin American Portfolio is long-term
capital appreciation. The Portfolio seeks to achieve this objective by investing
primarily in equity securities (i) of companies organized in or for which the
principal securities trading market is in Latin America, (ii) denominated in a
Latin American currency and issued by companies to finance operations in Latin
America, or (iii) of companies that alone or on a consolidated basis derive 50%
or more of their annual revenues from either goods produced, sales made or
services performed in Latin America (collectively, "Latin American issuers") and
by investing, from time to time, in debt securities issued or guaranteed by a
Latin American government or governmental entity. Under normal conditions,
substantially all, but not less than 80%, of the Portfolio's total assets are
invested in equity securities of Latin American issuers and in debt securities
issued or guaranteed by a Latin American government or governmental entity. For
purposes of this Prospectus, unless otherwise indicated, Latin America consists
of Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, the Dominican
Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama,
Paraguay, Peru, Uruguay and Venezuela.
The Portfolio focuses its investments in listed equity securities in
Argentina, Brazil, Chile and Mexico, the most developed capital markets in Latin
America. The Portfolio expects, under normal market conditions, to have at least
55% of its total assets invested in listed equity securities of issuers in these
four countries. The Portfolio is not limited in the extent to which it may
invest in any Latin American country and intends to invest opportunistically as
markets develop. The portion of the Portfolio's holdings in any Latin American
country will vary from time to time, although the portion of the Portfolio's
assets invested in Chile may tend to vary less than the portions invested in
other Latin American countries because, with limited exceptions, capital
invested in Chile currently cannot be repatriated for one year. Equity
securities in which the Portfolio may invest include those that are neither
listed on a stock exchange nor traded over-the-counter. As a result of the
absence of a public trading market for these securities, they may be less liquid
than publicly traded securities.
The governments of some Latin American countries have been engaged in
programs of selling part or all of their stakes in government owned or
controlled enterprises ("privatizations"). The Adviser believes that
privatizations may offer investors opportunities for significant capital
appreciation and intends to invest assets of the Portfolio in privatizations in
appropriate circumstances. In certain Latin American countries, the ability of
foreign entities, such as the Portfolio, to participate in privatizations may be
limited by local law, or the terms on
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which the Portfolio may be permitted to participate may be less advantageous
than those for local investors. There can be no assurance that Latin American
governments will continue to sell companies currently owned or controlled by
them or that any privatization programs in which the Portfolio participates will
be successful.
The Portfolio may participate in debt to equity conversion programs adopted
by several Latin American countries, pursuant to which investors may use
government issued or guaranteed debt securities, directly or indirectly, to make
investments in local companies. The terms of the various programs vary from
country to country although each program includes significant restrictions on
the application of the proceeds received in the conversion and on the remittance
of profits on the investment and of the invested capital. The Adviser will
evaluate opportunities to enter into debt to equity conversion transactions as
they arise.
The Portfolio's holdings may consist of lower-quality debt securities, many
of which trade at substantial discounts from face value, and may include
securities rated as low as D by S&P or C by Moody's. The issuers or governmental
authorities that control the repayment of the debt securities held by the
Portfolio may be unable or unwilling to repay the principal and/or interest when
due in accordance with the terms of such debt. Additionally, the willingness or
ability of many Latin American government or government related issuers to repay
principal and interest due in a timely manner may be affected by, among other
factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
sovereign debtor's policy towards the International Monetary Fund (the "IMF")
and the political constraints to which a sovereign debtor may be subject.
Issuers may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce principal and
interest arrearages on their debt. These disbursements may be conditioned on the
issuer's implementation of economic reforms and/or economic performance and the
timely service of such debtor's obligations. Failure to satisfy these conditions
may result in the cancellation of such third parties' commitments to lend funds
to the sovereign debtor, which may further impair such debtor's ability or
willingness to timely service its debts. In certain instances, the Portfolio may
invest in government issued or guaranteed debt that is in default as to payments
of principal and/or interest. To the extent the Portfolio is holding government
issued or guaranteed debt, it may incur additional expenses in connection with
any restructuring of the issuer's obligations or in otherwise enforcing its
rights. Investment in such debt securities involves a high degree of risk and is
generally considered to be speculative. The Portfolio will invest in such debt
securities only when the Portfolio believes such investments offer opportunities
for long-term capital appreciation.
To the extent that the Portfolio's assets are not invested in equity
securities of Latin American issuers or in government issued or guaranteed debt
securities, the remainder of its assets may be invested in (i) debt securities
of other Latin American issuers, (ii) equity or debt securities of corporate or
governmental issuers located in countries outside Latin America, and (iii)
short-term and medium-term debt securities of the type described under
"Additional Investment Information -- Temporary Investments" below. The
Portfolio's assets may be invested in debt securities when the Portfolio
believes that, based upon factors such as relative interest rate levels and
foreign exchange rates, debt securities offer opportunities for long-term
capital appreciation. It is likely that many of the debt securities in which the
Portfolio will invest will be unrated. The Portfolio may invest up to 20% of its
total assets in lower-quality debt securities that are determined by the Adviser
to be comparable
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to securities rated below investment grade by S&P or Moody's ("junk bonds").
Investment in such debt securities involves a high degree of risk and is
generally considered to be speculative in nature. See "Additional Investment
Information -- Lower Rated Debt Securities."
The Portfolio will not invest more than 25% of its total assets in one
industry except and to the extent, and only for such period of time as, the
Board of Directors determines in view of the considerations discussed below that
it is appropriate and in the best interest of the Portfolio and its shareholders
to invest more than 25% of the Portfolio's total assets in companies involved in
the telecommunications industry or financial services industry, respectively.
Since the securities markets of Latin American countries are emerging markets
characterized by a relatively small number of issues, it is possible that one or
more markets may on occasion be dominated by issues of companies engaged in
these two industries. In addition, it is possible that government privatizations
in certain Latin American countries, which currently represent a primary source
of new issues in many Latin American markets and often represent attractive
investment opportunities, will occur in these two industries. If the Board of
Directors permits greater than 25% of the Portfolio's total assets to be
invested in the telecommunications or financial services industry, the Portfolio
may be exposed to increased investment risks peculiar to that industry. The
Portfolio will notify its shareholders of any decision by the Board of Directors
to permit (or cease) investments of more than 25% of the Portfolio's total
assets in the telecommunications or financial services industry including, if
applicable, a discussion of any increased investment risks peculiar to such
industry to which the Portfolio may be exposed.
ADDITIONAL INVESTMENT INFORMATION
BORROWING AND OTHER FORMS OF LEVERAGE. The Latin American Portfolio is
authorized to borrow money from banks and other entities in an amount up to
33 1/3% of its total assets (including the amount borrowed) less all liabilities
and indebtedness other than the borrowing, and may use the proceeds of the
borrowing for investment purposes or to pay dividends. Borrowing for investment
purposes creates leverage which is a speculative characteristic. Although the
Portfolio is authorized to borrow, it will do so only when the Adviser believes
that borrowing will benefit the Portfolio after taking into account
considerations such as the costs of borrowing and the likely investment returns
on securities purchased with borrowed monies. Borrowing by the Portfolio will
create the opportunity for increased net income but, at the same time, will
involve special risk considerations. Leverage that results from borrowing will
magnify declines as well as increases in the Portfolio's net asset value per
share and net yield.
The Portfolio expects that all of its borrowing will be made on a secured
basis. The Portfolio's Custodian will either segregate the assets securing the
borrowing for the benefit of the lenders or arrangements will be made with a
suitable sub-custodian. If assets used to secure the borrowing decrease in
value, the Portfolio may be required to pledge additional collateral to the
lender in the form of cash or securities to avoid liquidation of those assets.
DEPOSITARY RECEIPTS. The Asian Equity, Global Equity, Latin American and
Japanese Equity Portfolios may invest in Depositary Receipts, including American
Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), European
Depositary Receipts ("EDRs") and other Depositary Receipts (which, together with
ADRs, GDRs and EDRs, are hereinafter collectively referred to as "Depositary
Receipts"), to the extent that such Depositary Receipts are or become available.
ADRs are securities, typically issued by a U.S. financial
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institution (a "depositary"), that evidence ownership interests in a security or
a pool of securities issued by a foreign issuer (the "underlying issuer") and
deposited with the depositary. ADRs include American Depositary Shares and New
York Shares and may be "sponsored" or "unsponsored." Sponsored ADRs are
established jointly by a depositary and the underlying issuer, whereas
unsponsored ADRs may be established by a depositary without participation by the
underlying issuer. The issuers of the stock of unsponsored ADRs are not
obligated to disclose material information in the United States and therefore,
there may not be a correlation between such information and the market value of
the ADR. GDRs, EDRs and other types of Depositary Receipts are typically issued
by foreign depositaries, although they may also be issued by U.S. depositaries,
and evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation. Generally, Depositary Receipts in
registered form are designed for use in the U.S. securities market and
Depositary Receipts in bearer form are designed for use in securities markets
outside the United States. The Portfolios may invest in sponsored and
unsponsored Depositary Receipts. For purposes of the Portfolios' investment
policies, the Portfolios' investments in Depositary Receipts will be deemed to
be investments in the underlying securities.
FOREIGN CURRENCY FORWARD CONTRACTS. Each Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolios
may use such contracts to protect against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells securities, lock in the U.S. dollar value of
dividends and interest on securities held by the Portfolio, and generally to
protect the U.S. dollar value of securities held by the Portfolio against
exchange rate fluctuation. While forward contracts may limit losses as a result
of exchange rate fluctuations, they will also limit any gains that might
otherwise have been realized. The Portfolio's Custodian may be required to place
cash or liquid securities in a segregated account in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will be at least equal to the amount of
the Portfolio's commitments with respect to such contracts.
FOREIGN INVESTMENT. Investment in securities of foreign issuers involves
somewhat different investment risks than those affecting securities of U.S.
domestic issuers. There may be limited publicly available information with
respect to foreign issuers, and foreign issuers are not generally subject to
uniform accounting, auditing and financial and other reporting standards and
requirements comparable to those applicable to U.S. companies. There may also be
less government supervision and regulation of foreign securities exchanges,
brokers and listed companies than in the United States. Many foreign securities
markets have substantially less volume than U.S. national securities exchanges,
and securities of some foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the United States. Dividends and interest paid by foreign issuers may be subject
to withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid to the Portfolios
by domestic companies, and it is not expected that a Portfolio or its
shareholders would be able to claim a credit for U.S. tax purposes with respect
to any such foreign taxes. Additional risks include future political and
economic developments, the possibility that a foreign jurisdiction might impose
or change withholding taxes on income payable with respect to foreign
securities, possible seizure, nationalization or expropriation of the foreign
issuer or foreign deposits and the
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possible adoption of foreign governmental restrictions such as exchange
controls. Many of the emerging countries may have less stable political
environments than more developed countries. Also, it may be more difficult to
obtain a judgment in a court outside the United States.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies, and the Portfolios may temporarily hold uninvested reserves
in bank deposits in foreign currencies. Therefore, the value of each Portfolio's
assets as measured in U.S. dollars may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and the
Portfolios may incur costs in connection with conversions between various
currencies.
The Asian Equity Portfolio may invest in securities of issuers located in
Hong Kong. Hong Kong was established as a British colony in the 1840's and has
been ruled by the British Government through an appointed Governor. Effective
July 1, 1997, Hong Kong reverts to Chinese sovereignty and will be ruled as a
Special Administrative Region of China. Although China has made certain
commitments to preserve the economic and social freedoms currently enjoyed in
Hong Kong, there can be no assurances China's commitments will be maintained.
Action taken by the Chinese government which limits or causes uncertainty with
regard to these economic and social freedoms could have an adverse affect on the
Portfolio's investments in securities of issuers located in Hong Kong.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Latin American
Portfolio may purchase and sell futures contracts and options on futures
contracts, including but not limited to financial futures, securities index
futures, foreign currency exchange futures, and interest rate futures contracts.
Futures contracts provide for the sale by one party and purchase by another
party of a specified amount of a specific security, instrument or basket
thereof, at a specific future date and at a specified price. An option on a
futures contract is a legal contract that gives the holder the right to buy or
sell a specified amount of futures contracts at a fixed or determinable price
upon the exercise of the option.
The Portfolio may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or purchase securities
index futures in order to gain market exposure. Subject to applicable laws, the
Portfolio may engage in transactions in securities index futures contracts (and
options thereon) which are traded on a recognized securities or futures
exchange, or may purchase or sell such instruments in the over-the-counter
market. There currently are limited securities index futures and options on such
futures in many countries, particularly emerging countries. The nature of the
strategies adopted by the Adviser, and the extent to which those strategies are
used, may depend on the development of such markets.
The Portfolio may engage in transactions involving foreign currency exchange
futures contracts. Such contracts involve an obligation to purchase or sell a
specific currency at a specified future date and at a specified price. The
Portfolio may engage in such transactions to hedge their respective holdings and
commitments against changes in the level of future currency rates or to gain
exposure to a particular currency.
The Portfolio may engage in transactions in interest rate futures
transactions. Interest rate futures contracts involve an obligation to purchase
or sell a specific debt security, instrument or basket thereof at a specified
future date at a specified price. The value of the contract rises and falls
inversely with changes in interest rates. The Portfolio may engage in such
transactions to hedge their holdings of debt instruments against future changes
in interest rates.
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Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies, and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures contracts, the value of financial futures
contracts rises and falls inversely with changes in interest rates. The
Portfolio may engage in financial futures contracts for hedging and non-hedging
purposes.
Under rules adopted by the Commodity Futures Trading Commission, the
Portfolio may enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of the Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to
activities that do not constitute "bona-fide" hedging. The Portfolio will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under such contracts, in combination with its outstanding
obligations with respect to options transactions (including options to purchase
securities or instruments) would exceed 20% of its total assets.
Gains and losses on futures contracts and options thereon depend on the
Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by the Portfolio and the prices of futures and
options relating to investments purchased or sold by the Portfolio, and (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position. The risk that the Portfolio
will be unable to close out a futures position or options contract will be
minimized by only entering into futures contracts or options transactions for
which there appears to be a liquid exchange or secondary market. The risk of
loss in trading on futures contracts in some strategies can be substantial, due
both to the low margin deposits required and the extremely high degree of
leverage involved in futures pricing.
INVESTMENT FUNDS. Some emerging countries have laws and regulations that
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of companies
listed and traded on the stock exchanges in these countries is permitted by
certain emerging countries through investment funds which have been specifically
authorized. The Latin American Portfolio may invest in these investment funds
subject to the provisions of the 1940 Act and other applicable laws as discussed
below under "Investment Restrictions." If the Portfolio invests in such
investment funds, the Portfolio's shareholders will bear not only their
proportionate share of the expenses of the Portfolio (including operating
expenses and the fees of the Adviser), but also will indirectly bear similar
expenses of the underlying investment funds.
Certain of the investment funds referred to in the preceding paragraph are
advised by the Adviser. The Portfolio may, to the extent permitted under the
1940 Act and other applicable law, invest in these investment funds. If the
Portfolio does elect to make an investment in such an investment fund, it will
only purchase the securities of such investment fund in the secondary market.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the
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<PAGE>
securities or even loss of rights in the collateral should the borrower of the
securities fail financially. A Portfolio will not enter into securities loan
transactions exceeding in the aggregate 33 1/3% (20% for the Latin American
Portfolio) of the market value of the Portfolio's total assets.
LOWER RATED DEBT SECURITIES. The Latin American Portfolio may invest in
lower rated or unrated debt securities, commonly referred to as "junk bonds." In
addition, the emerging country debt securities in which the Portfolio may invest
will not be required to meet a minimum rating standard and may not be rated.
Fixed income securities are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations (credit risk) and may also be
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer and general market
liquidity (market risk). Lower rated or unrated securities are more likely to
react to developments affecting market and credit risk than are more highly
rated securities, which react primarily to movements in the general level of
interest rates. The market values of fixed-income securities tend to vary
inversely with the level of interest rates. Yields and market values of lower
rated and unrated debt securities will fluctuate over time, reflecting not only
changing interest rates but the market's perception of credit quality and the
outlook for economic growth. When economic conditions appear to be
deteriorating, medium to lower rated securities may decline in value due to
heightened concern over credit quality, regardless of prevailing interest rates.
Fluctuations in the value of the Portfolio's investments will be reflected in
the Portfolio's net asset value per share. The Adviser considers both credit
risk and market risk in making investment decisions for the Portfolio. Investors
should carefully consider the relative risks of investing in lower rated and
unrated debt securities and understand that such securities are not generally
meant for short-term investing.
The market for lower rated and unrated debt securities is relatively new and
adverse economic developments may disrupt the market for lower rated and unrated
emerging country debt securities. Such disruptions may severely affect the
ability of issuers, especially highly leveraged issuers, to service their debt
obligations or to repay their obligations upon maturity. In addition, the
secondary market for lower rated and unrated debt securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities. As a result, the Adviser
could find it more difficult to sell these securities or may be able to sell the
securities only at prices lower than if such securities were widely traded. In
addition there may be limited trading markets for debt securities of issuers
located in emerging countries. Prices realized upon the sale of such lower rated
or unrated securities, under these circumstances, may be less than the prices
used in calculating the Portfolio's net asset value.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Portfolio
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Portfolio's investment portfolio
and increasing the exposure of the Portfolio to the risks of lower rated and
unrated debt securities.
MONEY MARKET INSTRUMENTS. The Portfolios are permitted to invest in money
market instruments, although each Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
Each Portfolio may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. See "Temporary
Investments." The money market investments
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permitted for the Portfolios include obligations of the U.S. Government and its
agencies and instrumentalities; obligations of foreign sovereignties; other debt
securities; commercial paper; bank obligations; certificates of deposit
(including Eurodollar certificates of deposit); and repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Asian Equity, International Small Cap Portfolio and the Latin
American Portfolio may invest in securities that are neither listed on a stock
exchange nor traded over-the-counter, including privately placed securities.
Such unlisted equity securities may involve a higher degree of business and
financial risk that can result in substantial losses. As a result of the absence
of a public trading market for these securities, they may be less liquid than
publicly traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized from these sales could be less than
those originally paid by the Portfolios or less than what may be considered the
fair value of such securities. Further, companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements which might be applicable if their securities were
publicly traded. If such securities are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Portfolios
may be required to bear the expenses of registration.
As a general matter, each Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Nor as a general matter, may each Portfolio
invest more than 10% of its total assets in securities that are restricted from
sale to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act"). However, each Portfolio may
invest up to 25% of its total assets in liquid Restricted Securities that can be
offered and sold to qualified institutional buyers under Rule 144A under the
1933 Act ("Rule 144A Securities"). The Board of Directors has adopted guidelines
and delegated to the Adviser, subject to the supervision of the Board of
Directors, the daily function of determining and monitoring the liquidity of
Rule 144A Securities. Rule 144A Securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities.
OPTIONS TRANSACTIONS. The Latin American Portfolio may seek to increase its
return or may hedge its portfolio investments through options transactions with
respect to securities, instruments, indices or baskets thereof in which the
Portfolio may invest, as well as with respect to foreign currency. Purchasing a
put option gives the Portfolio the right to sell a specified security, currency
or basket of securities or currencies at the exercise price until the expiration
of the option. Purchasing a call option gives the Portfolio the right to
purchase a specified security, currency or basket of securities or currencies at
the exercise price until the expiration of the option. The Portfolio may not
purchase call and put options to the extent that the value of its aggregate
investment in options exceeds 5% of its total assets.
The Portfolio also may write (i.e. sell) put and call options on investments
held in its portfolio, as well as with respect to foreign currency. A Portfolio
that has written an option receives a premium, which increases the Portfolio's
return on the underlying security or instrument in the event the option expires
unexercised or is closed out at a profit. However, by writing a call option, the
Portfolio will limit its opportunity to profit from an increase in the market
value of the underlying security or instrument above the exercise price of the
option for as long as the Portfolio's obligation as writer of the option
continues. The Portfolio may only write options that are "covered." A covered
call option means that so long as the Portfolio is obligated as the writer of
the option, it will own (i) the underlying security or instrument subject to the
option or (ii) securities or instruments convertible or exchangeable without the
payment of any consideration into the security or instrument subject to the
option.
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By writing (or selling) a put option, the Portfolio incurs an obligation to
buy the security or instrument underlying the option from the purchaser of the
put at the option's exercise price at any time during the option period, at the
purchaser's election. Options written by the Portfolio may be exercisable by the
purchaser only on a specific date. A Portfolio that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option.
The Portfolio may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Adviser and
the extent to which those strategies are used will depend on the development of
such option markets. The primary risks associated with the use of options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by the Portfolio and the prices of options relating to
such investments; and (ii) possible lack of a liquid secondary market for an
option.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolio may not enter into
repurchase agreements with more than seven days to maturity if, as a result,
more than 15% of the market value of the Portfolio's net assets are invested in
these agreements and other investments for which market quotations are not
readily available or which are otherwise illiquid.
SHORT SALES. The Latin American Portfolio may from time to time sell
securities short without limitation, but consistent with applicable legal
requirements, although at present the Portfolio does not intend to sell
securities short. A short sale is a transaction in which the Portfolio sells
securities it owns or has the right to acquire at no added cost (i.e., "against
the box") or does not own (but has borrowed) in anticipation of a decline in the
market price of the securities. To deliver the securities to the buyer, the
Portfolio arranges through a broker to borrow the securities and, in so doing,
the Portfolio becomes obligated to replace the securities borrowed at their
market price at the time of replacement. When the Portfolio makes a short sale,
the proceeds it receives from the sale will be held on behalf of a broker until
the Portfolio replaces the borrowed securities. The Portfolio may have to pay a
premium to borrow the securities and must pay any dividends or interest payable
on the securities until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash or other liquid securities. In addition, the Portfolio will
place in a segregated account with its Custodian an amount of cash or other
liquid securities 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 or
other liquid securities deposited as collateral with the broker in connection
with the short sale. Short
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sales by the Portfolio involve certain risks and special considerations.
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested.
TEMPORARY INVESTMENTS. For temporary defensive purposes, when the Adviser
determines that market conditions warrant, each Portfolio may invest up to 100%
of its assets in dollar and non-dollar denominated money market instruments and
short- and medium-term debt securities that the Adviser believes to be of high
quality, or hold cash. The short- and medium-term debt securities in which a
Portfolio may invest consist of (a) obligations of the U.S. or foreign country
governments, their respective agencies or instrumentalities; (b) bank deposits
and bank obligations (including certificates of deposit, time deposits and
bankers' acceptances) of U.S. or foreign country banks denominated in any
currency; (c) floating rate securities and other instruments denominated in any
currency issued by international development agencies; (d) finance company and
corporate commercial paper and other short-term corporate debt obligations of
U.S. and foreign country corporations meeting the Portfolio's credit quality
standards; and (e) repurchase agreements with banks and broker-dealers with
respect to such securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. Each Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of
cash or liquid securities in an amount at least equal to these commitments. The
payment obligation and the interest rates that will be received are each fixed
at the time a Portfolio enters into the commitment and no interest accrues to
the Portfolio until settlement. Thus, it is possible that the market value at
the time of settlement could be higher or lower than the purchase price if,
among other factors, the general level of interest rates has changed. It is a
current policy of each Portfolio not to enter into when-issued commitments or
delayed delivery securities exceeding in the aggregate 15% of the market value
of the Portfolio's total assets less liabilities, other than the obligations
created by these commitments.
INVESTMENT LIMITATIONS
Each Portfolio, except the Latin American Portfolio, is a diversified
investment company under the 1940 Act and is therefore subject to the following
limitations: (a) as to 75% of its total assets, a Portfolio may not invest more
than 5% of its total assets in the securities of any one issuer, except
obligations of the U.S. Government and its agencies and instrumentalities, and
(b) a Portfolio may not own more than 10% of the outstanding voting securities
of any one issuer. The Latin American Portfolio is a non-diversified investment
company under the 1940 Act, which means that the Latin American Portfolio is not
limited by the 1940 Act in the proportion of its total assets that may be
invested in the obligations of a single issuer. Thus, the Latin American
Portfolio may invest a greater proportion of its total assets in the securities
of a smaller number of issuers and, as a result, will be subject to greater risk
with respect to its portfolio securities. Nevertheless, the Latin American
Portfolio intends to comply with the more limited diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the "Code") for
qualification as a regulated investment company.
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Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each Portfolio. The Adviser provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each of the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages each of the
Portfolio's investments. Set forth below as an annual percentage of average
daily net assets are the management fees payable to the Adviser quarterly by
each Portfolio pursuant to the terms of the Investment Advisory Agreement. The
fee for each of the Portfolios is higher than most investment companies' because
each of the Portfolios invests internationally. The Adviser believes that the
fees are comparable to those of other investment companies that invest
internationally. The Adviser has agreed to a reduction in the fees payable to it
and to reimburse the Portfolios, if necessary, if such fees would cause total
annual operating expenses of the Portfolios to exceed the maximums set forth in
the table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL ANNUAL
OPERATING
MANAGEMENT FEES EXPENSES AFTER FEE WAIVERS
ABSENT FEE --------------------------
PORTFOLIO WAIVERS CLASS A CLASS B
- ------------------------------------------ ------------------- ------------ ------------
<S> <C> <C> <C>
Global Equity 0.80% 1.00% 1.25%
International Equity 0.80% 1.00% 1.25%
International Small Cap 0.95% 1.15% N/A
Asian Equity 0.80% 1.00% 1.25%
European Equity 0.80% 1.00% 1.25%
Japanese Equity 0.80% 1.00% 1.25%
Latin American 1.10% 1.70% 1.95%
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. On February 5, 1997, Morgan Stanley Group Inc. and
Dean Witter, Discover & Co. announced that they had entered into an Agreement
and Plan of Merger to form Morgan Stanley, Dean Witter, Discover & Co. Morgan
Stanley Group Inc. is the direct parent of the Adviser and Morgan Stanley.
Subject to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, the Adviser and Morgan Stanley
will be subsidiaries of Morgan Stanley, Dean Witter, Discover & Co. At February
28, 1997, the Adviser, together with its affiliated asset management companies,
had approximately $176.9 billion in asssets under management as an investment
manager or as a Named Fiduciary or Fiduciary Adviser. See "Management of the
Fund" in the Statement of Additional Information.
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PORTFOLIO MANAGERS. The following individuals have primary portfolio
management responsibility for the Portfolios noted below:
GLOBAL EQUITY PORTFOLIO -- FRANCES CAMPION. Frances Campion joined the
Adviser in January 1990 as a Global Equity Fund Manager and is now a Principal
of Morgan Stanley. Her responsibilities include day to day management of the
Global Equity product. Prior to joining the Adviser, Ms. Campion was a U.S.
equity analyst with Lombard Odier Limited where she had responsibility for the
management of global portfolios. Ms. Campion has ten years global investment
experience. She is a graduate of University College, Dublin.
INTERNATIONAL EQUITY PORTFOLIO -- DOMINIC CALDECOTT. Dominic Caldecott is a
Managing Director and is responsible for research and stock selection in the
Pacific Basin and has been primarily responsible for managing the Portfolio's
assets since its inception. He has ten years professional experience, primarily
in Tokyo, Hong Kong, and Seoul. Prior to joining Morgan Stanley, he worked with
GT Management Group in Tokyo and Hong Kong, specializing in Pacific Basin
investment management. He became a Vice President of Morgan Stanley in 1987, a
Principal in 1989, and a Managing Director in 1991. He is responsible for a
number of Pacific Basin investment programs for clients of Morgan Stanley. Mr.
Caldecott is a graduate of New College, Oxford, England.
INTERNATIONAL SMALL CAP PORTFOLIO -- MARGARET NAYLOR. Margaret Naylor is a
Principal of Morgan Stanley and works with Dominic Caldecott on Pacific Basin
research and stock selection. She joined the Adviser in March 1987 and has been
primarily responsible for managing the Portfolio's assets since December 1992.
Prior to joining the Adviser she spent three years at the Trade Policy Research
Centre, an independent research unit. Ms. Naylor is a graduate of the University
of York. Ms. Naylor became a Vice President of Morgan Stanley in 1993.
ASIAN EQUITY PORTFOLIO -- EAN WAH CHIN. Ean Wah Chin is a Managing Director
of Morgan Stanley, and is responsible for the Adviser's regional Asia ex-Japan
operations based in Singapore. She has been primarily responsible for managing
the Portfolio's assets since its inception. Prior to joining Morgan Stanley in
1986, Ms. Chin spent eight years with the Monetary Authority of Singapore and
the Government of Singapore Investment Corporation, where she was a portfolio
manager of one of the largest portfolios in Asia. Ms. Chin was an ASEAN scholar
educated at the University of Singapore.
EUROPEAN EQUITY PORTFOLIO -- ROBERT SARGENT. Robert Sargent joined Morgan
Stanley International in May, 1986, and transferred to the Adviser in June,
1987. Mr. Sargent is now a Principal of Morgan Stanley and has been primarily
responsible for managing the Portfolio's assets since its inception. As the fund
manager with primary responsibility for continental European stock selection and
portfolio management, Mr. Sargent is closely involved with the Adviser's
fundamental research effort and company visiting program. He is a graduate of
York University, Toronto, Canada.
JAPANESE EQUITY PORTFOLIO -- DOMINIC CALDECOTT AND KUNIHIKO
SUGIO. Information about Mr. Caldecott is included under International Equity
Portfolio above. Mr. Caldecott is responsible for research and stock selection
in the Pacific Basin and has been primarily responsible for managing the
Portfolio's assets since its inception. Kunihiko Sugio joined the Adviser in
December 1993 as a Vice President and manages dedicated Japanese equity
portfolios. He has been primarily responsible for managing the Portfolio's
assets since its inception. Prior to joining Morgan Stanley, he worked with
Baring International Investment Management, Tokyo, where he was a Director and
fund manager. He graduated from Wakayama Kokuritsu University.
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<PAGE>
LATIN AMERICAN PORTFOLIO -- ROBERT L. MEYER AND ANDY SKOV. Robert Meyer
joined the Adviser in 1989 and is now a Principal of Morgan Stanley, with
primary responsibility for the Adviser's investments in all of Latin America and
Israel. He has had primary responsibility for managing the Portfolio's assets
since its inception. Robert is co-manager of the Latin American Discovery Fund,
Inc. and worked previously in the U.S. equity group at the Adviser. He was born
in Argentina and has a B.A. in Economics and Political Science from Yale College
and a J.D. from Harvard Law School. Andy Skov joined the Adviser in 1994 as a
Portfolio Manager. Currently, he is a Vice President of the Adviser with
responsibilities for investment in Latin America. Prior to joining the Adviser,
he worked in the Latin America group at Bankers Trust in corporate finance,
research and sales; two of these years he spent in Argentina. He graduated from
the University of California at Berkeley with a B.A. (Phi Beta Kappa) in
Political Science and Economics Development.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the Officers and
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of each Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
LOCAL ADMINISTRATORS FOR THE LATIN AMERICAN PORTFOLIO. The Portfolio has,
as required by local law, entered into administration agreements with local
administrators in Brazil, Chile, and Colombia. A local administrator provides
certain services for the Portfolio with respect to the Portfolio's investments
in that country, including services relating to foreign exchange, local taxes,
remittance of income and capital gains, and repatriation of investments. The
Portfolio's local administrator in Brazil, Unibanco-Uniao, a Brazilian
corporation, is paid by the Fund an annual fee of 0.125% of the Portfolio's
average weekly net assets invested in Brazil. The Portfolio's local
administrator in Chile, Bice Chileconsult Agente de Valores S.A., a Chilean
corporation, is paid by the Fund an annual fee of 0.125% of the Portfolio's
average weekly net assets invested in Chile. The Portfolio's local administrator
in Colombia, CitiTrust S.A., a Colombian trust company, is paid by the Fund an
annual fee of $1,000 plus 0.20% per transaction in Colombia.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The Officers of the Fund conduct and supervise its daily business
operations.
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DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each Multiclass Portfolio pursuant to Rule 12b-1 under the 1940 Act
(each, a "Plan"). Under each Plan, the Distributor is entitled to receive from
each Multiclass Portfolio a distribution fee, which is accrued daily and paid
quarterly, of 0.25% of the Class B shares' average daily net assets on an
annualized basis. The Distributor expects to reallocate most of its fee to its
investment representatives. The Distributor may, in its discretion, voluntarily
waive from time to time all or any portion of its distribution fee and each of
the Distributor and the Adviser is free to make additional payments out of its
own assets to promote the sale of Fund shares, including payments that
compensate financial institutions for distribution services or shareholder
services.
Each Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountant's fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A shares of each Portfolio and Class B shares of each Multiclass
Portfolio may be purchased at the net asset value per share next determined
after receipt of the purchase order by the Portfolio. See "Valuation of Shares."
Shareholders of the International Small Cap Portfolio may be charged a 1.00%
transaction fee, which is payable directly to the International Small Cap
Portfolio, in connection with each purchase and redemption of shares of the
Portfolio. The transaction fee is intended to allocate transaction costs
associated with purchases and redemptions of shares of the Portfolio to
investors actually making such purchases and redemptions rather than to the
Portfolio's other shareholders. The 1.00% fee represents the Adviser's estimate
of such transaction costs, which include the costs of acquiring and disposing of
Portfolio securities. The transaction fee is not a sales charge or load, and is
retained by the Portfolio. The fee does not apply to Portfolios of the Fund
other than the International Small Cap Portfolio and is not charged in
connection with the reinvestment of dividends or capital gain distributions. The
fee will not be charged with respect to purchases and redemptions that do not
result in actual transaction costs to the Portfolio.
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio account opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares of each Portfolio. Certain
advisory or asset allocation accounts, such as Total Funds Management accounts,
managed by
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Morgan Stanley or its affiliates, including the Adviser ("Managed Accounts") may
purchase Class A shares without being subject to such minimum initial investment
or minimum account size requirements for a Portfolio account. Employees of the
Adviser and certain of its affiliates may purchase Class A shares subject to
conditions, including a lower minimum initial investment, established by
Officers of the Fund.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based solely upon changes in the market that reduce the net asset value of
shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remained Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B Account") converted to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution.
The minimum investment levels may be waived at the discretion of the Adviser
for (i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planners,
financial services firms, or investment advisers that have entered into an
agreement with Morgan Stanley or its affiliates; and (ii) retirement and
deferred compensation plans and trusts used to fund such plans, including, but
not limited to, those defined in Section 401(a), 403(b) or 457 of the Code and
"rabbi trusts." The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days
notice to shareholders.
The Adviser reserves the right in its sole discretion to determine which of
such advisory or asset allocation accounts shall be Managed Accounts. For
information regarding Managed Accounts, please contact your Morgan Stanley
account representative or the Fund at the telephone number provided on the cover
of this Prospectus.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Multiclass Account falls below $100,000 because of
shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains below $100,000 for a continuous 60-day period, the shares
in such account are subject to redemption by the Fund and, if redeemed, the net
asset value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
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Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption. If a shareholder reduces its
total investment in Class A shares of the International Small Cap Portfolio to
less than $500,000, the investment may be subject to redemption. The Fund
reserves the right to modify or terminate the involuntary redemption features of
the shares as stated above at any time upon 60-days notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Multiclass Portfolio account increases,
whether due to shareholder share purchases or market activity, to $500,000 or
more, the Class B shares will convert to Class A shares. Under current tax law,
such conversion is not a taxable event to the shareholder. Class A shares
converted from Class B shares are subject to the same minimum account size
requirements that are applicable to New Multiclass Accounts containing Class A
shares, as stated above. The Fund reserves the right to modify or terminate this
conversion feature at any time upon 60-days notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of each Portfolio and $100,000 minimum for Class B shares of
each Multiclass Portfolio, with certain exceptions for Morgan Stanley
employees and select customers) payable to "Morgan Stanley Institutional
Fund, Inc. -- [portfolio name]", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for payment
in other currencies is given by the Fund. The classes of shares of the
Portfolio(s) to be purchased should be designated on the Account Registration
Form. For purchases by check, the Fund is ordinarily credited with Federal Funds
within one business day. Thus, your purchase of shares by check is ordinarily
credited to your account at the net asset value per share of the relevant
Portfolio determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
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B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected, and the account number
assigned to you) as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
The purchase price of the Class A and Class B shares of each Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the regular close of the New York Stock
Exchange ("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed
at the price computed on the date of receipt; an order received after the
regular close of the NYSE will be executed at the price computed on the next
day the NYSE is open as long as the Transfer Agent receives payment by check
or in Federal Funds prior to the regular close of the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested
and, therefore, will not be earning dividends. Your bank may charge a service
fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000 for each portfolio, except for automatic reinvestment of dividends and
capital gains distributions for which there are no minimums) by purchasing
shares at net asset value by mailing a check to the Fund (payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]") at the above address or
by wiring monies to the Custodian Bank as outlined above. It is very important
that your account name, the portfolio name and the class selected be specified
in the letter or wire to assure proper crediting to your account. In order to
ensure that your wire orders are invested promptly, you are requested to notify
one of the Fund's representatives (toll-free 1-800-548-7786) prior to the wire
date. Additional investments will be applied to purchase additional shares in
the same class held by a shareholder in a Portfolio account.
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OTHER PURCHASE INFORMATION
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio(s)
will not be issued. All shares purchased are confirmed to you and credited to
your account on the Fund's books maintained by the Adviser or its agents. You
will have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a Portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolios and the Portfolios' performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a Portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging
shares of Portfolio A for shares of Portfolio B, then exchanging shares of
Portfolio B for shares of Portfolio C and again exchanging shares of Portfolio C
for shares of Portfolio B within a 120-day period. Two types of transactions are
exempt from these excessive trading restrictions: (1) trades exclusively between
money market portfolios; and (2) trades done in connection with an asset
allocation service, such as TFM Accounts or accounts managed or advised by the
Adviser and/or any of its affiliates.
INVESTMENT IN FUNDS THROUGH A TOTAL FUNDS MANAGEMENT ("TFM") ACCOUNT
In addition to the considerable diversification among individual securities
you receive by investing in a particular Portfolio, you can further reduce risk
by spreading your assets among several different Portfolios that each have
different risk and return characteristics. TFM is an active investment
management service managed by Morgan Stanley or its affiliates, including Morgan
Stanley Asset Management Inc. (each, a "TFM Adviser"), that allocates your
investments across a combination of either Class A or Class B shares of certain
of the Portfolios selected to meet your long-term investment objectives as well
as, in certain circumstances, your current income objectives.
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The TFM Adviser has developed investment strategies for TFM Accounts to meet
the diverse financial needs of different investors. You can open a TFM Account
by meeting with one of the investment professionals of a Participating Dealer
who will review your situation and help you identify your long-term investment
and/or current income objectives. After using TFM criteria to determine your
long-term investment and/or current income objectives, you can choose one of
several TFM investment strategies. Based on your chosen strategy, your initial
investment will be allocated among a number of the Class A or Class B shares of
the Portfolios. Depending on market conditions, the TFM Adviser periodically
reallocates the combination of Portfolios or the percentage amounts invested in
the shares of each Portfolio to implement your TFM investment strategy. In
addition, your TFM Account will be periodically rebalanced to maintain your TFM
strategy's current asset allocation mix, if and when the performance of one or
more of the Portfolios unbalances the strategy's mix. You will pay the TFM
Adviser a fee for the TFM Account service that is in addition to and separate
from the fees and expenses you will pay directly or indirectly as an investor in
the Portfolios. See "Fund Expenses."
From time to time, one or more of the Portfolios used for investment by the
TFM Accounts may experience relatively large investments or redemptions due to
the TFM Account allocations or rebalancings recommended by the TFM Adviser.
These transactions will affect the Portfolios, since Portfolios that experience
redemptions as a result of reallocations or rebalancings may have to sell
portfolio securities and Portfolios that receive additional cash will have to
invest it in additional portfolio securities. While it is impossible to predict
the overall impact of these transactions over time, there could be adverse
effects on portfolio management to the extent that Portfolios may be required to
sell securities or invest cash at times when they would not otherwise do so.
These transactions could also have tax consequences if sales of securities
resulted in gains and could also increase transaction costs. The Adviser,
representing the interests of the Portfolios, is committed to minimizing the
impact of TFM Account transactions on the Portfolios. The Adviser, however, will
have a conflict in fulfilling this responsibility in that it also serves as a
TFM Adviser. In that capacity, the Adviser, representing the interests of the
TFM Accounts, also is committed to minimizing the impact of TFM Account
transactions on the Portfolios to the extent consistent with pursuing the
investment objectives of the TFM Accounts. In addition, an affiliate of the TFM
Adviser, the Distributor is compensated on the sale, and may be compensated for
distribution or shareholder services on the sale of shares of the Portfolios.
See "Purchase of Shares" and "Shareholder Services -- Exchange Features." The
Adviser will monitor the impact of TFM Account transactions on the Portfolios.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares of each Portfolio or Class B shares of each Multiclass Portfolio
at the next determined net asset value of shares of the applicable class. On
days that both the NYSE and the Custodian Bank are open for business, the net
asset value per share of each of the Portfolios is determined at the regular
close of trading of the NYSE (currently 4:00 p.m. Eastern Time). Shares of each
Portfolio may be redeemed by mail or telephone. No charge is made for
redemptions, except for the imposition of the 1% transaction fee described under
"Purchase of Shares" above, which may be assessed in connection with redemptions
of shares of the International Small Cap Portfolio. Any redemption proceeds may
be more or less than the purchase price of your shares depending on, among other
factors, the market value of the investment securities held by a Portfolio.
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BY MAIL
Each Portfolio will redeem its Class A or Class B shares at the net asset
value determined on the date the request is received, if the request is received
in "good order" before the regular close of the NYSE. Your request should be
addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston,
Massachusetts 02208-2798, except that deliveries by overnight courier should be
addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global Funds
Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. In times of drastic market conditions, the telephone redemption option
may be difficult to implement. If you experience difficulty in making a
telephone redemption, your request may be made by regular mail or express mail
and it will be implemented at the net asset value next determined after it is
received. Redemption requests sent to the Fund through express mail must be
mailed to the address of the Dividend Disbursing and Transfer Agent listed under
"General Information." The Fund and the Fund's transfer agent (the "Transfer
Agent") will employ reasonable procedures to confirm that the instructions
communicated by telephone are genuine. These procedures include requiring the
investor to provide certain personal identification information at the time an
account is opened and prior to effecting each transaction requested by
telephone. In addition, all telephone transaction requests will be recorded and
investors may be required to provide additional telecopied written instructions
regarding transaction requests. Neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase.
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The Fund may suspend the right of redemption or postpone the date upon which
redemptions are effected at times when the NYSE is closed, or under any
emergency circumstances as determined by the Securities and Exchange Commission
(the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by a Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in any Portfolio for shares of any
other available portfolio(s) of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege may be modified or terminated by the Fund at any time
upon 60-days notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the name(s) of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of your current Portfolio, the name(s) of the portfolio(s)
and class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the
class(es) of the portfolios involved in the exchange of shares at the close of
business. Requests received after 4:00 p.m. (Eastern Time) are processed the
next business day based on the net asset value determined at the close of
business on such day. For additional information regarding responsibility for
the authenticity of telephoned instructions, see "Redemption of Shares -- By
Telephone" above.
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TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolio's shares may result in involuntary
conversion or redemption of your shares. See "Purchase of Shares" above.
VALUATION OF SHARES
The net asset value per share of a class of shares of each of the Portfolios
is determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such class, less any liabilities attributable
to such class, by the total number of outstanding shares of each class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolios. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. 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 a
price within a range not exceeding the current asked price nor less than the
current bid price. The current bid and asked prices are determined based on the
average of the bid and asked prices quoted on such valuation date by reputable
brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices but take into account institutional size, trading in similar groups of
securities and any developments related to the specific securities. Securities
not priced in this manner are valued at the most recently quoted bid price or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine the prices in
accordance with the above-stated procedures are determined in good faith at fair
value using methods determined by the Board of Directors. For purposes of
calculating net asset value per share, all assets and liabilities initially
expressed in foreign currencies will be translated into U.S. dollars at the mean
of the bid and asked price for such currencies against the U.S. dollar last
quoted by any major bank.
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Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expenses charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise the "total return" for each class
of a Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE.
Each of the Portfolios may advertise "total return" which shows what an
investment in a class of a Portfolio would have earned over a specified period
of time (such as one, five or ten years) assuming that all distributions and
dividends by the Portfolio were reinvested in the same class on the reinvestment
dates during the period. Total return does not take into account any federal or
state income taxes that may be payable on dividends and distributions or on
redemption. The Fund may also include comparative performance information in
advertising or marketing the Portfolios' shares, including data from Lipper
Analytical Services, Inc., other industry publications, business periodicals,
rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
that, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
may elect to receive income dividends and capital gains distributions in cash.
Each Portfolio expects to distribute substantially all of its taxable net
investment income in the form of annual dividends. Net realized capital gains,
if any, after reduction for any available tax loss carryforwards will also be
distributed annually.
Undistributed net investment income is included in a Portfolio's net assets
for the purpose of calculating net asset value per share. Therefore, on the
"ex-dividend" date, the net asset value per share excludes the dividend (i.e.,
is reduced by the per share amount of the dividend). Dividends paid shortly
after the purchase of shares by an investor, although in effect a return of
capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolios will differ at times.
Expenses of the Portfolios allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
44
<PAGE>
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolios or their shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
Each Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from a Portfolio's net investment income are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Such dividends paid by a Portfolio will generally qualify for the 70%
dividends-received deduction for corporate shareholders only to the extent of
the aggregate qualifying dividend income received by the Portfolio from U.S.
corporations. Each Portfolio will report annually to its shareholders the amount
of dividend income qualifying for such treatment.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. Each
Portfolio will send reports annually to its shareholders of the federal income
tax status of all distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
loss, including any available capital loss carryforwards) prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (1) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Application Form, (2) who is subject to backup withholding by the Internal
Revenue Service, or (3) who has not certified to the Fund that such shareholder
is not subject to backup withholding. This backup withholding is not an
additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption
45
<PAGE>
proceeds exceed or are less than the shareholder's adjusted basis in the sold,
exchanged or redeemed shares. If capital gain distributions have been made with
respect to shares that are sold at a loss after being held for six months or
less, then the loss is treated as a long-term capital loss to the extent of the
capital gain distributions.
Conversion of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
Investment income received by a Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that a Portfolio is liable for foreign income taxes so withheld, each
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although each
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that each Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolios generally do not invest for short-term trading purposes,
however, when circumstances warrant, each Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolios will not consider portfolio turnover rate
a limiting factor in making investment decisions consistent with their
respective objectives and policies. For the fiscal year ended December 31, 1996,
the Latin America
46
<PAGE>
Portfolio had a portfolio turnover rate of 192%. As portfolio turnover
increases, the Portfolios may expect to pay correspondingly increased brokerage
and trading costs. In addition to transaction costs, higher portfolio turnover
may result in the realization of capital gains. As discussed under "Taxes," to
the extent net short-term capital gains are realized, any distributions
resulting from such gains are considered ordinary income for federal income tax
purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 35 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
Portfolio are currently classified into two classes, the Class A shares and the
Class B shares, except for the International Small Cap, Money Market and
Municipal Money Market Portfolios, which offer only Class A shares.
The shares of each Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative rights, which means that the holders of more than 50% of the
shares voting for the election of Directors can elect 100% of the Directors if
they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of a Portfolio may be presumed to "control" (as defined in
the 1940 Act) such Portfolio. Under Maryland law, the Fund is not required to
hold an annual meeting of its shareholders unless required to do so under the
1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
47
<PAGE>
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
48
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
GLOBAL EQUITY, INTERNATIONAL EQUITY, INTERNATIONAL SMALL CAP,
ASIAN EQUITY, EUROPEAN EQUITY, JAPANESE EQUITY AND LATIN AMERICAN PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, please contact your Morgan Stanley representative
or call us toll free 1-800-548-7786. Please print all items except
signature, and mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First Name Initial Last Name
2.
First Name Initial Last Name
First Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien:
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor
OR
1. TAXPAYER IDENTIFICATION SOCIAL SECURITY
NUMBER ("TIN") NUMBER ("SSN")
OR
2. TIN
SSN
OR
TIN
SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your
correct TIN(s) or SSN(s). Accounts that have a missing or incorrect
TIN(s) or SSN(s) will be subject to backup withholding at a 31% rate on
dividends, distributions and other payments. If you have not provided us
with your correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of
persons subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained.
You may be notified that you are subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code because you have
underreported interest or dividends or you were required to, but failed
to, file a return which would have included a reportable interest or
dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following / / Class A Shares $ / / Class B Shares $
CLASS SECTION Portfolio(s): / / Class A Shares $
(Class A shares minimum $500,000 Global Equity Portfolio / / Class A Shares $ / / Class B Shares $
for each Portfolio and Class B International Equity Portfolio / / Class A Shares $ / / Class B Shares $
shares minimum $100,000 for the International Small Cap / / Class A Shares $ / / Class B Shares $
Global Equity, International Portfolio / / Class A Shares $ / / Class B Shares $
Equity, Asian Equity, European Asian Equity Portfolio / / Class A Shares $ / / Class B Shares $
Equity, Japanese Equity and Latin European Equity Portfolio
American Equity Portfolios). Please Japanese Equity Portfolio
indicate Portfolio, class and Latin American Portfolio
amount.
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate
portfolio, manner of
payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From - - - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the account
statement sent to my/our registered
address, I/we hereby authorize the Address
Fund to mail duplicate statements
to the name and address provided at City State Zip Code
right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative No. Branch
No.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE ARE
SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE
APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL SECURITY
ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND THAT IF
I/ WE DO NOT PROVIDE EITHER NUMBER TO CHASE GLOBAL FUNDS
SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE DATE OF THIS
APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR CORRECT SSN(S)
OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP
WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION PROCEEDS. (PLEASE
PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU MAY REQUEST SUCH
FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Expenses..................................... 2
Financial Highlights.............................. 6
Prospectus Summary................................ 14
Investment Objectives and Policies................ 18
Additional Investment Information................. 24
Investment Limitations............................ 31
Management of the Fund............................ 32
Purchase of Shares................................ 35
Redemption of Shares.............................. 40
Shareholder Services.............................. 42
Valuation of Shares............................... 43
Performance Information........................... 44
Dividends and Capital Gains Distributions......... 44
Taxes............................................. 45
Portfolio Transactions............................ 46
General Information............................... 47
Account Registration Form
</TABLE>
GLOBAL EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
INTERNATIONAL SMALL CAP PORTFOLIO
ASIAN EQUITY PORTFOLIO
EUROPEAN EQUITY PORTFOLIO
JAPANESE EQUITY PORTFOLIO
LATIN AMERICAN PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
EMERGING MARKETS DEBT PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
twenty-nine portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the Emerging Markets Portfolio and the Emerging Markets Debt Portfolio (each, a
"Portfolio" and collectively, the "Portfolios"). The Class A and Class B shares
currently offered by the Portfolios have different minimum investment
requirements and fund expenses. Shares of the portfolios are offered with no
sales charge, exchange fee or redemption fee, (except that the International
Small Cap Portfolio may impose a transaction fee).
THE EMERGING MARKETS PORTFOLIO MAY INVEST IN EQUITY SECURITIES OF RUSSIAN
COMPANIES. RUSSIA'S SYSTEM OF SHARE REGISTRATION AND CUSTODY INVOLVES CERTAIN
RISKS OF LOSS THAT ARE NOT NORMALLY ASSOCIATED WITH INVESTMENTS IN OTHER
SECURITIES MARKETS. SEE "ADDITIONAL INVESTMENT INFORMATION -- RUSSIAN SECURITIES
TRANSACTIONS."
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator") and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under the "Prospectus Summary" below. The
Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL
EQUITY -- Active Country Allocation, Asian Equity, Emerging Markets, European
Equity, Global Equity, Gold, International Equity, International Small Cap,
Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Aggressive
Equity, Emerging Growth, Equity Growth, Small Cap Value Equity, Technology, U.S.
Real Estate and Value Equity Portfolios; (iii) BALANCED -- Balanced Portfolio;
(iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income,
High Yield and Municipal Bond Portfolios; and (v) MONEY MARKET -- Money Market
and Municipal Money Market Portfolios. Additional information about the Fund is
contained in a "Statement of Additional Information," dated May 1, 1997, which
is incorporated herein by reference. The Statement of Additional Information and
the prospectuses pertaining to the other portfolios of the Fund are available
upon request and without charge by writing or calling the Fund at the address
and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Portfolios indicated below will incur:
<TABLE>
<CAPTION>
EMERGING
EMERGING MARKETS
MARKETS DEBT
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A..................................................................... None None
Class B..................................................................... None None
Maximum Sales Load Imposed on Reinvested Dividends
Class A..................................................................... None None
Class B..................................................................... None None
Deferred Sales Load
Class A..................................................................... None None
Class B..................................................................... None None
Redemption Fees
Class A..................................................................... None None
Class B..................................................................... None None
Exchange Fees
Class A..................................................................... None None
Class B..................................................................... None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------------------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C>
Management Fee*
Class A..................................................................... 1.25% 1.00%
Class B..................................................................... 1.25% 1.00%
12b-1 Fees
Class A..................................................................... None None
Class B..................................................................... 0.25% 0.25%
Other Expenses
Class A..................................................................... 0.49% 0.42%
Class B..................................................................... 0.49% 0.40%
----------- -----------
Total Operating Expenses*
Class A..................................................................... 1.74% 1.42%
Class B..................................................................... 1.99% 1.65%
----------- -----------
----------- -----------
</TABLE>
- ------------------------------
*The Adviser has agreed to waive its management fees and/or reimburse the
Portfolios, if necessary, if such fees would cause the Portfolios' total annual
operating expenses, as a percentage of average daily net assets, to exceed
1.75% for the Class A shares and 2.00% for the Class B shares. The management
fees are 1.25% for the Emerging Markets Portfolio and 1.00% for the Emerging
Markets Debt Portfolio. The Adviser reserves the right to terminate any of its
fee waivers and/or expense reimbursements at any time in its sole discretion.
The Adviser reserves the right to terminate any of its fee waivers and/or
expense reimbursements at any time in its sole discretion. For further
information on Fund expenses, see "Management of the Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. Expenses and fees for the Portfolios are based on actual figures for
the fiscal year ended December 31, 1996. Due to the continuous nature of Rule
12b-1 fees, long term Class B shareholders may pay more than the equivalent of
the maximum front-end sales charges otherwise permitted by the National
Association of Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The following example is based on total
operating expenses of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Emerging Markets Portfolio
Class A.......................................................... $ 18 $ 55 $ 94 $ 205
Class B.......................................................... 20 62 107 232
Emerging Markets Debt Portfolio
Class A.......................................................... 27 84 143 303
Class B.......................................................... 28 87 148 314
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Class A and Class
B shares for the Emerging Markets and Emerging Markets Debt Portfolios for each
of the periods presented. The audited financial highlights for the Portfolios'
shares for each of the periods presented are part of the Fund's financial
statements which appear in the Fund's December 31, 1996 Annual Report to
Shareholders and which are incorporated by reference in the Fund's Statement of
Additional Information. The Portfolios' financial highlights for each of the
periods presented have been audited by Price Waterhouse LLP, whose unqualified
report thereon is also incorporated by reference in the Statement of Additional
Information. Additional performance information is included in the Annual
Report. The Annual Report and the financial statements therein, along with the
Statement of Additional Information, are available at no cost from the Fund at
the address and telephone number noted on the cover page of this Prospectus.
After October 31, 1992, the Fund changed its fiscal year end to December 31. The
following information should be read in conjunction with the financial
statements and notes thereto.
4
<PAGE>
EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------
PERIOD
TWO FROM
YEAR YEAR YEAR YEAR MONTHS SEPTEMBER
ENDED ENDED ENDED ENDED ENDED 25, 1992*
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER TO
31, 31, 31, 31, 31, OCTOBER
1996 1995 1994 1993 1992 31, 1992
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................. $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11 $ 10.00
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1)................... 0.09 0.08 (0.04) (0.01) -- --
Net Realized and Unrealized Gain (Loss) on
Investments....................................... 1.51 (2.05) (1.69) 8.79 0.11 0.11
--------- --------- --------- --------- --------- ---------
Total from Investment Operations................. 1.60 (1.97) (1.73) 8.78 0.11 0.11
--------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income.............................. (0.08) (0.06) -- -- -- --
Net Realized Gain.................................. -- (1.13) (0.97) -- -- --
--------- --------- --------- --------- --------- ---------
Total Distributions.............................. (0.08) (1.19) (0.97) -- -- --
--------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD....................... $ 14.66 $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11
--------- --------- --------- --------- --------- ---------
TOTAL RETURN......................................... 12.19% (12.77)% (9.63)% 85.91% 1.09% 1.10%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands).............. $1,304,006 $876,591 $929,638 $735,352 $74,219 $28,806
Ratio of Expenses to Average Net Assets (1)........ 1.74% 1.72% 1.75% 1.75% 1.75%** 1.75%**
Ratio of Net Investment Income (Loss) to Average
Net Assets (1).................................... 0.69% 0.60% (0.26)% (0.06)% (0.33)%** (0.53)%**
Portfolio Turnover Rate............................ 55% 54% 32% 52% 2% 0%
Average Commission Rate#........................... $0.0006 N/A N/A N/A N/A N/A
<CAPTION>
CLASS B
---------
PERIOD
FROM
JANUARY
2,
1996***
TO
DECEMBER
31, 1996
---------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................. $ 13.25
---------
---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1)................... 0.04
Net Realized and Unrealized Gain (Loss) on
Investments....................................... 1.42
---------
Total from Investment Operations................. 1.46
---------
DISTRIBUTIONS
Net Investment Income.............................. (0.05)
Net Realized Gain.................................. --
---------
Total Distributions.............................. (0.05)
---------
NET ASSET VALUE, END OF PERIOD....................... $ 14.66
---------
TOTAL RETURN......................................... 11.04%
---------
---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands).............. $14,213
Ratio of Expenses to Average Net Assets (1)........ 1.99%**
Ratio of Net Investment Income (Loss) to Average
Net Assets (1).................................... 0.33%**
Portfolio Turnover Rate............................ 55%
Average Commission Rate#........................... $0.0006
</TABLE>
- --------------------
<TABLE>
<C><S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment income......... N/A N/A N/A $0.01 $0.00 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets..................... N/A N/A N/A 1.79 % 2.48 %** 4.82 %**
Net Investment Loss to Average Net Assets.......... N/A N/A N/A (0.10 )% (1.06 )%** (3.60 )%**
<CAPTION>
(1)
N/A
N/A
N/A
<CAPTION>
</TABLE>
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.42% of the trade amount.
5
<PAGE>
EMERGING MARKETS DEBT PORTFOLIO
<TABLE>
<CAPTION>
CLASS B
CLASS A ---------
--------------------------------------- PERIOD
PERIOD FROM
FROM JANUARY
FEBRUARY 2,
1, 1996***
YEAR ENDED YEAR ENDED 1994* TO TO
DECEMBER 31, DECEMBER 31, DECEMBER DECEMBER
1996 1995 31, 1994 31, 1996
------------- ------------- --------- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD...................... $ 8.59 $ 8.59 $ 10.00 $ 8.68
------------- ------------- --------- ---------
------------- ------------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................................... 1.54 1.36 0.50 1.01
Net Realized and Unrealized Gain (Loss) on
Investments............................................ 2.79 0.91 (1.91) 3.20
------------- ------------- --------- ---------
Total from Investment Operations...................... 4.33 2.27 (1.41) 4.21
------------- ------------- --------- ---------
DISTRIBUTIONS
Net Investment Income................................... (1.17) (1.86) -- (1.15)
In Excess of Net Investment Income...................... (0.01) -- -- (0.01)
Net Realized Gain....................................... (4.20) (0.41) -- (4.20)
------------- ------------- --------- ---------
Total Distributions................................... (5.38) (2.27) -- (5.36)
------------- ------------- --------- ---------
NET ASSET VALUE, END OF PERIOD............................ $ 7.54 $ 8.59 $ 8.59 $ 7.53
------------- ------------- --------- ---------
------------- ------------- --------- ---------
TOTAL RETURN.............................................. 50.52% 28.23% (14.10)% 48.52%
------------- ------------- --------- ---------
------------- ------------- --------- ---------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)................... $152,142 $181,878 $144,949 $4,253
Ratio of Expenses to Average Net Assets................. 2.70% 1.75% 1.49%** 2.81%**
Ratio of Expenses to Average Net Assets (Excluding
Dividend and Interest Expense)......................... 1.42% N/A N/A 1.65%**
Ratio of Net Investment Income to Average Net Assets.... 11.66% 14.70% 9.97%** 11.09%**
Portfolio Turnover Rate................................. 560% 406% 273% 560%
</TABLE>
- --------------
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
6
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-nine portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except for the
International Small Cap, Money Market and Municipal Money Market Portfolios,
also offers Class B shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. The investment objective of each
Portfolio described in this Prospectus is as follows:
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and telephone number noted on the
cover page of this Prospectus. The investment objectives of these other
portfolios are listed below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $1 billion.
7
<PAGE>
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
-The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Portfolio's investment adviser, are expected to benefit from their
involvement in technology and technology-related industries.
-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.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
BALANCED:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-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 three
highest rating categories of the recognized rating services.
8
<PAGE>
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing primarily in
municipal obligations, the interest on which is exempt from federal income
tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at February 28, 1997 had approximately $176.9 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. The minimum
initial investment, generally, is $500,000 for Class A shares of each Portfolio
and $100,000 for Class B shares of each Portfolio. The minimum initial
investment amount is reduced for certain categories of investors. For additional
information on how to purchase shares and minimum initial investments, see
"Purchase of Shares."
HOW TO REDEEM
Shares of each Portfolio may be redeemed at any time, without cost, at the
net asset value per share of shares of the applicable class next determined
after receipt of the redemption request. The redemption price may be more or
less than the purchase price. Certain redemptions that cause the value of an
account to remain for a continuous 60-day period below the minimum investment
amount for Class A shares or for Class B shares may result in involuntary
redemption or conversion. For additional information on how to redeem shares and
involuntary redemption or conversion, see "Purchase of Shares -- Minimum Account
Sizes and Involuntary Redemption of Shares" and "Redemption of Shares."
9
<PAGE>
RISK FACTORS
Investing in emerging country securities involves certain considerations not
typically associated with investing in securities of U.S. companies, including
(1) restrictions on foreign investment and on repatriation of capital invested
in emerging countries, (2) currency fluctuations, (3) the cost of converting
foreign currency into U.S. dollars, (4) potential price volatility and lesser
liquidity of shares traded on emerging country securities markets or lack of a
secondary trading market for such securities and (5) political and economic
risks, including the risk of nationalization or expropriation of assets and the
risk of war. In addition, accounting, auditing, financial and other reporting
standards in emerging countries are not equivalent to U.S. standards and
therefore, disclosure of certain material information may not be made and less
information may be available to investors investing in emerging countries than
in the United States. There is also generally less governmental regulation of
the securities industry in emerging countries than in the United States.
Moreover, it may be more difficult to obtain a judgment in a court outside the
United States. For temporary, defensive purposes, when the Adviser determines
that market conditions warrant, each Portfolio may invest up to 100% of its
assets in money market instruments and short- and medium-term debt securities
that the Adviser believes to be of high quality, or hold cash. See "Additional
Investment Information -- Temporary Investments." The Portfolios may invest in
certain derivatives, including options, futures and options on futures. These
investments entail certain costs and risks, including imperfect correlation
between the value of securities held by a Portfolio and the value of the
particular derivative instrument, and the risk that a Portfolio could not close
out a derivatives position when it would be most advantageous to do so. Each
Portfolio may invest in depositary receipts, investment funds, loan
participations and assignments, non-publicly traded securities, private
placements, restricted securities and repurchase agreements, lend its portfolio
securities and purchase securities on a when-issued basis. Each of these
investment strategies involves specific risks which are described under
"Investment Objectives and Policies" and "Additional Investment Information"
herein.
The Emerging Markets Portfolio may invest in equity securities of Russian
companies. The registration, clearing and settlement of securities transactions
in Russia are subject to significant risks not normally associated with
securities transactions in the United States and other more developed markets.
See "Additional Investment Information -- Russian Securities Transactions."
10
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies the Portfolios employ in their efforts to achieve these objectives.
Each Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolios will attain their
objective. In addition to the investments and strategies described below, the
Portfolios may invest in certain securities and obligations as set forth in
"Additional Investment Information" below and as described under "Investment
Objectives and Policies" in the Statement of Additional Information. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval.
THE EMERGING MARKETS PORTFOLIO
The investment objective of the Portfolio is to provide long-term capital
appreciation by investing primarily in equity securities of emerging country
issuers. With respect to the Portfolio, equity securities include common and
preferred stocks, convertible securities, rights and warrants to purchase common
stocks. The Portfolio may also invest indirectly in equity securities of
emerging country issuers through depositary receipts. Under normal conditions,
at least 65% of the Portfolio's total assets will be invested in emerging
country equity securities. As used in this Prospectus, the term "emerging
country" applies to any country which, in the opinion of the Adviser, is
generally considered to be an emerging country by the international financial
community, including the International Bank for Reconstruction and Development
(more commonly known as the World Bank) and the International Finance
Corporation. There are currently over 130 countries which, in the opinion of the
Adviser, are generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets. These countries generally include every nation in the world
except the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe. Currently, investing in many emerging countries is
not feasible or may involve unacceptable political risks. The Portfolio will
focus its investments on those emerging market countries in which it believes
the economies are developing strongly and in which the markets are becoming more
sophisticated. The Portfolio intends to invest primarily in some or all of the
following countries:
<TABLE>
<S> <C> <C> <C>
Argentina Hungary Nigeria
Botswana India Pakistan South Korea
Brazil Indonesia Peru Sri Lanka
Chile Jamaica Philippines Taiwan
China Jordan Poland Thailand
Colombia Kenya Portugal Turkey
Greece Malaysia Russia Venezuela
Hong Kong Mexico South Africa Zimbabwe
</TABLE>
As markets in other countries develop, the Portfolio expects to expand and
further diversify the emerging countries in which it invests. The Portfolio does
not intend to invest in any security in a country where the currency is not
freely convertible to U.S. dollars, unless the Portfolio has obtained the
necessary governmental licensing to convert such currency or other appropriately
licensed or sanctioned contractual guarantees to protect such investment against
loss of that currency's external value, or the Portfolio has a reasonable
11
<PAGE>
expectation at the time the investment is made that such governmental licensing
or other appropriately licensed or sanctioned guarantees would be obtained or
that the currency in which the security is quoted would be freely convertible at
the time of any proposed sale of the security by the Portfolio.
An emerging country security is one issued by a company that, in the opinion
of the Adviser, has one or more of the following characteristics: (i) its
principal securities trading market is in an emerging country, (ii) alone, or on
a consolidated basis, the company derives 50% or more of its annual revenue from
either goods produced, sales made or services performed in emerging countries;
or (iii) the company is organized under the laws of, and has a principal office
in, an emerging country. The Adviser will base determinations as to eligibility
on publicly available information and inquiries made to the companies.
To the extent that the Portfolio's assets are not invested in emerging
country equity securities, the remainder of the assets may be invested in (i)
debt securities denominated in the currency of an emerging country or issued or
guaranteed by an emerging country company or the government of an emerging
country, (ii) equity or debt securities of corporate or governmental issuers
located in industrialized countries, and (iii) short- and medium-term debt
securities of the type described below under "Additional Investment Information
- -- Temporary Investments." The Portfolio's assets may be invested in debt
securities when the Portfolio believes that, based upon factors such as relative
interest rate levels and foreign exchange rates, such debt securities offer
opportunities for long-term capital appreciation. It is likely that many of the
debt securities in which the Portfolio will invest will be unrated and, whether
or not rated, such securities may have speculative characteristics. When deemed
appropriate by the Adviser, the Portfolio may invest up to 10% of its total
assets (measured at the time of the investment) in lower quality debt
securities. Lower quality debt securities, also known as "junk bonds," are often
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. As of the date of this
prospectus, less than 5% of the Portfolio's total assets were invested in junk
bonds. The market prices of these securities may fluctuate more than those of
higher quality securities and may decline significantly in periods of general
economic difficulty, which may follow periods of rising interest rates.
Securities in the lowest quality category may present the risk of default, or
may be in default.
THE EMERGING MARKETS DEBT PORTFOLIO
The investment objective of the Portfolio is to seek high total return. In
seeking to achieve this objective, the Portfolio will seek to invest at least
65% of its total assets in debt securities of government and government-related
issuers located in emerging countries (including participations in loans between
governments and financial institutions), and of entities organized to
restructure outstanding debt of such issuers. In addition, the Portfolio may
invest up to 35% of its total assets in debt securities of corporate issuers
located in or organized under the laws of emerging countries. See "The Emerging
Markets Portfolio" above for a definition of emerging countries.
12
<PAGE>
The Adviser intends to invest the Portfolio's assets in emerging country
debt securities that provide a high level of current income, while at the same
time holding the potential for capital appreciation if the perceived
creditworthiness of the issuer improves due to improving economic, financial,
political, social or other conditions in the country in which the issuer is
located. Currently, investing in many emerging country securities is not
feasible or may involve unacceptable political risks. Initially, the Portfolio
expects that its investments in emerging country debt securities will be made
primarily in some or all of the following emerging countries:
<TABLE>
<S> <C> <C>
Algeria India Philippines
Argentina Indonesia Poland
Brazil Ivory Coast Portugal
Bulgaria Jamaica Russia
Chile Jordan Slovakia
China Malaysia South Africa
Colombia Mexico Thailand
Costa Rica Morocco Trinidad & Tobago
Czech Republic Nicaragua Tunisia
Dominican Republic Nigeria Turkey
Ecuador Pakistan Uruguay
Egypt Panama Venezuela
Greece Paraguay Zaire
Hungary Peru
</TABLE>
As opportunities to invest in debt securities in other countries develop, the
Portfolio expects to expand and further diversify the emerging countries in
which it invests. While the Portfolio generally is not restricted in the portion
of its assets which may be invested in a single country or region, it is
anticipated that, under normal conditions, the Portfolio's assets will be
invested in issuers in at least three countries.
Emerging country debt securities that the Portfolio may invest in include
bonds, notes, bills, debentures, convertible securities, warrants, bank debt
obligations, short-term paper, mortgage and other asset-backed securities, loan
participations, loan assignments and interests issued by entities organized and
operated for the purpose of restructuring the investment characteristics of
instruments issued by emerging country issuers. U.S. dollar-denominated emerging
country debt securities held by the Portfolio will generally be listed but not
traded on a securities exchange, and non-U.S. dollar-denominated securities held
by the Portfolio may or may not be listed or traded on a securities exchange.
The Portfolio will be subject to no restrictions on the maturities of the
emerging country debt securities it holds; those maturities may range from
overnight to 30 years.
The Portfolio is not restricted in the portion of its assets which may be
invested in securities denominated in a particular currency and a substantial
portion of the Portfolio's assets may be invested in non-U.S. dollar-denominated
securities. The portion of the Portfolio's assets invested in securities
denominated in currencies other than the U.S. dollar will vary depending on
market conditions. Although the Portfolio is permitted to engage in a wide
variety of investment practices designed to hedge against currency exchange rate
risks with respect to its holdings of non-U.S. dollar-denominated debt
securities, the Portfolio may be limited in its ability to hedge against these
risks.
13
<PAGE>
In selecting particular emerging country debt securities for investment by
the Portfolio, the Adviser will apply a market risk analysis contemplating
assessment of factors such as liquidity, volatility, tax implications, interest
rate sensitivity, counterparty risks and technical market considerations.
Emerging country debt securities in which the Portfolio may invest will be
subject to high risk and will not be required to meet a minimum rating standard
and may not be rated for creditworthiness by any internationally recognized
credit rating organization. The Portfolio's investments are expected to be rated
in the lower and lowest rating categories of internationally recognized credit
rating organizations or are expected to be unrated securities of comparable
quality. These types of debt obligations are predominantly speculative with
respect to the capacity to pay interest and repay principal in accordance with
their terms and generally involve a greater risk of default and of volatility in
price than securities in higher rating categories. Ratings of non-U.S. debt
instruments, to the extent undertaken, are related to evaluations of the country
in which the issuer of the instrument is located and generally take into account
the currency in which a non-U.S. debt instrument is denominated. Instruments
issued by a foreign government in other than the local currency, typically have
a lower rating than local currency instruments due to the risk that the
government will be unable to obtain the required foreign currency to service its
foreign currency-denominated debt. In general, the ratings of debt securities or
obligations issued by a non-U.S. public or private entity will not be higher
than the rating of the currency or the foreign currency debt of the central
government of the country in which the issuer is located, regardless of the
intrinsic creditworthiness of the issuer.
The Portfolio's investments in government, government-related and
restructured debt securities will consist of (i) debt securities or obligations
issued or guaranteed by governments, governmental agencies or instrumentalities
and political subdivisions located in emerging countries including
participations in loans between governments and financial institutions, (ii)
debt securities or obligations issued by government owned, controlled or
sponsored entities located in emerging countries, and (iii) issuers of
structured securities. Certain issuers of such structured securities may be
deemed to be "investment companies" as defined in the Investment Company Act of
1940 (the "1940 Act"). As a result, the Portfolio's investment in such
securities may be limited by certain investment restrictions contained in the
1940 Act. The Portfolio's investments in government, government-related and
restructured debt instruments are subject to special risks, including the
inability or unwillingness to repay principal and interest, requests to
reschedule or restructure outstanding debt and requests to extend additional
loan amounts. The Portfolio may have limited recourse in the event of default on
such debt instruments.
The Portfolio's investments in debt securities of corporate issuers in
emerging countries may include debt securities or obligations issued (i) by
banks located in emerging countries or by branches of emerging country banks
located outside the country or (ii) by companies organized under the laws of an
emerging country. Determinations as to eligibility will be made by the Adviser
based on publicly available information and inquiries made to the issuer. The
Portfolio may also invest in certain debt obligations customarily referred to as
"Brady Bonds," which are created through the exchange of existing commercial
bank loans to foreign entities for new obligations in connection with debt
restructurings under a plan introduced by former U.S. Secretary of the Treasury
Nicholas F. Brady.
The Portfolio may also invest in zero coupon, pay-in-kind or deferred
payment securities and in securities that may be collateralized by zero coupon
securities (such as Brady Bonds). Zero coupon securities are securities that are
sold at a discount to par value and on which interest payments are not made
during the life of the
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security. Upon maturity, the holder is entitled to receive the par value of the
security. While interest payments are not made on such securities, the Portfolio
accrues income, or "Phantom Income," with respect to these securities prior to
the receipt of cash payments. The Portfolio will distribute its "phantom income"
to shareholders and, to the extent that shareholders elect to receive dividends
in cash rather than reinvesting such dividends in additional shares, the
Portfolio will have fewer assets available to purchase income producing
securities. Pay-in-kind securities pay interest by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. Deferred payment securities remain zero coupon
securities until a predetermined date, at which time the stated coupon rate
becomes effective and interest becomes payable at regular intervals. Zero
coupon, pay-in-kind and deferred payment securities may be subject to greater
fluctuation in value and lesser liquidity in the event of adverse market
conditions than comparably rated securities that pay cash interest at regular
interest payment periods.
The Portfolio may also invest up to 5% of its total assets in
mortgage-backed securities and in other asset-backed securities issued by
non-governmental entities, such as banks and other financial institutions.
Mortgage-backed securities include mortgage pass-through securities and
collateralized mortgage obligations. Asset-backed securities are collateralized
by such assets as automobile or credit card receivables and are securitized
either in a pass-through structure or in a pay-through structure similar to a
CMO.
ADDITIONAL INVESTMENT INFORMATION
BORROWING AND OTHER FORMS OF LEVERAGE. The Emerging Markets Debt Portfolio
is authorized to borrow money from banks and other entities in an amount up to
33 1/3% of the Portfolio's total assets (including the amount borrowed) less all
liabilities and indebtedness other than the borrowing, and may use the proceeds
of the borrowing for investment purposes or to pay dividends. Borrowing for
investment purposes creates leverage which is a speculative characteristic.
Although the Portfolio is authorized to borrow, it will do so only when the
Adviser believes that borrowing will benefit the Portfolio after taking into
account considerations such as the costs of the borrowing and the likely
investment returns on securities purchased with borrowed monies. Borrowing by
the Portfolio will create the opportunity for increased net income but, at the
same time, will involve special risk considerations. Leverage that results from
borrowing will magnify declines as well as increases in the Portfolio's net
asset value per share and net yield.
The Portfolio expects that all of its borrowing will be made on a secured
basis. The Portfolio's Custodian will either segregate the assets securing the
borrowing for the benefit of the lenders or arrangements will be made with a
suitable sub-custodian. If assets used to secure the borrowing decrease in
value, the Portfolio may be required to pledge additional collateral to the
lender in the form of cash or securities to avoid liquidation of those assets.
DEPOSITARY RECEIPTS. The Portfolios may invest in Depositary Receipts,
including American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") and other Depositary Receipts
(which, together with ADRs, GDRs and EDRs, are hereinafter collectively referred
to as "Depositary Receipts"), to the extent that such Depositary Receipts are or
become available. ADRs are securities, typically issued by a U.S. financial
institution (a "depositary"), that evidence ownership interests in a security or
a pool of securities issued by a foreign issuer (the "underlying issuer") and
deposited with the depositary. ADRs include American Depositary Shares and New
York Shares and may be "sponsored" or "unsponsored." Sponsored ADRs are
established jointly by a depositary and the underlying issuer, whereas
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unsponsored ADRs may be established by a depositary without participation by the
underlying issuer. The issuers of the stock of unsponsored ADRs are not
obligated to disclose material information in the United States and therefore,
there may not be a correlation between such information and the market value of
the ADR. GDRs, EDRs and other types of Depositary Receipts are typically issued
by foreign depositaries, although they may also be issued by U.S. depositaries,
and evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation. Generally, Depositary Receipts in
registered form are designed for use in the U.S. securities market and
Depositary Receipts in bearer form are designed for use in securities markets
outside the United States. The Portfolios may invest in sponsored and
unsponsored Depositary Receipts. For purposes of the Portfolios' investment
policies, the Portfolios' investments in Depositary Receipts will be deemed to
be investments in the underlying securities.
FOREIGN CURRENCY FORWARD CONTRACTS. The Portfolios may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolios
may use such contracts to protect against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells securities, lock in the U.S. dollar value of
dividends and interest on securities held by the Portfolio, and generally to
protect the U.S. dollar value of securities held by the Portfolio against
exchange rate fluctuation. While forward contracts may limit losses as a result
of exchange rate fluctuations, they will also limit any gains that might
otherwise have been realized. The Portfolio's Custodian may be required to place
cash or liquid securities in a segregated account in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will be at least equal to the amount of
the Portfolio's commitments with respect to such contracts.
FOREIGN INVESTMENT. Investment in securities of foreign issuers involves
somewhat different investment risks than those affecting securities of U.S.
domestic issuers. There may be limited publicly available information with
respect to foreign issuers, and foreign issuers are not generally subject to
uniform accounting, auditing and financial and other reporting standards and
requirements comparable to those applicable to U.S. companies. There may also be
less government supervision and regulation of foreign securities exchanges,
brokers and listed companies than in the United States. Many foreign securities
markets have substantially less volume than U.S. national securities exchanges,
and securities of some foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the United States Dividends and interest paid by foreign issuers may be subject
to withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid by domestic
companies. Additional risks include future political and economic developments,
the possibility that a foreign jurisdiction might impose or change withholding
taxes on income payable with respect to foreign securities, possible seizure,
nationalization or expropriation of the foreign issuer or foreign deposits and
the possible adoption of foreign governmental restrictions such as exchange
controls.
Prior governmental approval for foreign investments may be required under
certain circumstances in some emerging countries, and the extent of foreign
investment in certain debt securities and domestic companies may
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be subject to limitation in other emerging countries. Foreign ownership
limitations also may be imposed by the charters of individual companies in
emerging countries to prevent, among other concerns, violation of foreign
investment limitations.
Repatriation of investment income, capital and the proceeds of sales by
foreign investors may require governmental registration and/or approval in some
emerging countries. The Portfolios could be adversely affected by delays in, or
a refusal to grant, any required governmental registration or approval for such
repatriation. Any investment subject to such repatriation controls will be
considered illiquid if it appears reasonably likely that this process will take
more than seven days.
The economies of individual emerging countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of emerging countries generally are heavily dependent upon
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been, and may
continue to be, adversely affected by economic conditions in the countries with
which they trade.
With respect to any emerging country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) which could affect adversely the economies of such countries or the value
of each Portfolio's investments in those countries. In addition, it may be
difficult to obtain and enforce a judgment in a court outside of the United
States.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies, and because each Portfolio may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the value of each Portfolio's
assets, as measured in U.S. dollars, may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations and the Portfolios
may incur costs in connection with conversions between various currencies.
The Emerging Markets Portfolio may invest in securities of issuers located
in Hong Kong. Hong Kong was established as a British colony in the 1840's and
has been ruled by the British Government through an appointed Governor.
Effective July 1, 1997, Hong Kong reverts to Chinese sovereignty and will be
ruled as a Special Administrative Region of China. Although China has made
certain commitments to preserve the economic and social freedoms currently
enjoyed in Hong Kong, there can be no assurances China's commitments will be
maintained. Action taken by the Chinese government which limits or causes
uncertainty with regard to these economic and social freedoms could have an
adverse affect on the Portfolio's investments in securities of issuers located
in Hong Kong.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolios may
purchase and sell futures contracts and options on futures contracts, including
but not limited to financial futures, securities index futures, foreign currency
exchange futures, and interest rate futures contracts. Futures contracts provide
for the sale by one party and purchase by another party of a specified amount of
a specific security, instrument or basket
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thereof, at a specific future date and at a specified price. An option on a
futures contract is a legal contract that gives the holder the right to buy or
sell a specified amount of futures contracts at a fixed or determinable price
upon the exercise of the option.
The Portfolios may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or purchase securities
index futures in order to gain market exposure. Subject to applicable laws, the
Portfolios may engage in transactions in securities index futures contracts (and
options thereon) which are traded on a recognized securities or futures
exchange, or may purchase or sell such instruments in the over-the-counter
market. There currently are limited securities index futures and options on such
futures in many countries, particularly emerging countries. The nature of the
strategies adopted by the Adviser, and the extent to which those strategies are
used, may depend on the development of such markets.
The Portfolios may engage in transactions involving foreign currency
exchange futures contracts. Such contracts involve an obligation to purchase or
sell a specific currency at a specified future date and at a specified price.
The Portfolios may engage in such transactions to hedge their respective
holdings and commitments against changes in the level of future currency rates
or to gain exposure to a particular currency.
The Portfolios may engage in transactions in interest rate futures
transactions. Interest rate futures contracts involve an obligation to purchase
or sell a specific debt security, instrument or basket thereof at a specified
future date at a specified price. The value of the contract rises and falls
inversely with changes in interest rates. The Portfolios may engage in such
transactions to hedge their holdings of debt instruments against future changes
in interest rates.
Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies, and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures contracts, the value of financial futures
contracts rises and falls inversely with changes in interest rates. The
Portfolios may engage in financial futures contracts for hedging and non-hedging
purposes.
Under rules adopted by the Commodity Futures Trading Commission, each
Portfolio may enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of such Portfolios'
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to
activities that do not constitute "bona fide" hedging. No Portfolio will enter
into futures contracts to the extent that its outstanding obligations to
purchase securities under such contracts, in combination with its outstanding
obligations with respect to options transactions (including options to purchase
securities or instruments) would exceed 20% of its total assets.
Gains and losses on futures contracts and options thereon depend on the
Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by a Portfolio and the prices of futures and
options relating to investments purchased or sold by the Portfolio, and (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position. The risk that a Portfolio will
be unable to close out a futures position or options contract will be minimized
by only entering into futures contracts or options transactions for which there
appears to be a
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liquid exchange or secondary market. The risk of loss in trading on futures
contracts in some strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in futures
pricing.
INVESTMENT FUNDS. Some emerging countries have laws and regulations that
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of companies
listed and traded on the stock exchanges in these countries is permitted by
certain emerging countries through investment funds which have been specifically
authorized. The Portfolios may invest in these investment funds subject to the
provisions of the 1940 Act and other applicable laws as discussed below under
"Investment Restrictions." If a Portfolio invests in such investment funds, the
Portfolio's shareholders will bear not only their proportionate share of the
expenses of the Portfolio (including operating expenses and the fees of the
Adviser), but also will indirectly bear similar expenses of the underlying
investment funds.
Certain of the investment funds referred to in the preceding paragraph are
advised by the Adviser. These Portfolios may, to the extent permitted under the
1940 Act and other applicable law, invest in these investment funds. If a
Portfolio does elect to make an investment in such an investment fund, it will
only purchase the securities of such investment fund in the secondary market.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Portfolios may invest in fixed
rate and floating rate loans ("Loans") arranged through private negotiations
between an issuer of sovereign debt obligations and one or more financial
institutions ("Lenders"). The Portfolio's investments in Loans are expected in
most instances to be in the form of participation in Loans ("Participations")
and assignments of all or a portion of Loans ("Assignments") from third parties.
The Portfolio will have the right to receive payments of principal, interest and
any fees to which it is entitled only from the Lender selling the Participation
and only upon receipt by the Lender of the payments from the borrower. In the
event of the insolvency of the Lender selling a Participation, the Portfolio may
be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. Certain Participations may be
structured in a manner designed to avoid purchasers of Participations being
subject to the credit risk of the Lender with respect to the Participation. Even
under such a structure, in the event of the Lender's insolvency, the Lender's
servicing of the Participation may be delayed and the assignability of the
Participation may be impaired. The Portfolio will acquire Participations only if
the Lender interpositioned between the Portfolio and the borrower is determined
by the Adviser to be creditworthy.
When the Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. However, 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. Because there is no liquid market for such securities, the
Portfolio anticipates that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities and the Portfolio's
ability to dispose of particular Assignments or Participations when necessary to
meet the Portfolio's liquidity needs or in response to a specific economic event
such as a deterioration in the creditworthiness of the borrower. The lack of a
liquid secondary market for Assignments and Participations also may make it more
difficult for the Portfolio to assign a value to these securities for purposes
of valuing the Portfolio's portfolio and calculating its net asset value.
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LOANS OF PORTFOLIO SECURITIES. The Portfolios may lend securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing their net investment income. These loans must be
secured continuously by cash or equivalent collateral, or by a letter of credit
at least equal to the market value of the securities loaned plus accrued
interest or income. There may be a risk of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. Each Portfolio will not enter into securities loan
transactions exceeding in the aggregate 33 1/3% of the market value of its total
assets.
MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money
market instruments, although each Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
The Portfolios may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. See "Temporary
Investments." The money market investments permitted for the Portfolios include
obligations of the U.S. government and its agencies and instrumentalities;
obligations of foreign sovereignties; other debt securities; commercial paper;
bank obligations; certificates of deposit (including Eurodollar certificates of
deposit); and repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolios may invest in securities that are neither listed on
a stock exchange nor traded over-the-counter, including privately placed
securities. Investing in such unlisted emerging country equity securities,
including investments in new and early stage companies, may involve a high
degree of business and financial risk that can result in substantial losses. As
a result of the absence of a public trading market for these securities, they
may be less liquid than publicly traded securities. Although these securities
may be resold in privately negotiated transactions, the prices realized from
these sales could be less than those originally paid by the Portfolios or less
than what may be considered the fair value of such securities. Further,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which might be applicable
if their securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolios may be required to bear the expenses of registration.
As a general matter, each Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Nor, as a general matter, may each Portfolio
invest more than 10% of its total assets in securities that are restricted from
sale to the public without registration ("Restricted Securities") under the
Securities Act of 1933 (the "1933 Act"). However, each Portfolio may invest up
to 25% of its total assets in liquid Restricted Securities that can be offered
and sold to qualified institutional buyers under Rule 144A under the 1933 Act
("Rule 144A Securities"). The Board of Directors has adopted guidelines and
delegated to the Adviser, subject to the supervision of the Board of Directors,
the daily function of determining and monitoring the liquidity of Rule 144A
Securities. Rule 144A securities may become illiquid if qualified institutional
buyers are not interested in acquiring the securities.
OPTIONS TRANSACTIONS. The Portfolios may seek to increase their returns or
may hedge their portfolio investments through options transactions with respect
to securities, instruments, indices or baskets thereof in which such Portfolios
may invest, as well as with respect to foreign currency. Purchasing a put option
gives a Portfolio the right to sell a specified security, currency or basket of
securities or currencies at the exercise price until the expiration of the
option. Purchasing a call option gives a Portfolio the right to purchase a
specified
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security, currency or basket of securities or currencies at the exercise price
until the expiration of the option. A Portfolio may not purchase call and put
options to the extent that the value of its aggregate investment in options,
excluding options on futures contracts, exceeds 5% of its total assets.
The Portfolios also may write (i.e., sell) put and call options on
investments held in its portfolio, as well as with respect to foreign currency.
A Portfolio that has written an option receives a premium, which increases the
Portfolio's return on the underlying security or instrument in the event the
option expires unexercised or is closed out at a profit. However, by writing a
call option, a Portfolio will limit its opportunity to profit from an increase
in the market value of the underlying security or instrument above the exercise
price of the option for as long as the Portfolio's obligation as writer of the
option continues. The Portfolios may only write options that are "covered." A
covered call option means that so long as the Portfolio is obligated as the
writer of the option, it will own (i) the underlying security or instrument
subject to the option or (ii) securities or instruments convertible or
exchangeable without the payment of any consideration into the security or
instrument subject to the option.
By writing (or selling) a put option, a Portfolio incurs an obligation to
buy the security or instrument underlying the option from the purchaser of the
put at the option's exercise price at any time during the option period, at the
purchaser's election. Options written by a Portfolio may be exercisable by the
purchaser only on a specific date. A Portfolio that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option.
The Portfolios may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Adviser and
the extent to which those strategies are used will depend on the development of
such option markets. The primary risks associated with the use of options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by a Portfolio and the prices of options relating to
such investments; and (ii) possible lack of a liquid secondary market for an
option.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolios may not enter into
repurchase agreements with more than seven days to maturity if, as a result,
more than 15% of the market value of the Portfolio's net assets would be
invested in such repurchase agreements and in other investments for which market
quotations are not readily available or which are otherwise illiquid.
REVERSE REPURCHASE AGREEMENTS. The Emerging Markets Debt Portfolio may
enter into reverse repurchase agreements with brokers, dealers, domestic and
foreign banks or other financial institutions. In a reverse repurchase
agreement, the Portfolio sells a security and agrees to repurchase it at a
mutually agreed upon date
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and price, reflecting the interest rate effective for the term of the agreement.
It may also be viewed as the borrowing of money by the Portfolio. The
Portfolio's investment of the proceeds of a reverse repurchase agreement is the
speculative factor known as leverage. The Portfolio may enter into a reverse
repurchase agreement only if the interest income from investment of the proceeds
is greater than the interest expense of the transaction and the proceeds are
invested for a period no longer than the term of the agreement. The Portfolio
will maintain with the Custodian a separate account with a segregated portfolio
of cash or other liquid securities in an amount at least equal to its purchase
obligations under these agreements. Reverse repurchase agreements are considered
to be borrowings and are subject to the percentage limitations on borrowings set
forth in "Borrowing and Other Forms of Leverage."
RUSSIAN SECURITIES TRANSACTIONS. The Emerging Markets Portfolio may invest
in equity securities of Russian issuers. The registration, clearing and
settlement of securities transactions in Russia are subject to significant risks
not normally associated with securities transactions in the United States and
other more developed markets. Ownership of shares in Russian companies is
evidenced by entries in a company's share register (except where shares are held
through depositories that meet the requirements of the 1940 Act) and the
issuance of extracts from the register or, in certain limited cases, by formal
share certificates. However, Russian share registers are frequently unreliable
and the Portfolio could possibly lose its registration through oversight,
negligence or fraud. Moreover, Russia lacks a centralized registry to record
securities transactions and registrars located throughout Russia or the
companies themselves maintain share registers. Registrars are under no
obligation to provide extracts to potential purchasers in a timely manner or at
all and are not necessarily subject to effective state supervision. In addition,
while registrars are liable under law for losses resulting from their errors, it
may be difficult for the Portfolio to enforce any rights it may have against the
registrar or issuer of the securities in the event of loss of share
registration. Although Russian companies with more than 1,000 shareholders are
required by law to employ an independent company to maintain share registers, in
practice, such companies have not always followed this law. Because of this lack
of independence of registrars, management of a Russian company may be able to
exert considerable influence over who can purchase and sell the company's shares
by illegally instructing the registrar to refuse to record transactions on the
share register. Furthermore, these practices may prevent the Portfolio from
investing in the securities of certain Russian companies deemed suitable by the
Adviser and could cause a delay in the sale of Russian securities by the
Portfolio if the company deems a purchaser unsuitable, which may expose the
Portfolio to potential loss on its investment.
In light of the risks described above, the Board of Directors of the
Portfolio has approved certain procedures concerning the Portfolio's investments
in Russian securities. Among these procedures is a requirement that the
Portfolio will not invest in the securities of Russian issuers unless that
issuer's registrar has entered into a contract with the Portfolio's
sub-custodian containing certain protective conditions including, among other
things, the sub-custodian's right to conduct regular share confirmations on
behalf of the Portfolio. This requirement will likely have the effect of
precluding investments in certain Russian companies that the Portfolio would
otherwise make.
SHORT SALES. The Emerging Markets Debt Portfolio may from time to time sell
securities short without limitation, but consistent with applicable legal
requirements. A short sale is a transaction in which the Portfolio sells
securities it owns or has the right to acquire at no added cost (i.e., "against
the box") or does not own (but has borrowed) in anticipation of a decline in the
market price of the securities. To deliver the securities to the buyer, the
Portfolio arranges through a broker to borrow the securities and, in so doing,
the Portfolio becomes
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obligated to replace the securities borrowed at their market price at the time
of replacement. When the Portfolio makes a short sale, the proceeds it receives
from the sale will be held on behalf of a broker until the Portfolio replaces
the borrowed securities. The Portfolio may have to pay a premium to borrow the
securities and must pay any dividends or interest payable on the securities
until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash or other liquid securities. In addition, the Portfolio will
place in a segregated account with its Custodian an amount of cash or other
liquid securities 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 or
other liquid securities deposited as collateral with the broker in connection
with the short sale. Short sales by the Portfolio involve certain risks and
special considerations. Possible losses from short sales differ from losses that
could be incurred from a purchase of a security, because losses from short sales
may be unlimited, whereas losses from purchases can equal only the total amount
invested.
STRUCTURED NOTES. The Portfolios may invest in structured notes, which are
derivatives on which the amount of principal repayment and/or interest payments
is based upon the movement of one or more factors. These factors include, but
are not limited to, currency exchange rates, interest rates (such as the prime
lending rate and LIBOR) and stock indices such as the S&P 500 Index. In some
cases, the impact of the movements of these factors may increase or decrease
through the use of multipliers or deflators. The use of structured notes allows
a Portfolio to tailor its investments to the specific risks and returns the
Adviser wishes to accept while avoiding or reducing certain other risks.
STRUCTURED SECURITIES. The Emerging Markets Debt Portfolio may invest a
portion of its assets 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,
such as a corporation or trust, of specified instruments (such as commercial
bank loans or Brady Bonds) and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured Securities to
create securities with different investment characteristics, such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to Structured Securities is dependent on the
extent of the cash flow on the underlying instruments. Because the type of
Structured Securities in which the Portfolio anticipates it will invest
typically involve no credit enhancement, their credit risk generally will be
equivalent to that of the underlying instruments. The Portfolio is permitted to
invest in a class of Structured Securities that is either subordinated or
unsubordinated to the right of payment of another class. Subordinated Structured
Securities typically have higher yields and present greater risks than
unsubordinated Structured Securities. Certain issuers of Structured Securities
may be deemed to be "investment companies" as defined in the 1940 Act and, as a
result, the Portfolio's investment in Structured Securities may be limited by
the 1940 Act. Structured Securities are typically sold in private placement
transactions, and there currently is no active trading market for Structured
Securities.
SWAPS--SWAP CONTRACTS. The Portfolios may invest in Swaps, which are
derivatives in the form of a contract or other similar instrument in which two
parties agree to exchange the returns generated by a security, instrument or
basket thereof for the returns generated by another security, instrument, basket
thereof or index. The payment streams are calculated by reference to a specific
security, index or instrument and an agreed upon notional amount. The relevant
indices include but are not limited to, currencies, fixed interest rates, prices
and
23
<PAGE>
total return on interest rate indices, fixed-income indices, stock indices and
commodity indices (as well as amounts derived from arithmetic operations on
these indices). For example, a Portfolio may agree to swap the return generated
by a fixed-income index for the return generated by a second fixed-income index.
The currency swaps in which the Portfolios may enter will generally involve an
agreement to pay interest streams in one currency based on a specified index in
exchange for receiving interest streams denominated in another currency. Such
swaps may involve initial and final exchanges that correspond to the agreed upon
notional amount.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
return streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Portfolio receiving or paying, as the case
may be, only the net amount of the two returns. A Portfolio's obligations under
a swap agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the maintenance of a segregated account consisting of cash or
liquid securities. A Portfolio will not enter into any swap agreement unless the
counterparty meets the rating requirements set forth in guidelines established
by the Fund's Board of Directors.
Interest rate and total rate of return swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of loss
with respect to interest rate and total rate of return swaps is limited to the
net amount of payments that a Portfolio is contractually obligated to make. If
the other party to an interest rate or total rate of return swap defaults, a
Portfolio's risk of loss consists of the net amount of payments that a Portfolio
is contractually entitled to receive. In contrast, currency swaps may involve
the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. Therefore, the entire principal
value of a currency swap may be subject to the risk that the other party to the
swap will default on its contractual delivery obligations. If there is a default
by the counterparty, a Portfolio may have contractual remedies pursuant to the
agreements related to the transaction. The swap markets has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Swaps that include caps,
floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the Portfolios would be less favorable than it would have been if this
investment technique were not used.
TEMPORARY INVESTMENTS. For temporary defensive purposes, when the Adviser
determines that market conditions warrant, each Portfolio may invest up to 100%
of its assets in dollar and non-dollar denominated money market instruments and
short- and medium-term debt securities that the Adviser believes to be of high
quality, or hold cash. The short- and medium-term debt securities in which a
Portfolio may invest consist of (a) obligations of the U.S. or foreign country
governments, their respective agencies or instrumentalities; (b) bank deposits
and bank obligations (including certificates of deposit, time deposits and
bankers' acceptances) of U.S. or foreign country banks denominated in any
currency; (c) floating rate securities and other instruments denominated in any
currency issued by international development agencies; (d) finance company and
corporate commercial paper and other short-term corporate debt obligations of
U.S. and foreign country corporations meeting the Portfolio's credit quality
standards; and (e) repurchase agreements with banks and broker-dealers with
respect to such securities.
24
<PAGE>
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Each Portfolio will maintain with the Custodian a
separate account with a segregated portfolio of cash or other liquid securities
in an amount at least equal to these commitments. The payment obligation and the
interest rates that will be received are each fixed at the time the Portfolio
enters into the commitment and no interest accrues to the Portfolio until
settlement. Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if, among other factors, the
general level of interest rates has changed. It is a current policy of each
Portfolio not to enter into when-issued commitments or delayed delivery
securities exceeding in the aggregate 15% of the market value of the Portfolio's
total assets less liabilities, other than the obligations created by these
commitments.
INVESTMENT LIMITATIONS
Each Portfolio is a non-diversified portfolio under the 1940 Act, which
means that the Portfolio is not limited by the 1940 Act in the proportion of its
assets that may be invested in the obligations of a single issuer. Thus, each
Portfolio may invest a greater proportion of its total assets in the securities
of a smaller number of issuers and, as a result, will be subject to greater risk
with respect to its portfolio securities. Nevertheless, each Portfolio intends
to comply with the more limited diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
Each Portfolio operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each Portfolio. The Adviser provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each of the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages each of the
Portfolio's investments. The Adviser is entitled to receive from each Portfolio
an annual management fee, payable quarterly, equal to the percentage of average
daily net assets set forth in the table below. However, the Adviser has agreed
to a reduction in the fees payable to it and to reimburse the Portfolio, if
necessary, if such fees would cause the total annual operating expenses of
either Portfolio to exceed the respective percentages of average daily net
assets set forth in the table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL ANNUAL
OPERATING
EXPENSES AFTER FEE
WAIVERS
MANAGEMENT -------------------------
PORTFOLIO FEE CLASS A CLASS B
- ------------------------------ ----------- --------- ---------
<S> <C> <C> <C>
Emerging Markets Portfolio 1.25% 1.75% 2.00%
Emerging Markets Debt
Portfolio 1.00% 1.75% 2.00%
</TABLE>
25
<PAGE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. On February 5, 1997, Morgan Stanley Group Inc. and
Dean Witter, Discover & Co. announced that they had entered into an Agreement
and Plan of Merger to form Morgan Stanley, Dean Witter, Discover & Co. Morgan
Stanley Group Inc. is the direct parent of the Adviser and Morgan Stanley.
Subject to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, the Adviser and Morgan Stanley
will be subsidiaries of Morgan Stanley, Dean Witter, Discover & Co. At February
28, 1997, the Adviser, together with its affiliated asset management companies,
had approximately $176.9 billion in assets under management as an investment
manager or as a Named Fiduciary or Fiduciary Adviser. See "Management of the
Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. The following individuals have primary portfolio
management responsibility for the Portfolios noted below:
EMERGING MARKETS PORTFOLIO -- MADHAV DHAR AND MARIANNE L. HAY. Madhav Dhar
is a Managing Director of Morgan Stanley. He joined the Adviser in 1984 to focus
on global asset allocation and investment strategy and is now a co-head of the
Adviser's emerging markets group. He holds a B.S. (honors) from St. Stephens
College, Delhi University (India), and an M.B.A. from Carnegie-Mellon
University. Mr. Dhar has had primary responsibility for managing the Portfolio's
assets since inception. Marianne L. Hay, a Managing Director of Morgan Stanley &
Co. Incorporated, is a co-head of the Adviser's emerging markets group and
shares, with Mr. Dhar, primary responsibility for managing the Portfolio's
assets. She joined the Adviser in June 1993 to work with the Adviser's senior
management covering all emerging markets, asset aloocation, product development
and clients services. Ms. Hay has 17 years of investment experience. Prior to
joining the Adviser, she was a director of Martin Currie Investment Management,
Ltd. where her responsibilities included geographic asset allocation and
portfolio management for global and emerging markets funds, as well as being
director in charge of the company's North American clients. Prior to to her
tenure at Martin Currie Investment Management, Ltd. she worked for the Bank of
Scotland and the investment management firm of Ivory and Sime plc. She graduated
with an honors degree in genetics from Edinburgh University and holds a Diploma
in Education and the qualification of the Association of the Institute of
Bankers in Scotland.
EMERGING MARKETS DEBT PORTFOLIO -- PAUL GHAFFARI. Paul Ghaffari is a
Principal of Morgan Stanley. He joined the Adviser in June 1993 as a Vice
President and Portfolio Manager for the Morgan Stanley Emerging Markets Debt
Fund (a closed-end investment company). Prior to joining the Adviser, Mr.
Ghaffari was a Vice President in the Fixed Income Division of the Emerging
Markets Sales and Trading Department at Morgan Stanley. From 1983 to 1992, he
worked in LDC Sales and Trading Department and the Mortgage-Backed Securities
Department at J.P. Morgan & Co. Inc. and worked in the Treasury Department at
the Morgan Guaranty Trust Co. He holds a B.A. in International Relations from
Pamona College and an M.S. in Foreign Service from Georgetown University. Mr.
Ghaffari has had primary responsibility for managing the Portfolio's assets
since inception.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the Officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under
26
<PAGE>
federal laws. The Administration Agreement also provides that the Administrator,
through its agents, will provide dividend disbursing and transfer agent services
to the Fund. For its services under the Administration Agreement, the Fund pays
the Adviser a monthly fee which on an annual basis equals 0.15% of the average
daily net assets of each Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors administrative services provided by CGFSC. Their
services are also subject to the supervision of the Board of Directors of the
Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
LOCAL ADMINISTRATORS FOR THE EMERGING MARKETS PORTFOLIO. The Portfolio has,
as required by local law, entered into administration agreements with local
administrators in Brazil and Colombia. A local administrator provides certain
services for the Portfolio with respect to the Portfolio's investments in that
country, including services relating to foreign exchange, local taxes,
remittance of income and capital gains, and repatriation of investments. The
Portfolio's local administrator in Brazil, Unibanco-Uniao, a Brazilian
corporation, is paid by an annual fee of 0.125% of the Portfolio's average
weekly net assets invested in Brazil. The Portfolio's local administrator in
Colombia, CitiTrust S.A., a Colombian trust company, is paid by the Fund an
annual fee of $1,000 plus 0.20% per transaction in Colombia.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The Officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares for each Portfolio pursuant to Rule 12b-1 under the 1940 Act (each, a
"Plan"). Under each Plan, the Distributor is entitled to receive from the
Portfolios a distribution fee, which is accrued daily and paid quarterly, of
0.25% of the Class B shares' average daily net assets on an annualized basis.
The Distributor expects to reallocate most of its fee to its investment
representatives. The Distributor may, in its discretion, voluntarily waive from
time to time all or any portion of its distribution fee and each of the
Distributor and the Adviser is free to make additional payments out of its own
assets to promote the sale of Fund shares, including payments that compensate
financial institutions for distribution services or shareholder services.
Each Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
27
<PAGE>
PAYMENTS TO FINANCIAL INSTITUTIONS. The Adviser or its affiliates may
compensate certain financial institutions for the continued investment of their
customers' assets in the Emerging Markets Portfolio pursuant to the advice of
such financial institutions. These payments will be made directly by the Adviser
or its affiliates from their assets, and will not be made from the assets of the
Fund or by the assessment of a sales charge on shares. Such financial
institutions may also perform certain shareholder or recordkeeping services that
would otherwise be performed by CGFSC. The Adviser may elect to enter into a
contract to pay the financial institutions for such services.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including organizational costs, legal fees, accountant's fees,
custodial fees, and printing and mailing costs) specified in the Administration
and Distribution Agreements.
PURCHASE OF SHARES
Class A and Class B shares of each Portfolio may be purchased at the net
asset value per share next determined after receipt of the purchase order by the
Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio account opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares of each Portfolio. Certain
advisory or asset allocation accounts, such as Total Funds Management accounts,
managed by Morgan Stanley or its affiliates, including the Adviser ("Managed
Accounts") may purchase Class A shares without being subject to any minimum
initial investment or minimum account size requirements for a Portfolio account.
Employees of the Adviser and certain of its affiliates may purchase Class A
Shares subject to conditions, including a lower minimum initial investment,
established by Officers of the Fund.
If the value of a New Account, containing Class A shares falls below
$500,000 (but remains at or above $100,000) because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $500,000 (but remains at or above $100,000) for a continuous
60-day period, the Class A shares in such account will convert to Class B shares
and will be subject to the distribution fee and other features applicable to the
Class B shares. The Fund, however, will not convert Class A shares to Class B
shares based solely upon changes in the market that reduce the net asset value
of shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remained Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B Account") converted to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution.
28
<PAGE>
The minimum investment levels may be waived at the discretion of the Adviser
for (i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planers,
financial services firms or investment advisers that have entered into an
agreement with Morgan Stanley or its affiliates; and (ii) retirement and
deferred compensation plans and trusts, used to fund such plans, including, but
not limited to, those defined in Section 401(a), 403(b) or 457 of the Code and
"rabbi trusts". The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days
notice to shareholders.
The Adviser reserves the right in its sole discretion to determine which of
such advisory or asset aloocation accounts shall be Managed Accounts. For
information regarding Managed Accounts, please contact your Morgan Stanley
account representative or the Fund at the telephone number provided on the cover
of this Prospectus.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption. The Fund reserves the right
to modify or terminate the involuntary redemption features of the shares as
stated above at any time upon 60-days notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form, and mailing it, together with a check ($500,000 minimum
for Class A shares of each Portfolio and $100,000 minimum for Class B shares
of each Portfolio, with certain exceptions for Morgan Stanley employees and
select customers) payable to "Morgan Stanley Institutional Fund, Inc. --
[portfolio name]", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
29
<PAGE>
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The classes of shares of the
Portfolio(s) to be purchased should be designated on the Account Registration
Form. For purchases by check, the Fund is ordinarily credited with Federal
Funds within one business day. Thus, your purchase of shares by check is
ordinarily credited to your account at the net asset value per share of each
of the Portfolios determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA#021000021
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
The purchase price of the Class A and Class B shares of the Portfolios is
the net asset value next determined after the order is received. See
"Valuation of Shares." An order received prior to the regular close of the
New York Stock Exchange ("NYSE"), which is currently 4:00 p.m. Eastern Time,
will be executed at the price computed on the date of receipt; an order
received after the regular close of the NYSE will be executed at the price
computed on the next day the NYSE is open as long as the Transfer Agent
receives payment by check or in Federal Funds prior to the regular close of
the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the
Fund and Chase (the "Custodian Bank") are open for business. Your bank may
charge a service fee for wiring Federal funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested.
Your bank may charge a service fee for wiring funds.
30
<PAGE>
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000 for each portfolio, except for automatic reinvestment of dividends and
capital gains distributions for which there are no minimums) by purchasing
shares at net asset value by mailing a check to the Fund (payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]") at the above address or
by wiring monies to the Custodian Bank as outlined above. It is very important
that your account name, the portfolio name and the class selected be specified
in the letter or wire to assure proper crediting to your account. In order to
ensure that your wire orders are invested promptly, you are requested to notify
one of the Fund's representatives (toll free: 1-800-548-7786) prior to the wire
date. Additional investments will be applied to purchase additional shares in
the same class held by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio(s)
will not be issued. All shares purchased are confirmed to you and credited to
your account on the Fund's books maintained by the Adviser or its agents. You
will have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is canceled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
purchases in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of each Portfolio and the Portfolios' performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging
shares of Portfolio A for shares of Portfolio B, then exchanging shares of
Portfolio B for shares of Portfolio C and again exchanging shares of Portfolio C
for shares of Portfolio B within a 120-day period. Two types of transactions are
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<PAGE>
exempt from these excessive trading restrictions: (1) trades exclusively between
money market portfolios; and (2) trades done in connection with an asset
allocation service, such as TFM Accounts or accounts managed or advised by the
Adviser and/or any of its affiliates.
INVESTMENT IN FUNDS THROUGH A TOTAL FUNDS MANAGEMENT ("TFM") ACCOUNT
In addition to the considerable diversification among individual securities
you receive by investing in a particular Portfolio, you can further reduce risk
by spreading your assets among several different Portfolios that each have
different risk and return characteristics. TFM is an active investment
management service managed by Morgan Stanley or its affiliates, including Morgan
Stanley Asset Management Inc. (each, a "TFM Adviser"), that allocates your
investments across a combination of either Class A or Class B shares of certain
of the Portfolios selected to meet your long-term investment objectives as well
as, in certain circumstances, your current income objectives.
The TFM Adviser has developed investment strategies for TFM Accounts to meet
the diverse financial needs of different investors. You can open a TFM Account
by meeting with one of the investment professionals of a Participating Dealer
who will review your situation and help you identify your long-term investment
and/or current income objectives. After using TFM criteria to determine your
long-term investment and/or current income objectives, you can choose one of
several TFM investment strategies. Based on your chosen strategy, your initial
investment will be allocated among a number of the Class A or Class B shares of
the Portfolios. Depending on market conditions, the TFM Adviser periodically
reallocates the combination of Portfolios or the percentage amounts invested in
the shares of each Portfolio to implement your TFM investment strategy. In
addition, your TFM Account will be periodically rebalanced to maintain your TFM
strategy's current asset allocation mix, if and when the performance of one or
more of the Portfolios unbalances the strategy's mix. You will pay the TFM
Adviser a fee for the TFM Account service that is in addition to and separate
from the fees and expenses you will pay directly or indirectly as an investor in
the Portfolios. See "Fund Expenses."
From time to time, one or more of the Portfolios used for investment by the
TFM Accounts may experience relatively large investments or redemptions due to
the TFM Account allocations or rebalancings recommended by the TFM Adviser.
These transactions will affect the Portfolios, since Portfolios that experience
redemptions as a result of reallocations or rebalancings may have to sell
portfolio securities and Portfolios that receive additional cash will have to
invest it in additional portfolio securities. While it is impossible to predict
the overall impact of these transactions over time, there could be adverse
effects on portfolio management to the extent that Portfolios may be required to
sell securities or invest cash at times when they would not otherwise do so.
These transactions could also have tax consequences if sales of securities
resulted in gains and could also increase transaction costs. The Adviser,
representing the interests of the Portfolios, is committed to minimizing the
impact of TFM Account transactions on the Portfolios. The Adviser, however, will
have a conflict in fulfilling this responsibility in that it also serves as a
TFM Adviser. In that capacity, the Adviser, representing the interests of the
TFM Accounts, also is committed to minimizing the impact of TFM Account
transactions on the Portfolios to the extent consistent with pursuing the
investment objectives of the TFM Accounts. In addition, an affiliate of the TFM
Adviser, the Distributor is compensated on the sale,and may be compensated for
distribution or shareholder services on the sale of shares of the Portfolios.
See "Purchase of Shares" and "Shareholder Services -- Exchange Features." The
Adviser will monitor the impact of TFM Account transactions on the Portfolios.
32
<PAGE>
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares or Class B shares of each Portfolio at the next determined net
asset value of shares of the applicable class. On days that both the NYSE and
the Custodian Bank are open for business, the net asset value per share of each
of the Portfolios is determined at the regular close of trading of the NYSE
(currently 4:00 p.m. Eastern Time). Shares of the Portfolios may be redeemed by
mail or telephone. No charge is made for redemption. Any redemption proceeds may
be more or less than the purchase price of your shares depending on, among other
factors, the market value of the investment securities held by the Portfolio.
BY MAIL
Each Portfolio will redeem its Class A or Class B shares at the net asset
value determined on the date the request is received, if the request is received
in "good order" before the regular close of the NYSE. Your request should be
addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston,
Massachusetts 02208-2798, except that deliveries by overnight courier should be
addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global Funds
Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. In times of drastic market conditions, the telephone redemption option
may be difficult to implement. If you experience difficulty in making a
telephone redemption, your request may be made by mail or express mail and will
be implemented at the net asset value next determined after it is received.
Redemption requests sent to the Fund through express mail must be mailed to the
address of the Dividend Disbursing and Transfer Agent listed under "General
Information." The Fund and the Fund's transfer agent (the "Transfer Agent") will
employ reasonable procedures to confirm that the instructions communicated by
telephone are genuine. These procedures include requiring the investor to
provide certain personal identification information at the time an account is
opened and prior to effecting each transaction requested by telephone. In
addition, all telephone transaction requests will be recorded and investors may
be required to provide additional telecopied written instructions
33
<PAGE>
regarding transaction requests. Neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in either portfolio for shares of any
other available portfolio(s) of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares" above. Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege may be modified or terminated by the Fund at any time
upon 60-days notice to shareholders.
34
<PAGE>
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the names of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of your current portfolio, the name(s) of the portfolio(s)
and class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the class of
each of the portfolios involved in the exchange of shares at the close of
business. Requests received after 4:00 p.m. (Eastern Time) are processed the
next business day based on the net asset value determined at the close of
business on such day. For additional information regarding responsibility for
the authenticity of telephoned instructions, see "Redemption of Shares -- By
Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by writing to Morgan Stanley Institutional Fund Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of each Portfolio's shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolios is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. 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 a
price within a range not exceeding the current asked price nor less than the
current bid price. The current bid and asked prices are determined based on the
average of the bid and asked prices quoted on such valuation date by reputable
brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices, but take into account institutional size, trading in similar groups of
securities and any developments related to the
35
<PAGE>
specific securities. Securities not priced in this manner are valued at the most
recently quoted bid price, or when securities exchange valuations are used, at
the latest quoted sale price on the day of valuation. If there is no such
reported sale, the latest quoted bid price will be used. Securities purchased
with remaining maturities of 60 days or less are valued at amortized cost, if it
approximates market value. In the event that amortized cost does not approximate
market value, market prices as determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determined prices in
accordance with the above-stated procedures are determined in good faith at fair
value using methods determined by the Board of Directors. For purposes of
calculating net asset value per share, all assets and liabilities initially
expressed in foreign currencies will be translated into U.S. dollars at the mean
of the bid and asked price of such currencies against the U.S. dollar last
quoted by any major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distributions expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise the total return for each class of
the Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE.
"Total return" shows what an investment in a class of the Portfolio would
have earned over a specified period of time (such as one, five or ten years),
assuming that all distributions and dividends by the Portfolio were reinvested
in the same class on the reinvestment dates during the period. Total return does
not take into account any federal or state income taxes that may be payable on
dividends and distributions or upon redemption. The Fund may also include
comparative performance information in advertising or marketing the Portfolios'
shares, including data from Lipper Analytical Services, Inc., other industry
publications, business periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
that, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
may elect to receive income dividends and capital gains distributions in cash.
Each Portfolio expects to distribute substantially all of its taxable net
investment income in the form of annual dividends. Net realized capital gains of
each Portfolio, if any, after reduction for any tax loss carryforwards will also
be distributed annually.
36
<PAGE>
Undistributed net investment income is included in each Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(I.E., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of each Portfolio will differ at times.
Expenses of each Portfolio allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
Each Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from a Portfolio's net investment income are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Such dividends paid by a Portfolio generally will qualify for the 70%
dividends-received deduction for corporate shareholders. Each Portfolio will
report annually to its shareholders the amount of dividend income qualifying for
such treatment.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. Each
Portfolio will send reports annually to shareholders of the federal income tax
status of all distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
losses, including any available capital loss carryforwards), prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
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<PAGE>
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (1) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Application Form, (2) who is subject to backup withholding by the Internal
Revenue Service, or (3) who has not certified to the Fund that such shareholder
is not subject to backup withholding. This backup withholding is not an
additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceed or are
less than the shareholder's adjusted basis in the sold, exchanged or redeemed
shares. If capital gain distributions have been made with respect to shares that
are sold at a loss after being held for six months or less, then the loss is
treated as a long-term capital loss to the extent of the capital gain
distributions.
Conversion of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
Investment income received by a Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that a Portfolio is liable for foreign income taxes so withheld, each
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although each
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that each Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other
38
<PAGE>
remuneration paid to Morgan Stanley or other affiliates must be fair and
reasonable in comparison to those of other broker-dealers for comparable
transactions involving similar securities being purchased or sold during a
comparable time period.
PORTFOLIO TURNOVER
The Portfolios generally do not invest for short-term trading purposes,
however, when circumstances warrant, each Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolios will not consider portfolio turnover rate
a limiting factor in making investment decisions consistent with their
respective objectives and policies. For the fiscal year ended December 31, 1996,
the Emerging Markets Debt Portfolio had a portfolio turnover rate of 560%. As
portfolio turnover increases, the Portfolios may expect to pay correspondingly
increased brokerage and trading costs. In addition to transaction costs, higher
portfolio turnover may result in the realization of capital gains. As discussed
under "Taxes," to the extent net short-term capital gains are realized, any
distributions resulting from such gains are considered ordinary income for
federal income tax purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 35 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
portfolio are currently classified into two classes, the Class A shares and the
Class B shares, except for the International Small Cap, Money Market and
Municipal Money Market Portfolios which offer only Class A shares.
The shares of the Portfolios, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative rights, which means that the holders of more than 50% of the
shares voting for the election of Directors can elect 100% of the Directors if
they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of a Portfolio may be presumed to "control" (as that term is
defined in the 1940 Act) that Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser, or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
39
<PAGE>
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
40
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
EMERGING MARKETS AND EMERGING MARKETS DEBT PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, please contact your Morgan Stanley representative
or call us toll free 1-800-548-7786. Please print all items except
signature, and mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First Name Initial Last Name
2.
First Name Initial Last Name
First Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / /UNINCORPORATED / / PARTNERSHIP / /UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien:
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor
OR
1. TAXPAYER IDENTIFICATION SOCIAL SECURITY
NUMBER ("TIN") NUMBER ("SSN")
OR
2. TIN
SSN
OR
TIN
SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your
correct TIN(s) or SSN(s). Accounts that have a missing or incorrect
TIN(s) or SSN(s) will be subject to backup withholding at a 31% rate on
dividends, distributions and other payments. If you have not provided us
with your correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of
persons subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained.
You may be notified that you are subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code because you have
underreported interest or dividends or you were required to, but failed
to, file a return which would have included a reportable interest or
dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following / / Class A Shares $ / / Class B Shares $
CLASS SECTION Portfolio(s): / / Class A Shares $ / / Class B Shares $
(Class A shares minimum $500,000 Emerging Markets Portfolio
for each Portfolio and Class B Emerging Markets Debt
shares minimum $100,000 for each Portfolio
Portfolio. Please indicate
Portfolio, class and amount.
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate
portfolio, manner of
payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of Commercial Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the account
statement sent to my/our registered
address, I/we hereby authorize the Address
Fund to mail duplicate statements
to the name and address provided at City State Zip Code
right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative No. Branch
No.
</TABLE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE ARE
SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE
APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL SECURITY
ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND THAT IF
I/ WE DO NOT PROVIDE EITHER NUMBER TO CHASE GLOBAL FUNDS
SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE DATE OF THIS
APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR CORRECT SSN(S)
OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP
WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION PROCEEDS. (PLEASE
PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU MAY REQUEST SUCH
FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 7
Investment Objectives and Policies................ 11
Additional Investment Information................. 15
Investment Limitations............................ 25
Management of the Fund............................ 25
Purchase of Shares................................ 28
Redemption of Shares.............................. 33
Shareholder Services.............................. 34
Valuation of Shares............................... 35
Performance Information........................... 36
Dividends and Capital Gains Distributions......... 36
Taxes............................................. 37
Portfolio Transactions............................ 38
General Information............................... 39
Account Registration Form
</TABLE>
EMERGING MARKETS PORTFOLIO
EMERGING MARKETS DEBT PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
EMERGING GROWTH PORTFOLIO
AGGRESSIVE EQUITY PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
twenty-nine portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the Equity Growth, Emerging Growth and Aggressive Equity Portfolios (each, a
"Portfolio" and collectively, the "Portfolios"). The Class A and Class B shares
currently offered by the Portfolios have different minimum investment
requirements and fund expenses. Shares of the portfolios are offered with no
sales charge, exchange fee or redemption fee, (except that the International
Small Cap Portfolio may impose a transaction fee.).
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional investors and high net
worth individual investors a series of portfolios which benefit from the
investment expertise and commitment to excellence associated with Morgan Stanley
and its affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity,
Technology, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield and Municipal Bond Portfolios; and (v)
MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional
information about the Fund is contained in a "Statement of Additional
Information" dated May 1, 1997, which is incorporated herein by reference. The
Statement of Additional Information and the prospectuses pertaining to the other
portfolios of the Fund are available upon request and without charge by writing
or calling the Fund at the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Portfolios indicated below will incur:
<TABLE>
<CAPTION>
EQUITY EMERGING AGGRESSIVE
GROWTH GROWTH EQUITY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A......................................................... None None None
Class B......................................................... None None None
Maximum Sales Load Imposed on Reinvested Dividends
Class A......................................................... None None None
Class B......................................................... None None None
Deferred Sales Load
Class A......................................................... None None None
Class B......................................................... None None None
Redemption Fees
Class A......................................................... None None None
Class B......................................................... None None None
Exchange Fees
Class A......................................................... None None None
Class B......................................................... None None None
</TABLE>
<TABLE>
<CAPTION>
EQUITY EMERGING AGGRESSIVE
GROWTH GROWTH EQUITY
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (Net of Fee Waivers)*
Class A......................................................... 0.52% 0.95% 0.56%
Class B......................................................... 0.52% 0.95% 0.56%
12b-1 Fees
Class A......................................................... None None None
Class B......................................................... 0.25% 0.25% 0.25%
Other Expenses
Class A......................................................... 0.28% 0.30% 0.44%
Class B......................................................... 0.28% 0.30% 0.44%
----------- ----------- -----------
Total Operating Expenses (Net of Fee Waivers)*
Class A......................................................... 0.80% 1.25% 1.00%
Class B......................................................... 1.05% 1.50% 1.25%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
* The Adviser has agreed to waive its management fees and/or reimburse each
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolios to exceed a specified percentage of their
respective average daily net assets. These reductions became or will become
effective as of the inception of each Portfolio. As a result of these
reductions, the Management Fees stated above are lower than the contractual
fees stated under "Management of the Fund." The Adviser reserves the right to
terminate any of its fee
2
<PAGE>
waivers and/or expense reimbursements at any time in its sole discretion. For
further information on Fund expenses, see "Management of the Fund." Set forth
below, for each Portfolio, are the management fees and total operating
expenses absent such fee waivers and/or expense reimbursements as a percent
of average daily net assets of the Class A shares and Class B shares,
respectively, of each Portfolio.
<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT FEES ABSENT ------------------------
PORTFOLIO FEE WAIVERS CLASS A CLASS B
- ------------------------------------------------------------ ------------------------- ----------- -----------
<S> <C> <C> <C>
Equity Growth............................................... 0.60% 0.88% 1.12%
Emerging Growth............................................. 1.00% 1.30% 1.54%
Aggressive Equity........................................... 0.80% 1.24% 1.47%
</TABLE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. Expenses and fees for the Equity Growth, Emerging Growth and
Aggressive Equity Portfolios are based on actual figures for the fiscal year
ended December 31, 1996. Due to the continuous nature of Rule 12b-1 fees, long
term Class B shareholders may pay more than the equivalent of the maximum
front-end charges otherwise permitted by the National Association of Securities
Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The example is based on total operating expenses
of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Equity Growth Portfolio
Class A.......................................................... $ 8 $ 26 $ 44 $ 99
Class B.......................................................... 11 33 58 128
Emerging Growth Portfolio
Class A.......................................................... 13 40 69 151
Class B.......................................................... 15 47 82 179
Aggressive Equity Portfolio
Class A.......................................................... 10 32 55 122
Class B.......................................................... 13 40 69 151
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A and Class
B shares of the Equity Growth, Emerging Growth and Aggressive Equity Portfolios
for each of the periods presented. The audited financial highlights for the
Portfolios' shares for each of the periods presented are part of the Fund's
financial statements which appear in the Fund's December 31, 1996 Annual Report
to Shareholders and which are incorporated by reference in the Fund's Statement
of Additional Information. The Portfolios' financial highlights for each of the
periods presented have been audited by Price Waterhouse LLP, whose unqualified
report thereon is also incorporated by reference in the Statement of Additional
Information. Additional performance information is included in the Annual
Report. The Annual Report and the financial statements therein, along with the
Statement of Additional Information, are available at no cost from the Fund at
the address and telephone number noted on the cover page of this Prospectus.
After October 31, 1992, the Fund changed its fiscal year end to December 31. The
following information should be read in conjunction with the financial
statements and notes thereto.
4
<PAGE>
EQUITY GROWTH PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------
YEAR ENDED TWO MONTHS
DECEMBER 31, ENDED YEAR ENDED
------------------------------------------ DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
--------- --------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......... $ 14.14 $ 12.02 $ 12.14 $ 11.88 $ 11.44 $ 10.66
--------- --------- --------- --------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)................... 0.17 0.22 0.17 0.22 0.03 0.16
Net Realized and Unrealized Gain on
Investments................................ 4.07 4.93 0.21 0.28 0.41 0.82
--------- --------- --------- --------- ------------- -------------
Total from Investment Operations.......... 4.24 5.15 0.38 0.50 0.44 0.98
--------- --------- --------- --------- ------------- -------------
DISTRIBUTIONS
Net Investment Income....................... (0.17) (0.28) (0.13) (0.23) -- (0.20)
In Excess of Net Investment Income.......... -- -- -- (0.01) -- --
Net Realized Gain........................... (3.27) (2.75) (0.37) -- -- --
--------- --------- --------- --------- ------------- -------------
Total Distributions....................... (3.44) (3.03) (0.50) (0.24) -- (0.20)
--------- --------- --------- --------- ------------- -------------
NET ASSET VALUE, END OF PERIOD................ $ 14.94 $ 14.14 $ 12.02 $ 12.14 $ 11.88 $ 11.44
--------- --------- --------- --------- ------------- -------------
--------- --------- --------- --------- ------------- -------------
TOTAL RETURN.................................. 30.97% 45.02% 3.26% 4.33% 3.85% 9.26%
--------- --------- --------- --------- ------------- -------------
--------- --------- --------- --------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)....... $ 352,703 $ 158,112 $ 97,259 $ 73,789 $ 45,985 $ 36,558
Ratio of Expenses to Average Net Assets
(1)........................................ 0.80% 0.80% 0.80% 0.80% 0.80%** 0.80%
Ratio of Net Investment Income to Average
Net Assets (1)............................. 1.12% 1.57% 1.44% 1.59% 1.93%** 1.73%
Portfolio Turnover Rate..................... 186% 186% 146% 172% 1% 38%
Average Commission Rate#.................... $0.0535 N/A N/A N/A N/A N/A
- ------------------------------
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income.................................. $0.01 $0.01 $0.01 $0.02 $0.01 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets........... 0.88% 0.88% 0.89% 0.93% 1.11%** 1.01%
Net Investment Income to Average Net
Assets.................................. 1.04% 1.49% 1.35% 1.46% 1.62%** 1.52%
<CAPTION>
CLASS B
-------------
PERIOD FROM PERIOD FROM
APRIL 2, JANUARY 2,
1991* TO 1996*** TO
OCTOBER 31, DECEMBER 31,
1991 1996
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......... $ 10.00 $ 14.22
------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)................... 0.05 0.13
Net Realized and Unrealized Gain on
Investments................................ 0.61 3.99
------------- -------------
Total from Investment Operations.......... 0.66 4.12
------------- -------------
DISTRIBUTIONS
Net Investment Income....................... -- (0.15)
In Excess of Net Investment Income.......... -- --
Net Realized Gain........................... -- (3.27)
------------- -------------
Total Distributions....................... -- (3.42)
------------- -------------
NET ASSET VALUE, END OF PERIOD................ $ 10.66 $ 14.92
------------- -------------
------------- -------------
TOTAL RETURN.................................. 6.60% 29.92%
------------- -------------
------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)....... $ 18,139 $5,498
Ratio of Expenses to Average Net Assets
(1)........................................ 0.80%** 1.05%**
Ratio of Net Investment Income to Average
Net Assets (1)............................. 2.34%** 0.91%**
Portfolio Turnover Rate..................... 3% 186%
Average Commission Rate#.................... N/A $0.0535
- ------------------------------
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income.................................. $0.03 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets........... 1.37%** 1.12%**
Net Investment Income to Average Net
Assets.................................. 1.77%** 0.84%**
</TABLE>
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.
5
<PAGE>
EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994 1993
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................... $ 21.49 $ 16.12 $ 16.22 $ 16.22
------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income Loss (1)............................... (0.19) (0.18) (0.09) (0.11)
Net Realized and Unrealized Gain (Loss) on Investments....... 0.89 5.55 (0.01) 0.11
------------- ------------- ------------- -------------
Total from Investment Operations........................... 0.70 5.37 (0.10) 0.00
------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Realized Gain............................................ (8.69) -- -- --
------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD................................. $ 13.50 $ 21.49 $ 16.12 $ 16.22
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
TOTAL RETURN................................................... 3.72% 33.31% (0.62)% 0.00%
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)........................ $ 62,793 $ 119,378 $ 117,669 $ 103,621
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)......................................................... (0.88)% (0.76)% (0.61)% (0.77)%
Portfolio Turnover Rate...................................... 33% 25% 24% 25%
Average Commission Rate ..................................... $0.0507 N/A N/A N/A
- ------------------------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income................ $0.01 $0.003 $0.002 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets............................ 1.30% 1.26% 1.26% 1.31%
Net Investment Income (Loss) to Average Net Assets........ (0.92)% (0.77)% (0.62)% (0.83)%
<CAPTION>
CLASS B
-------------
PERIOD FROM
TWO MONTHS JANUARY 2,
ENDED YEAR ENDED 1996*** TO
DECEMBER 31, OCTOBER 31, DECEMBER 31,
1992 1992 1996
------------- ------------- -------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................... $ 14.97 $ 16.18 $ 21.47
------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income Loss (1)............................... (0.01) (0.09) (0.15)
Net Realized and Unrealized Gain (Loss) on Investments....... 1.26 (1.12) 0.82
------------- ------------- -------------
Total from Investment Operations........................... 1.25 (1.21) 0.67
------------- ------------- -------------
DISTRIBUTIONS
Net Realized Gain............................................ -- -- (8.69)
------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD................................. $ 16.22 $ 14.97 $ 13.45
------------- ------------- -------------
------------- ------------- -------------
TOTAL RETURN................................................... 8.35% (7.48)% 3.58%
------------- ------------- -------------
------------- ------------- -------------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)........................ $ 94,161 $ 80,156 $3,997
Ratio of Expenses to Average Net Assets (1).................. 1.25%** 1.25% 1.50%**
Ratio of Net Investment Income (Loss) to Average Net Assets
(1)......................................................... (0.68)%** (0.66)% (1.09)%**
Portfolio Turnover Rate...................................... 1% 17% 33%
Average Commission Rate ..................................... N/A N/A $0.0507
- ------------------------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income................ $0.00 $0.01 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets............................ 1.36%** 1.29% 1.54%**
Net Investment Income (Loss) to Average Net Assets........ (0.79)%** (0.71)% (1.14)%**
</TABLE>
** Annualized.
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.
6
<PAGE>
AGGRESSIVE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS B
CLASS A -------------
-------------------------------- PERIOD FROM
PERIOD FROM JANUARY 2,
YEAR ENDED MARCH 8, 1995* 1996*** TO
DECEMBER 31, TO DECEMBER 31, DECEMBER 31,
1996 1995 1996
------------- ----------------- -------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............................... $ 12.17 $ 10.00 $ 12.25
------------- ------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)........................................ 0.18 0.15 0.13
Net Realized and Unrealized Gain on Investments.................. 4.73 3.95 4.67
------------- ------- -------------
Total from Investment Operations............................... 4.91 4.10 4.80
------------- ------- -------------
DISTRIBUTIONS
Net Investment Income............................................ (0.17) (0.15) (0.15)
Net Realized Gain................................................ (2.48) (1.78) (2.48)
------------- ------- -------------
Total Distributions............................................ (2.65) (1.93) (2.63)
------------- ------- -------------
NET ASSET VALUE, END OF PERIOD..................................... $ 14.43 $ 12.17 $ 14.42
------------- ------- -------------
------------- ------- -------------
TOTAL RETURN....................................................... 40.90% 41.25% 39.72%
------------- ------- -------------
------------- ------- -------------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)............................ $ 68,480 $ 28,548 $8,805
Ratio of Expenses to Average Net Assets (1)...................... 1.00% 1.00%** 1.25%**
Ratio of Net Investment Income to Average Net Assets (1)......... 1.26% 1.64%** 0.95%**
Portfolio Turnover Rate.......................................... 380% 309% 380%
Average Commission Rate#......................................... $0.0484 N/A $0.0484
</TABLE>
- ------------------
<TABLE>
<C> <S> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income................ $0.03 $0.06 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets............................ 1.24% 1.59%** 1.47%**
Net Investment Income to Average Net Assets............... 1.02% 1.05%** 0.73%**
</TABLE>
* Commencement of operations.
** Annualized.
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commissions were charged, during the period.
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PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-nine portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and except the International
Small Cap, Money Market and Municipal Money Market Portfolios, offers Class B
shares. Each portfolio has its own investment objective and policies designed to
meet its specific goals. The investment objective of each Portfolio described in
this Prospectus is as follows:
- The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
- The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
- The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
The other portfolios of the Fund are described in other Prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The investment objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
- The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
- The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
- The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
- The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
- The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
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- The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
- The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
- The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
- The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Portfolio's investment adviser, are expected to benefit from their
involvement in technology and technology-related industries.
- 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.
- The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
- The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
- The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio
of fixed income securities.
- The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
- 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 three
highest rating categories of the recognized rating services.
- The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
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- The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing primarily in
municipal obligations, the interest on which is exempt from federal income
tax.
MONEY MARKET:
- The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one
year or less.
- The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at February 28, 1997 had approximately $176.9 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. The minimum initial investment, generally, is $500,000 for Class A
shares of each Portfolio and $100,000 for Class B shares of each Portfolio. The
minimum initial investment amount is reduced for certain categories of
investors. For additional information on how to purchase shares and minimum
initial investments, see "Purchase of Shares."
HOW TO REDEEM
Shares of each Portfolio may be redeemed at any time, without cost, at the
net asset value per share of shares of the applicable class next determined
after receipt of the redemption request. The redemption price may be more or
less than the purchase price. Certain redemptions that cause the value of an
account to remain for a continuous 60-day period below the minimum investment
amount for Class A shares or for Class B shares may result in involuntary
redemption or automatic conversion. For additional information on how to redeem
shares and involuntary redemption or conversion, see "Purchase of Shares --
Minimum Account Sizes and Involuntary Redemption of Shares" and "Redemption of
Shares."
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RISK FACTORS
The investment policies of the Portfolios entail certain risks and
considerations of which an investor should be aware. Because the Emerging Growth
Portfolio seeks long-term capital appreciation by investing primarily in small-
to medium-sized companies, which are types of companies that are more vulnerable
to financial and other risks than larger, more established companies,
investments in this Portfolio may involve a higher degree of risk and price
volatility than the general equity markets. The Aggressive Equity Portfolio may
invest in small-to medium-sized companies to a lesser extent. Each Portfolio may
invest in securities of foreign issuers, which are subject to certain risks not
typically associated with domestic securities. In addition, the Portfolios may
invest in Depositary Receipts, money market instruments, repurchase agreements,
lend their portfolio securities and may purchase securities on a when-issued or
delayed delivery basis. The Equity Growth and Aggressive Equity Portfolios may
invest in non-publicly traded securities, private placements, restricted
securities, covered call options and may invest in foreign currency forward
contracts to hedge currency risk associated with investment in non-U.S.
dollar-denominated securities. The Equity Growth and Aggressive Equity
Portfolios may invest in certain derivatives, including options, futures and
options on futures. These investments entail certain costs and risks, including
imperfect correlation between the value of securities held by a Portfolio and
the value of the particular derivative instrument, and the risk that a Portfolio
could not close out a derivatives position when it would be most advantageous to
do so. The Aggressive Equity Portfolio may sell securities short and invest in
specialty equity-linked securities, such as PERCS, ELKS or LYONs, of U.S. and,
to a limited extent, foreign issuers, which may involve risks in addition to
those associated with other equity securities. The Aggressive Equity Portfolios
is a non-diversified portfolio under the Investment Company Act of 1940, as
amended (the "1940 Act") and therefore may invest a greater proportion of its
assets in the securities of a smaller number of issuers and may, as a result, be
subject to greater risk with respect to its portfolio securities. Each of these
investment strategies involves specific risks which are described under
"Investment Objectives and Policies" and "Additional Investment Information"
herein and under "Investment Objectives and Policies" in the Statement of
Additional Information.
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies the Portfolios employ in their efforts to achieve these objectives.
Each Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolios will attain their
objectives. In addition to the investments and strategies described below, the
Portfolios may invest in certain securities and obligations as set forth in
"Additional Investment Information" below and as described under "Investment
Objectives and Policies" in the Statement of Additional Information. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval.
THE EQUITY GROWTH PORTFOLIO
The Portfolio's investment objective is to provide long-term capital
appreciation by investing in growth-oriented equity securities of medium and
large capitalization U.S. corporations and, to a limited extent, foreign
corporations. With respect to the Portfolio, equity securities include common
and preferred stocks, convertible securities and rights and warrants to purchase
common stocks. Under normal circumstances, the Portfolio will invest at least
65% of the value of its total assets in equity securities.
The Adviser employs a flexible and eclectic investment process in pursuit of
the Portfolio's investment objectives. In selecting stocks for the Portfolio,
the Adviser concentrates on a universe of rapidly growing, high quality
companies and lower, but accelerating, earnings growth situations. The Adviser's
universe of potential investments generally comprises companies with market
capitalizations of $500 million or more. The Portfolio is not restricted to
investments in specific market sectors. The Adviser uses its research
capabilities, analytical resources and judgment to assess economic, industry and
market trends, as well as individual company developments, to select promising
growth investments for the Portfolio. The Adviser concentrates on companies with
strong, communicative managements and clearly defined strategies for growth. In
addition, the Adviser rigorously assesses company developments, including
changes in strategic direction, management focus and current and likely future
earnings results. Valuation is important to the Adviser but is viewed in the
context of prospects for sustainable earnings growth and the potential for
positive earnings surprises vis-a-vis consensus expectations. The Portfolio is
free to invest in any equity security that, in the Adviser's judgment, provides
above average potential for capital appreciation.
In selecting investments for the Portfolio, the Adviser emphasizes
individual security selection. The Portfolio's investments will generally be
diversified by number of issues but concentrated sector positions may result
from the investment process. The Portfolio has a long-term investment
perspective; however, the Adviser may take advantage of short-term opportunities
that are consistent with the Portfolio's objective by selling recently purchased
securities which have increased in value.
The Portfolio may invest up to 25% of its total assets at the time of
purchase in securities of foreign companies. The Portfolio may invest in
securities of foreign issuers directly or in the form of Depositary Receipts.
Investors should recognize that investing in foreign companies involves certain
special considerations which are not typically associated with investing in U.S.
companies.
The Portfolio may invest in convertible securities of domestic and, subject
to the above restrictions, foreign issuers on occasions when, due to market
conditions, it is more advantageous to purchase such securities than to
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<PAGE>
purchase common stock. Since the Portfolio invests in both common stocks and
convertible securities, the risks of investing in the general equity markets may
be tempered to a degree by the Portfolio's investments in convertible securities
which are often not as volatile as common stock.
THE EMERGING GROWTH PORTFOLIO
The Portfolio's investment objective is to provide long-term capital
appreciation by investing primarily in growth-oriented equity securities of
small- to medium-sized domestic corporations and, to a limited extent as
described below, foreign corporations. The production of any current income is
incidental to this objective. Such companies generally have annual gross
revenues ranging from $10 million to $750 million. With respect to the
Portfolio, equity securities include common and preferred stocks, convertible
securities, and rights and warrants to purchase common stocks, and any similar
equity interest, such as trust or partnership interests. Such equity securities
may not pay dividends or distributions and may or may not carry voting rights.
The Adviser employs a flexible investment program in pursuit of the
Portfolio's investment objective. The Portfolio is not restricted to investments
in specific market sectors. The Portfolio will invest in small- to medium-sized
companies that are early in their life cycle, but which, in the Adviser's
judgment, have the potential to become major enterprises. The Adviser uses its
judgment and research capabilities to assess economic, industry, market and
company developments to select investments in promising emerging growth
companies that are expected to benefit from new technology or new products or
services. In addition, the Adviser looks for special developments, such as
research discoveries, changes in customer demand, rejuvenated management or
basic changes in the economic environment. These situations are only
illustrative of the types of investments the Portfolio may make. The Portfolio
is free to invest in any common stock which, in the Adviser's judgment, provides
above-average potential for capital appreciation.
The Portfolio intends to manage its investments actively to accomplish its
investment objective. Since the Portfolio has a long-term investment
perspective, the Adviser does not intend to respond to short-term market
fluctuations or to acquire securities for the purpose of short-term trading;
however, the Adviser may take advantage of short-term opportunities that are
consistent with its objective.
The Portfolio may invest up to 25% of its total assets at the time of
purchase in securities of foreign companies. The Portfolio may invest in
securities of foreign issuers directly or in the form of Depositary Receipts.
The Portfolio may enter into foreign currency forward contracts which provide
for the purchase or sale of foreign currencies in connection with the settlement
of foreign securities transactions or to hedge the underlying currency exposure
related to foreign investments. The Portfolio will not enter into these
commitments for speculative purposes. Investors should recognize that investing
in foreign companies involves certain special considerations which are not
typically associated with investing in U.S. companies.
The Portfolio may also invest in convertible securities of domestic and,
subject to the above restrictions, foreign issuers on occasions when, due to
market conditions, it is more advantageous to purchase such securities than to
purchase common stock. The Portfolio will not invest in debt securities that are
not rated at least investment grade by either Standard & Poor's Ratings Group
("S&P") or Moody's Investors Service, Inc. ("Moody's"). Since the Portfolio
invests in both common stocks and convertible securities, the risks of investing
in the general equity markets may be tempered to a degree by the Portfolio's
investments in convertible securities, which are often not as volatile as equity
securities.
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<PAGE>
THE AGGRESSIVE EQUITY PORTFOLIO
The Portfolio's investment objective is to provide capital appreciation by
investing primarily in a non-diversified portfolio of corporate equity and
equity-linked securities. With respect to the Portfolio, equity and
equity-linked securities include common and preferred stocks, convertible
securities, rights and warrants to purchase common stocks, options, futures, and
specialty securities, such as ELKS, LYONs, PERCS of U.S., and to a limited
extent, foreign issuers. Under normal circumstances, the Portfolio will invest
at least 65% of the value of its total assets in equity and equity-linked
securities.
The Adviser employs a flexible and eclectic investment process in pursuit of
the Portfolio's investment objective. In selecting securities for the Portfolio,
the Adviser concentrates on a universe of rapidly growing, high quality
companies and lower, but accelerating, earnings growth situations. The Adviser's
universe of potential investments generally comprises companies with market
capitalizations of $500 million or more, but smaller market capitalization
securities may be purchased from time to time. The Portfolio is not restricted
to investments in specific market sectors. The Adviser uses its research
capabilities, analytical resources and judgment to assess economic, industry and
market trends, as well as individual company developments, to select promising
investments for the Portfolio. The Adviser concentrates on companies with
strong, communicative managements and clearly defined strategies for growth. In
addition, the Adviser rigorously assesses earnings results. The Adviser seeks
companies which will deliver surprisingly strong earnings growth. Valuation is
of secondary importance to the Adviser and is viewed in the context of prospects
for sustainable earnings growth and the potential for positive earnings
surprises in relation to consensus expectations. The Portfolio is free to invest
in any equity or equity-linked security that, in the Adviser's judgment,
provides above average potential for capital appreciation.
In selecting investments for the Portfolio, the Adviser emphasizes
individual security selection. Overweighted sector positions and issuer
positions may result from the investment process. The Portfolio has a long-term
investment perspective; however, the Adviser may take advantage of short-term
opportunities that are consistent with the Portfolio's objective by selling
recently purchased securities which have increased in value.
The Portfolio may invest in equity and equity-linked securities of domestic
and foreign corporations. However, the Portfolio does not expect to invest more
than 25% of its total assets at the time of purchase in securities of foreign
companies. The Portfolio may invest in securities of foreign issuers directly or
in the form of Depositary Receipts. The Portfolio may also invest in foreign
currency forward contracts. Investors should recognize that investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies.
ADDITIONAL INVESTMENT INFORMATION
CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES.
The Portfolios may invest in securities such as convertible securities,
preferred stock, warrants or other securities exchangeable under certain
circumstances for shares of common stock. Warrants are instruments giving
holders the right, but not the obligation, to buy shares of a company at a given
price during a specified period.
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<PAGE>
The Aggressive Equity Portfolio may invest in equity-linked securities,
including, among others, PERCS, ELKS or LYONs, which are securities that are
convertible into or the value of which is based upon the value of, equity
securities upon certain terms and conditions. The amount received by an investor
at maturity of such securities is not fixed but is based on the price of the
underlying common stock. It is impossible to predict whether the price of the
underlying common stock will rise or fall. Trading prices of the underlying
common stock will be influenced by the issuer's operational results, by complex,
interrelated political, economic, financial, or other factors affecting the
capital markets, the stock exchanges on which the underlying common stock is
traded and the market segment of which the issuer is a part. In addition, it is
not possible to predict how equity-linked securities will trade in the secondary
market, which is fairly developed and liquid. The market for such securities may
be shallow, however, and high volume trades may be possible only with
discounting. In addition to the foregoing risks, the return on such securities
depends on the creditworthiness of the issuer of the securities, which may be
the issuer of the underlying securities or a third party investment banker or
other lender. The creditworthiness of such third party issuer of equity-linked
securities may, and often does, exceed the creditworthiness of the issuer of the
underlying securities. The advantage of using equity-linked securities over
traditional equity and debt securities is that the former are income producing
vehicles that may provide a higher income than the dividend income on the
underlying equity securities while allowing some participation in the capital
appreciation of the underlying equity securities. Another advantage of using
equity-linked securities is that they may be used for hedging to reduce the risk
of investing in the generally more volatile underlying equity securities.
The following are three examples of equity-linked securities. The Portfolio
may invest in the securities described below or other similar equity-linked
securities.
PERCS. Preferred Equity Redemption Cumulative Stock ("PERCS") technically
is preferred stock with some characteristics of common stock. PERCS are
mandatorily convertible into common stock after a period of time, usually three
years, during which the investors' capital gains are capped, usually at 30%.
Commonly, PERCS may be redeemed by the issuer at any time or if the issuer's
common stock is trading at a specified price level or better. The redemption
price starts at the beginning of the PERCS duration period at a price that is
above the cap by the amount of the extra dividends the PERCS holder is entitled
to receive relative to the common stock over the duration of the PERCS and
declines to the cap price shortly before maturity of the PERCS. In exchange for
having the cap on capital gains and giving the issuer the option to redeem the
PERCS at any time or at the specified common stock price level, the Portfolio
may be compensated with a substantially higher dividend yield than that on the
underlying common stock. Investors, such as the Portfolio, that seek current
income find PERCS attractive because PERCS provide a higher dividend income than
that paid with respect to a company's common stock.
ELKS. Equity-Linked Securities ("ELKS") differ from ordinary debt
securities, in that the principal amount received at maturity is not fixed but
is based on the price of the issuer's common stock. ELKS are debt securities
commonly issued in fully registered form for a term of three years under an
indenture trust. At maturity, the holder of ELKS will be entitled to receive a
principal amount equal to the lesser of a cap amount, commonly in the range of
30% to 55% greater than the current price of the issuer's common stock, or the
average closing price per share of the issuer's common stock, subject to
adjustment as a result of certain dilution events, for the 10 trading days
immediately prior to maturity. Unlike PERCS, ELKS are commonly not subject to
redemption prior to maturity. ELKS usually bear interest during the three-year
term at a substantially higher
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<PAGE>
rate than the dividend yield on the underlying common stock. In exchange for
having the cap on the return that might have been received as capital gains on
the underlying common stock, the Portfolio may be compensated with the higher
yield, contingent on how well the underlying common stock does. Investors, such
as the Portfolio, that seek current income, find ELKS attractive because ELKS
provide a higher dividend income than that paid with respect to a company's
common stock.
LYONS. Liquid Yield Option Notes ("LYONs") differ from ordinary debt
securities, in that the amount received prior to maturity is not fixed but is
based on the price of the issuer's common stock. LYONs are zero-coupon notes
that sell at a large discount from face value. For an investment in LYONs, the
Portfolio will not receive any interest payments until the notes mature,
typically in 15 to 20 years, when the notes are redeemed at face, or par, value.
The yield on LYONs, typically, is lower-than-market rate for debt securities of
the same maturity, due in part to the fact that the LYONs are convertible into
common stock of the issuer at any time at the option of the holder of the LYONs.
Commonly, the LYONs are redeemable by the issuer at any time after an initial
period or if the issuer's common stock is trading at a specified price level or
better or, at the option of the holder, upon certain fixed dates. The redemption
price typically is the purchase price of the LYONs plus accrued original issue
discount to the date of redemption, which amounts to the lower-than-market
yield. The Portfolio will receive only the lower-than-market yield unless the
underlying common stock increases in value at a substantial rate. LYONs are
attractive to investors like the Portfolio when it appears that they will
increase in value due to the rise in value of the underlying common stock.
DEPOSITARY RECEIPTS. The Portfolios may invest in Depositary Receipts,
including American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") and other Depositary Receipts
(which, together with ADRs, GDRs and EDRs, are hereinafter collectively referred
to as "Depositary Receipts"), to the extent that such Depositary Receipts are or
become available. ADRs are securities, typically issued by a U.S. financial
institution (a "depositary"), that evidence ownership interests in a security or
a pool of securities issued by a foreign issuer (the "underlying issuer") and
deposited with the depositary. ADRs include American Depositary Shares and New
York Shares and may be "sponsored" or "unsponsored." Sponsored ADRs are
established jointly by a depositary and the underlying issuer, whereas
unsponsored ADRs may be established by a depositary without participation by the
underlying issuer. The issuers of the stock of unsponsored ADRs are not
obligated to disclose material information in the United States and therefore,
there may not be a correlation between such information and the market value of
the ADR. GDRs, EDRs and other types of Depositary Receipts are typically issued
by foreign depositaries, although they may also be issued by U.S. depositaries,
and evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation. Generally, Depositary Receipts in
registered form are designed for use in the U.S. securities market and
Depositary Receipts in bearer form are designed for use in securities markets
outside the United States. The Portfolios may invest in sponsored and
unsponsored Depositary Receipts. For purposes of the Portfolios' investment
policies, the Portfolios' investments in Depositary Receipts will be deemed to
be investments in the underlying securities.
FOREIGN CURRENCY FORWARD CONTRACTS. Each Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolios
may use such contracts to protect against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells securities, lock in the U.S. dollar value of
dividends and interest on securities held by the Portfolio, and generally to
protect the U.S. dollar
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value of securities held by the Portfolio against exchange rate fluctuation.
While forward contracts may limit losses as a result of exchange rate
fluctuations, they will also limit any gains that might otherwise have been
realized. The Portfolio's Custodian may be required to place cash or liquid
securities in a segregated account in an amount equal to the value of the
Portfolio's total assets committed to the consummation of forward contracts. If
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will be at least equal to the amount of the
Portfolio's commitments with respect to such contracts.
FOREIGN INVESTMENT. The Portfolios may invest in U.S. dollar-denominated
securities of foreign issuers trading in U.S. markets and each Portfolio may
invest in non-U.S. dollar-denominated securities of foreign issuers. Investment
in securities of foreign issuers involves somewhat different investment risks
than those affecting securities of U.S. domestic issuers. There may be limited
publicly available information with respect to foreign issuers, and foreign
issuers are not generally subject to uniform accounting, auditing and financial
standards and requirements comparable to those applicable to U.S. companies.
There may also be less government supervision and regulation of foreign
securities exchanges, brokers and listed companies than in the United States.
Many foreign securities markets have substantially less volume than U.S.
national securities exchanges, and securities of some foreign issuers are less
liquid and more volatile than securities of comparable domestic issuers.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. Dividends and interest
paid by foreign issuers may be subject to withholding and other foreign taxes,
which may decrease the net return on foreign investments as compared to
dividends and interest paid to the Portfolio by domestic companies. It is not
expected that a Portfolio or its shareholders would be able to claim a credit
for U.S. tax purposes with respect to any such foreign taxes. Additional risks
include future political and economic developments, the possibility that a
foreign jurisdiction might impose or change withholding taxes on income payable
with respect to foreign securities, possible seizure, nationalization or
expropriation of the foreign issuer or foreign deposits and the possible
adoption of foreign governmental restrictions such as exchange controls. Also,
it may be more difficult to obtain a judgement in a court outside the United
States.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies and, since the Portfolios may also temporarily hold
uninvested reserves in bank deposits in foreign currencies, the value of the
Portfolios' assets measured in U.S. dollars may be affected favorably or
unfavorably by changes in currency exchange rates and in exchange control
regulations, and the Portfolios may incur costs in connection with conversions
between various currencies.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS.
The Equity Growth and the Aggressive Equity Portfolios may purchase and sell
futures contracts and options on futures contracts, including but not limited to
financial futures, securities index futures, foreign currency exchange futures,
and interest rate futures contracts. Futures contracts provide for the sale by
one party and purchase by another party of a specified amount of a specific
security, instrument or basket thereof, at a specific future date and at a
specified price. An option on a futures contract is a legal contract that gives
the holder the right to buy or sell a specified amount of futures contracts at a
fixed or determinable price upon the exercise of the option.
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<PAGE>
The Portfolios may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or purchase securities
index futures in order to gain market exposure. Subject to applicable laws, the
Portfolios may engage in transactions in securities index futures contracts (and
options thereon) which are traded on a recognized securities or futures
exchange, or may purchase or sell such instruments in the over-the-counter
market. There currently are limited securities index futures and options on such
futures in many countries, particularly emerging countries. The nature of the
strategies adopted by the Adviser, and the extent to which those strategies are
used, may depend on the development of such markets.
The Portfolios may engage in transactions involving foreign currency
exchange futures contracts. Such contracts involve an obligation to purchase or
sell a specific currency at a specified future date and at a specified price.
The Portfolios may engage in such transactions to hedge their respective
holdings and commitments against changes in the level of future currency rates
or to gain exposure to a particular currency.
The Portfolios may engage in transactions in interest rate futures
transactions. Interest rate futures contracts involve an obligation to purchase
or sell a specific debt security, instrument or basket thereof at a specified
future date at a specified price. The value of the contract rises and falls
inversely with changes in interest rates. The Portfolios may engage in such
transactions to hedge their holdings of debt instruments against future changes
in interest rates.
Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies, and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures contracts, the value of financial futures
contracts rises and falls inversely with changes in interest rates. The
Portfolios may engage in financial futures contracts for hedging and non-hedging
purposes.
Under rules adopted by the Commodity Futures Trading Commission, each
Portfolio may enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of such Portfolios'
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to
activities that do not constitute "bona fide" hedging. No Portfolio will enter
into futures contracts to the extent that its outstanding obligations to
purchase securities under such contracts, in combination with its outstanding
obligations with respect to options transactions (including options to purchase
securities or instruments) would exceed 20% of its total assets.
Gains and losses on futures contracts and options thereon depend on the
Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by a Portfolio and the prices of futures and
options relating to investments purchased or sold by the Portfolio, and (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position. The risk that a Portfolio will
be unable to close out a futures position or options contract will be minimized
by only entering into futures contracts or options transactions for which there
appears to be a liquid exchange or secondary market. The risk of loss in trading
on futures contracts in some strategies can be substantial, due both to the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing.
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LOANS OF PORTFOLIO SECURITIES. The Portfolios may lend their securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. A Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of its total assets.
MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money
market instruments, although the Portfolios intend to stay invested in
securities satisfying their primary investment objective to the extent
practical. Each Portfolio may make money market investments pending other
investment or settlement for liquidity, or in adverse market conditions. See
"Temporary Investments." The money market investments permitted for the
Portfolios include obligations of the U.S. Government and its agencies and
instrumentalities; other debt securities; commercial paper; bank obligations;
certificates of deposit (including Eurodollar certificates of deposit); and
repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Equity Growth and Aggressive Equity Portfolios may invest in
securities that are neither listed on a stock exchange nor traded
over-the-counter. Such unlisted equity securities may involve a higher degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Portfolios or less than what may be
considered the fair value of such securities. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration.
As a general matter, a Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Securities that are not registered under the
Securities Act of 1933, as amended, but that can be offered and sold to
qualified institutional buyers under Rule 144A under that Act ("Rule 144A
Securities") will not be included within the foregoing 15% restriction if the
securities are determined to be liquid. The Board of Directors has adopted
guidelines and delegated to the Adviser, subject to the supervision of the Board
of Directors, the daily function of determining and monitoring the liquidity of
Rule 144A Securities. Rule 144A Securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities.
OPTIONS TRANSACTIONS. The Equity Growth and Aggressive Equity Portfolios
may seek to increase their returns or may hedge their portfolio investments
through options transactions with respect to securities, instruments, indices or
baskets thereof in which such Portfolios may invest, as well as with respect to
foreign currency. Purchasing a put option gives a Portfolio the right to sell a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the option. Purchasing a call option
gives a Portfolio the right to purchase a specified security, currency or basket
of securities or currencies at the exercise price until the expiration of the
option. A Portfolio may not purchase call and put options to the extent that the
value of its aggregate investment in options exceeds 5% of its total assets.
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<PAGE>
The Portfolios also may write (i.e., sell) put and call options on
investments held in its portfolio, as well as with respect to foreign currency.
A Portfolio that has written an option receives a premium, which increases the
Portfolio's return on the underlying security or instrument in the event the
option expires unexercised or is closed out at a profit. However, by writing a
call option, a Portfolio will limit its opportunity to profit from an increase
in the market value of the underlying security or instrument above the exercise
price of the option for as long as the Portfolio's obligation as writer of the
option continues. The Portfolios may only write options that are "covered." A
covered call option means that so long as the Portfolio is obligated as the
writer of the option, it will own (i) the underlying security or instrument
subject to the option or (ii) securities or instruments convertible or
exchangeable without the payment of any consideration into the security or
instrument subject to the option.
By writing (or selling) a put option, a Portfolio incurs an obligation to
buy the security or instrument underlying the option from the purchaser of the
put at the option's exercise price at any time during the option period, at the
purchaser's election. Options written by a Portfolio may be exercisable by the
purchaser only on a specific date. A Portfolio that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option.
The Portfolios may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Adviser and
the extent to which those strategies are used will depend on the development of
such option markets. The primary risks associated with the use of options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by a Portfolio and the prices of options relating to
such investments; and (ii) possible lack of a liquid secondary market for an
option.
REPURCHASE AGREEMENTS. The Portfolios may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities, with a market value at least equal to the purchase
price (including accrued interest) as collateral and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolios may not enter into
repurchase agreements with more than seven days to maturity if, as a result,
more than 15% of the market value of the Portfolio's net assets are invested in
these agreements and other investments for which market quotations are not
readily available or which are otherwise illiquid.
SHORT SALES. The Aggressive Equity Portfolio may from time to time sell
securities short consistent with applicable legal requirements. A short sale is
a transaction in which the Portfolio sells securities it either owns or has the
right to acquire at no added cost (i.e., "against the box") or does not own (but
has borrowed) in anticipation of a decline in the market price of the
securities. To deliver the securities to the buyer, the Portfolio arranges
through a broker to borrow the securities and, in so doing, the Portfolio will
become obligated to replace the securities borrowed at their market price at the
time of the replacement, whatever that price may be. When the Portfolio makes a
short sale of borrowed securities, the proceeds it receives from the sale will
be held
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<PAGE>
on behalf of a broker until the Portfolio replaces the borrowed securities. The
Portfolio may have to pay a premium to borrow the securities and must pay any
dividends or interest payable on the securities until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash or other liquid securities. In addition, if the short sale is
not "against the box", the Portfolio will place in a segregated account with the
Custodian an amount of cash or other liquid securities 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 or other liquid securities deposited as
collateral with the broker in connection with the short sale. Short sales by the
Portfolio involves 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 can equal only the total amount invested.
SMALL- AND MEDIUM-SIZED COMPANIES. Because the Emerging Growth Portfolio
seeks long-term capital appreciation by investing primarily in small- to
medium-sized companies, which are types of companies that are more vulnerable to
financial and other risks than larger, more established companies, investments
in this Portfolio may involve a higher degree of risk and price volatility than
the general equity markets. The Aggressive Equity Portfolio may invest in small-
to medium-sized companies to a lesser extent.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, the Portfolios
may reduce their holdings in equity and other securities for temporary defensive
purposes and the Portfolios may invest in certain short-term (less than twelve
months to maturity) and medium-term (not greater than five years to maturity)
debt securities or may hold cash. The short-term and medium-term debt securities
in which the Portfolio may invest consist of (a) obligations of the United
States or foreign country governments, their respective agencies or
instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of United
States or foreign country banks denominated in any currency; (c) floating rate
securities and other instruments denominated in any currency issued by
international development agencies; (d) finance company and corporate commercial
paper and other short-term corporate debt obligations of United States and
foreign country corporations meeting the Portfolio's credit quality standards;
and (e) repurchase agreements with banks and broker-dealers with respect to such
securities. For temporary defensive purposes, the Portfolios intend to invest
only in short-term and medium-term debt securities that the Adviser believes to
be of high quality, i.e., subject to relatively low risk of loss of interest or
principal (there is currently no rating system for debt securities to most
foreign countries).
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolios may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment, but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of
cash or liquid securities in an amount at least equal to these commitments. The
payment obligation and the interest rates that will be received are each fixed
at the time a Portfolio enters into the commitment and no interest accrues to
the Portfolio until settlement. Thus, it is possible that the market value at
the time of settlement could be higher or lower than the
21
<PAGE>
purchase price if the general level of interest rates has changed. It is a
current policy of the Portfolios not to enter into when-issued commitments
exceeding in the aggregate 15% of the Portfolio's net assets other than the
obligations created by these commitments.
INVESTMENT LIMITATIONS
Each of the Equity Growth and Emerging Growth Portfolios is a diversified
investment company and is therefore subject to the following fundamental
limitations: (a) as to 75% of its total assets, a Portfolio may not invest more
than 5% of its total assets in the securities of any one issuer, except
obligations of the U.S. Government and its agencies and instrumentalities, and
(b) a Portfolio may not own more than 10% of the outstanding voting securities
of any one issuer.
The Aggressive Equity Portfolio is a non-diversified portfolio under the
1940 Act, which means that the Portfolio is not limited by the 1940 Act in the
proportion of its assets that may be invested in the obligations of a single
issuer. Thus, the Portfolio may invest a greater proportion of its assets in the
securities of a small number of issuers and as a result will be subject to
greater risk with respect to its portfolio securities. Nevertheless, the
Portfolio intends to comply with more limited diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company.
Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each Portfolio. The Adviser provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each of the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages each of the
Portfolio's investments. Set forth below as an annual percentage of average
daily net assets are the management fees payable to the Adviser quarterly by
each Portfolio pursuant to the terms of the Investment Advisory Agreement. The
fees for the Emerging Growth and Aggressive Equity Portfolios are higher than
most investment companies because each of the Portfolios invest internationally.
The Adviser believes that the fees are comparable to those of other investment
companies that invest internationally. The Adviser has agreed to a reduction in
the fees payable to it and to reimburse the Portfolios, if necessary, if such
fees would cause the total annual operating expenses of the Portfolios to exceed
the maximums set forth below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING
EXPENSES AFTER FEE
WAIVER
------------------------
PORTFOLIO MANAGEMENT FEE CLASS A CLASS B
- --------------------------------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
Equity Growth Portfolio 0.60% 0.80% 1.05%
Emerging Growth Portfolio 1.00% 1.25% 1.50%
Aggressive Equity Portfolio 0.80% 1.00% 1.25%
</TABLE>
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The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. On February 5, 1997, Morgan Stanley Group Inc. and
Dean Witter, Discover & Co. announced that they had entered into an Agreement
and Plan of Merger to form Morgan Stanley, Dean Witter, Discover & Co. Morgan
Stanley Group Inc. is the direct parent of the Adviser and Morgan Stanley.
Subject to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, the Adviser and Morgan Stanley
will be subsidiaries of Morgan Stanley, Dean Witter, Discover & Co. At February
28, 1997, the Adviser, together with its affiliated asset management companies,
had approximately $176.9 billion in assets under management as an investment
manager or as a Named Fiduciary or Fiduciary Adviser. See "Management of the
Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. The following persons have primary responsibility for
managing the Portfolios indicated.
EQUITY GROWTH PORTFOLIO -- KURT FEUERMAN AND MARGARET K. JOHNSON. Kurt
Feuerman joined Morgan Stanley Asset Management in July 1993 as a Managing
Director in the Institutional Equity Group. Previously Mr. Feuerman was a
Managing Director of Morgan Stanley & Co., Incorporated's Research Department,
where he was responsible for emerging growth stocks, gaming and restaurants.
Before joining Morgan Stanley, Mr. Feuerman was a Managing Director of Drexel
Burnham Lambert, where he had been an equity analyst since 1984. Over the years,
he has been highly ranked in the Institutional Investor All American Research
Poll in four separate categories: packaged food, tobacco, emerging growth and
gaming. Mr. Feuerman earned an M.B.A. from Columbia University in 1982, an M.A.
from Syracuse University in 1980, and a B.A. from McGill University in 1977.
Margaret Johnson is a Principal of the Adviser and a Portfolio Manager in the
Institutional Equity Group. She joined the Adviser in 1984 and worked as an
Analyst in the Marketing and Fiduciary Advisor areas. Ms. Johnson became an
Equity Analyst in 1986 and a Portfolio Manager in 1989. Prior to joining Morgan
Stanley, she worked for the New York City PBS affiliate, WNET, Channel 13. She
holds a B.A. degree from Yale College and is a Chartered Financial Analyst. Mr.
Feuerman and Ms. Johnson have had primary responsibility for managing the
Portfolio's assets since July 1993 and April 1991, respectively.
EMERGING GROWTH PORTFOLIO -- KURT A. FEUERMAN, DANIEL R. LASCANO AND
CHRISTOPHER R. BLAIR. Information about Mr. Feuerman is included under the
Equity Growth Portfolio above.
Daniel Lascano is a Vice President of Morgan Stanley Asset Management. He
joined the Firm in 1993 as an equity analyst. Prior to joining the Adviser, Mr.
Lascano worked at Morgan Stanley & Co. as a research assistant to Kurt Feuerman.
Mr. Lascano graduated from the University of California at Berkeley with a B.A.
in Economics and Statistics.
Christopher Blair joined Morgan Stanley Asset Management in 1993 as a
Security Analyst in the Emerging Growth Stock Group. He was elected Vice
President in 1996. Prior to joining the Adviser, he was a Financial Analyst for
two years in Morgan Stanley's Corporate Finance Department, where he focused on
the telecommunications and technology sectors. Mr. Blair graduated with
Distinction from McGill University with a B.A. in Economics and Political
Science. Mr. Feuerman, Mr. Lascano and Mr. Blair have shared primary
responsibility for managing the Portfolio's assets since April 1997.
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<PAGE>
AGGRESSIVE EQUITY PORTFOLIO -- KURT FEUERMAN. Information about Mr.
Feuerman is included under the Equity Growth Portfolio above.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the Officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide the Fund dividend disbursing
and transfer agent services to the Fund. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15% of the average daily net assets of each Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The Officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each Portfolio pursuant to Rule 12b-1 under the 1940 Act (each, a
"Plan"). Under each Plan, the Distributor is entitled to receive from each
Portfolio a distribution fee, which is accrued daily and paid quarterly, of
0.25% of the Class B shares' average daily net assets on an annualized basis.
The Distributor expects to reallocate most of its fee to its investment
representatives. The Distributor may, in its discretion, voluntarily waive from
time to time all or any portion of its distribution fee and each of the
Distributor and the Adviser if free to make additional payments out of its own
assets to promote the sale of Fund shares, including payments that compensate
financial institutions for distribution services or shareholder services.
The Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees, and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
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<PAGE>
PURCHASE OF SHARES
Class A and Class B shares of each Portfolio may be purchased at the net
asset value per share next determined after receipt of the purchase order by the
Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio account opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares of each Portfolio. Certain
advisory or asset allocation accounts, such as Total Funds Management accounts,
managed by Morgan Stanley or its affiliates, including the Adviser ("Managed
Accounts") may purchase Class A shares without being subject to such minimum
initial investment or minimum account size requirements for a Portfolio account.
Employees of the Adviser and certain of its affiliates may purchase Class A
Shares subject to conditions, including a lower minimum initial investment,
established by Officers of the Fund.
If the value of a New Account containing Class A shares falls below $500,000
(but remains at or above $100,000) because of shareholder redemption(s), the
Fund will notify the shareholder, and if the account value remains below
$500,000 (but remains at or above $100,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based solely upon changes in the market that reduce the net asset value of
shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remained Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B Account") converted to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution.
The minimum investment levels may be waived at the discretion of the Adviser
for (i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planners,
financial services firms, or investment advisers that have entered into an
agreement with Morgan Stanley or its affiliates; and (ii) retirement and
deferred compensation plans and trusts used to fund such plans, including, but
not limited to, those defined in Section 401(a), 403(b) or 457 of the Code and
"rabbi trusts." The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days
notice to shareholders.
The Adviser reserves the right in its sole discretion to determine which of
such advisory or asset allocation accounts shall be Managed Accounts. For
information regarding Managed Accounts, please contact your Morgan Stanley
account representative or the Fund at the telephone number provided on the cover
of this Prospectus.
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<PAGE>
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption. The Fund reserves the right
to modify or terminate the involuntary redemption features of the shares as
stated above at any time upon 60-days notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of each Portfolio and $100,000 for Class B shares of each
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio
name]", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The classes of shares of the
Portfolio(s) to be purchased should be designated on the Account Registration
Form. For purchases by check, the Fund is ordinarily credited with Federal
Funds within one business day. Thus, your purchase of shares by check is
ordinarily credited to your account at the net asset value per share of each
of the relevant Portfolios determined on the next business day after receipt.
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2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete the Account Registration Form and mail it to the address shown
thereon.
The purchase price of the Class A and Class B shares of each Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the close of the New York Stock Exchange
("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the
price computed on the date of receipt; an order received after the close of
the NYSE will be executed at the price computed on the next day the NYSE is
open as long as the Transfer Agent receives payment by check or in Federal
Funds prior to the regular close of the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested.
Your bank may charge a service fee for wiring funds.
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ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000 for each portfolio, except for automatic reinvestment of dividends and
capital gains distributions for which there are no minimums) by purchasing
shares at net asset value by mailing a check to the Fund (payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]") at the above address or
by wiring monies to the Custodian Bank as outlined above. It is very important
that your account name, the portfolio name and the class selected be specified
in the letter or wire to assure proper crediting to your account. In order to
ensure that your wire orders are invested promptly, you are requested to notify
one of the Fund's representatives (toll free: 1-800-548-7786) prior to the wire
date. Additional investments will be applied to purchase additional shares in
the same class held by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio(s)
will not be issued. All shares purchased are confirmed to you and credited to
your account on the Fund's books maintained by the Adviser or its agents. You
will have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a Portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolio and the Portfolios' performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of a Portfolio from further purchases of shares of the Fund for an
indefinite period. The Fund considers excessive trading to be more than one
purchase and sale involving shares of the same Portfolio within any 120-day
period. As an example, exchanging shares of Portfolios of the Fund as follows
amounts to excessive trading, exchanging shares of Portfolio A for shares of
Portfolio B, then exchanging shares of Portfolio B for shares of Portfolio C of
the Fund and again exchanging the shares of Portfolio C for shares of Portfolio
B within a 120-day period. Two types of transactions are exempt from these
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excessive trading restrictions: (1) trades exclusively between money market
portfolios, and (2) trades done in connection with an asset allocation service
such as TFM Accounts or accounts managed or advised by the Adviser and/or any of
its affiliates.
INVESTMENT IN FUNDS THROUGH A TOTAL FUNDS MANAGEMENT ("TFM") ACCOUNT
In addition to the considerable diversification among individual securities
you receive by investing in a particular Portfolio, you can further reduce risk
by spreading your assets among several different Portfolios that each have
different risk and return characteristics. TFM is an active investment
management service managed by Morgan Stanley or its affiliates, including Morgan
Stanley Asset Management Inc. (each, a "TFM Adviser"), that allocates your
investments across a combination of either Class A or Class B shares of certain
of the Portfolios selected to meet your long-term investment objectives as well
as, in certain circumstances, your current income objectives.
The TFM Adviser has developed investment strategies for TFM Accounts to meet
the diverse financial needs of different investors. You can open a TFM Account
by meeting with one of the investment professionals of a Participating Dealer
who will review your situation and help you identify your long-term investment
and/or current income objectives. After using TFM criteria to determine your
long-term investment and/or current income objectives, you can choose one of
several TFM investment strategies. Based on your chosen strategy, your initial
investment will be allocated among a number of the Class A or Class B shares of
the Portfolios. Depending on market conditions, the TFM Adviser periodically
reallocates the combination of Portfolios or the percentage amounts invested in
the shares of each Portfolio to implement your TFM investment strategy. In
addition, your TFM Account will be periodically rebalanced to maintain your TFM
strategy's current asset allocation mix, if and when the performance of one or
more of the Portfolios unbalances the strategy's mix. You will pay the TFM
Adviser a fee for the TFM Account service that is in addition to and separate
from the fees and expenses you will pay directly or indirectly as an investor in
the Portfolios. See "Fund Expenses."
From time to time, one or more of the Portfolios used for investment by the
TFM Accounts may experience relatively large investments or redemptions due to
the TFM Account allocations or rebalancings recommended by the TFM Adviser.
These transactions will affect the Portfolios, since Portfolios that experience
redemptions as a result of reallocations or rebalancings may have to sell
portfolio securities and Portfolios that receive additional cash will have to
invest it in additional portfolio securities. While it is impossible to predict
the overall impact of these transactions over time, there could be adverse
effects on portfolio management to the extent that Portfolios may be required to
sell securities or invest cash at times when they would not otherwise do so.
These transactions could also have tax consequences if sales of securities
resulted in gains and could also increase transaction costs. The Adviser,
representing the interests of the Portfolios, is committed to minimizing the
impact of TFM Account transactions on the Portfolios. The Adviser, however, will
have a conflict in fulfilling this responsibility in that it also serves as a
TFM Adviser. In that capacity, the Adviser, representing the interests of the
TFM Accounts, also is committed to minimizing the impact of TFM Account
transactions on the Portfolios to the extent consistent with pursuing the
investment objectives of the TFM Accounts. In addition, an affiliate of the TFM
Adviser, the Distributor is compensated on the sale, and may be compensated for
distribution or shareholder services on the sale of shares of the Portfolios.
See "Purchase of Shares" and "Shareholder Services -- Exchange Features." The
Adviser will monitor the impact of TFM Account transactions on the Portfolios.
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REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares or Class B shares of a Portfolio at the next determined net asset
value of shares of the applicable class. On days that both the NYSE and the
Custodian Bank are open for business, the net asset value per share of each of
the Portfolios is determined at the regular close of trading of the NYSE
(currently 4:00 p.m. Eastern Time). Shares of each Portfolio may be redeemed by
mail or telephone. No charge is made for redemption. Any redemption proceeds may
be more or less than the purchase price of your shares depending on, among other
factors, the market value of the investment securities held by the Portfolios.
BY MAIL
Each Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your request
should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798, except that deliveries by overnight courier
should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global
Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. In times of drastic market conditions, the telephone redemption option
may be difficult to implement. If you experience difficulty in making a
telephone redemption, your request may be made by regular mail or express mail
and it will be implemented at the net asset value next determined after it is
received. Redemption requests sent to the Fund through express mail must be
mailed to the address of the Dividend Disbursing and Transfer Agent listed under
"General Information." The Fund and the Fund's transfer agent (the "Transfer
Agent") will employ reasonable procedures to confirm that the instructions
communicated by telephone are genuine. These procedures include requiring the
investor to provide certain personal identification information at the time an
account is opened and prior to effecting each transaction requested by
telephone. In addition, all telephone transaction requests will be recorded and
investors may be required to provide additional telecopied written
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instructions regarding transaction requests. Neither the Fund nor the Transfer
Agent will be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to be
genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in the Portfolios for shares of any
other available portfolio(s) of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege may be modified or terminated by the Fund at any time
upon 60-days notice to shareholders.
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BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the name(s) of the portfolio(s) and the class(es) of shares into which you
intend to exchange shares, and the signatures of all registered account holders.
Send the exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box
2798, Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current Portfolio, the name(s) of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the
class(es) of the portfolios at the close of business. Requests received after
4:00 p.m. (Eastern Time) are processed the next business day based on the net
asset value determined at the close of business on such day. For additional
information regarding responsibility for the authenticity of telephoned
instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of a Portfolio's shares and may result in involuntary
conversion or redemption of your shares. See "Purchase of Shares" above.
VALUATION OF SHARES
The net asset value per share of a class of shares of each of the Portfolios
is determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such class, less any liabilities attributable
to such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of a
Portfolio. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. 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 a
price within a range not exceeding the current asked price nor less than the
current bid price. The current bid and asked prices are determined based on the
average of the bid and asked prices quoted on such valuation date by reputable
brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices, but take into account institutional-size, trading in similar groups of
securities and any developments related to the
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specific securities. Securities not priced in this manner are valued at the most
recently quoted bid price or, when securities exchange valuations are used, at
the latest quoted sale price on the day of valuation. If there is no such
reported sale, the latest quoted bid price will be used. Securities purchased
with remaining maturities of 60 days or less are valued at amortized cost, if it
approximates market value. In the event that amortized cost does not approximate
market value, market prices as determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine prices in accordance
with the above-stated procedures are determined in good faith at fair value
using methods determined by the Board of Directors. For purposes of calculating
net asset value per share, all assets and liabilities initially expressed in
foreign currencies will be translated into U.S. dollars at the mean of the bid
and asked price of such currencies against the U.S. dollar as quoted by a major
bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE.
Each of the Portfolios may advertise "total return" which shows what an
investment in a class of a Portfolio would have earned over a specified period
of time (such as one, five or ten years), assuming that all distributions and
dividends by the Portfolio were reinvested in the same class on the reinvestment
dates during the period. Total return does not take into account any federal or
state income taxes that may be payable on dividends and distributions or on
redemption. The Fund may also include comparative performance information in
advertising or marketing the Portfolios' shares, including data from Lipper
Analytical Services, Inc., other industry publications, business periodicals,
rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
that, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
may elect to receive income dividends and capital gains distributions in cash.
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The Emerging Growth Portfolio expects to distribute substantially all of its
taxable net investment income in the form of annual dividends and the Equity
Growth and the Aggressive Equity Portfolios expect to distribute substantially
all of their net investment income in the form of quarterly dividends. Net
realized gains for each Portfolio, if any, after reduction for any available tax
loss carryforwards will also be distributed annually.
Undistributed net investment income is included in each Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolios will differ at times.
Expenses of the Portfolios allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
Each Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from a Portfolio's net investment income are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Such dividends paid by a Portfolio will generally qualify for the 70%
dividends-received deduction for corporate shareholders only to the extent of
the aggregate qualifying dividend income received by the Portfolio from U.S.
corporations. Each Portfolio will report annually to its shareholders the amount
of dividend income qualifying for such treatment.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. Each
Portfolio will send reports annually to its shareholders of the federal income
tax status of all distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
loss, including any available capital loss carryforwards), prior to the end of
each calendar year to avoid liability for federal excise tax.
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Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (1) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Application Form, (2) who is subject to backup withholding by the Internal
Revenue Service, or (3) who has not certified to the Fund that such shareholder
is not subject to backup withholding. This backup withholding is not an
additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceeds or is
less than the shareholder's adjusted basis in the sold, exchanged or redeemed
shares. If capital gain distributions have been made with respect to shares that
are sold at a loss after being held for six months or less, however, then the
loss is treated as a long-term capital loss to the extent of the capital gain
distributions.
Conversion of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
Investment income received by a Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that a Portfolio is liable for foreign income taxes so withheld, it is
not expected that a Portfolio or its shareholders would be able to claim a
credit for U.S. tax purposes with respect to any such foreign taxes.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
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PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolios generally do not invest for short-term trading purposes,
however, when circumstances warrant, each Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolios will not consider portfolio turnover rate
a limiting factor in making investment decisions consistent with their
respective objectives and policies. For the fiscal year ended December 31, 1996,
the Equity Growth and Aggressive Equity Portfolios had a portfolio turnover rate
of 186% and 380%, respectively. As portfolio turnover increases, the Portfolios
may expect to pay correspondingly increased brokerage and trading costs. In
addition to transaction costs, higher portfolio turnover may result in the
realization of capital gains. As discussed under "Taxes," to the extent net
short-term capital gains are realized, any distributions resulting from such
gains are considered ordinary income for federal income tax purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 35 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
Portfolio are currently classified into two classes, the Class A shares and the
Class B shares.
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The shares of the Portfolios, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative rights, which means that the holders of more than 50% of the
shares voting for the election of Directors can elect 100% of the Directors if
they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of a Portfolio may be presumed to "control" (as defined in
the 1940 Act) such Portfolio. Under Maryland law, the Fund is not required to
hold an annual meeting of its shareholders unless required to do so under the
1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Commission for the purpose of providing
custodial services for such assets. MSTC may also hold certain domestic assets
for the Fund. For more information on the custodians, see "General Information
- -- Custody Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits the annual financial statements of each Portfolio.
LITIGATION
The Fund is not involved in any litigation.
37
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
EQUITY GROWTH, EMERGING GROWTH
AND AGGRESSIVE EQUITY PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<S> <C> <C>
If you need assistance in filling out this form for the
ACCOUNT INFORMATION Morgan Stanley Institutional Fund, please contact your
Fill in where applicable Morgan Stanley representative or call us toll free
1-800-548-7786. Please print all items except signature, and
mail to the Fund at the address above.
- ---------------------------------------------------------------------------------------------------------------------------------
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
<TABLE>
<S> <C> <C> <C>
1. ----------------------------------------------------------------------------------------------------------------------------
First Name Initial Last Name
2. ----------------------------------------------------------------------------------------------------------------------------
First Name Initial Last Name
-----------------------------------------------------------------------------------------------------------------------------
First Name Initial Last Name
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
/ / TRUST / / OTHER (Specify)
------------------------ ------------------------
</TABLE>
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
/ / United States Citizen / / Resident Alien
Street or P.O. Box
-------------------------------------------------------------------------------
City State Zip
----------------------------- ------------------------------ ---------------
Home Telephone No. Business Telephone No.
-------------------------------- --------------------
/ / Non-Resident Alien:
Permanent Address (Where you reside permanently for tax purposes)
Street Address
-----------------------------------------------------------------------------------
City Country
----------------------------------- -----------------------------------------------
Postal Code
---------------------------
Home Telephone No. Business Telephone No.
-------------------------------- --------------------
Current Mailing Address (If different from Permanent Address)
Street Address
-----------------------------------------------------------------------------------
City Country
----------------------------------- -----------------------------------------------
Postal Code
---------------------------
Home Telephone No. Business Telephone No.
-------------------------------- --------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
C) TAXPAYER
IDENTIFICATION
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor
<TABLE>
<CAPTION>
Enter your Taxpayer Identification Number. For most individual taxpayers, this is your Social Security Number
<S> <C> <C>
1. Taxpayer identification Number ("TIN") OR Social Security Number ("SSN")
-------------------------------------- ------------------------------------
2. TIN OR SSN
-------------------------------------- ------------------------------------
TIN OR SSN
-------------------------------------- ------------------------------------
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your correct TIN(s) or SSN(s). Accounts that have a missing
or incorrect TIN(s) or SSN(s) will be subject to backup withholding at a 31% rate on dividends, distributions and other payments.
If you have not provided us with your correct TIN(s) or SSN(s), you may be subject to a $50 penalty imposed by the Internal
Revenue Service.
Backup withholding is not an additional tax; the tax liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained.
You may be notified that you are subject to backup withholding under Section 3406(a)(1)(C) of the Internal Revenue Code
because you have underreported interest or dividends or you were required to, but failed to, file a return which would have
included a reportable interest or dividend payment.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
D) PORTFOLIO AND For Purchase of the following
CLASS SECTION Portfolio(s):
(Class A shares minimum $500,000 for Equity Growth Portfolio / / Class A Shares $ / / Class B Shares $
each Portfolio and Class B shares Emerging Growth Portfolio / / Class A Shares $ / / Class B Shares $
minimum $100,000 for each Portfolio). Aggressive Equity Portfolio / / Class A Shares $ / / Class B Shares $
Please indicate Portfolio, class and / / Class B Shares $
amount.
Total Initial Investment $
</TABLE>
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
E) METHOD OF
INVESTMENT
Please indicate portfolio, manner of
payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From ----------------------------- --------
-------------------------- ---------------------------- Account No.
Name of Portfolio
/ / Account previously established by: / / Phone exchange / / Wire on ------------------------------ --------
---------- Account No. (Check
Date (Previously assigned by the Fund) Digit)
</TABLE>
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone
AND EXCHANGE requests to wire redemption proceeds to
OPTION the commercial bank indicated at right
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests
shares by telephone. A are believed to be authentic.
SIGNATURE GUARANTEE IS
REQUIRED IF BANK ACCOUNT IS The Fund and the Fund's Transfer Agent
NOT REGISTERED IDENTICALLY TO will employ reasonable procedures to
YOUR FUND ACCOUNT. confirm that instructions communicated
TELEPHONE REQUESTS FOR by telephone are genuine. These
REDEMPTIONS OR EXCHANGE WILL procedures include requiring the
NOT BE HONORED UNLESS THE BOX investor to provide certain personal
IS CHECKED. identification information at the time
an account is opened and prior to
effecting each transaction requested by
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
<CAPTION>
G)
Name of COMMERCIAL Bank (Not Savings Bank)
Bank Account No.
Bank ABA No.
Name(s) in which your Bank Account is Established
Bank's Street Address
City State Zip
</TABLE>
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION ----------------------------------------------
In addition to the account statement Name
sent to my/our registered address, I/we
hereby authorize the Fund to mail ----------------------------------------------
duplicate statements to the name and
address provided at right. ----------------------------------------------
Address
----------------------------------------------
City State Zip Code
</TABLE>
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION ----------------------- ------------------------- ---------------------
Representative Name Representative No. Branch No.
</TABLE>
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
</TABLE>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE
ARE SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE
HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL
SECURITY ADMINISTRATION FOR A TIN OR A SSN AND I/WE
UNDERSTAND THAT IF I/WE DO NOT PROVIDE EITHER NUMBER TO CHASE
GLOBAL FUNDS SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE
DATE OF THIS APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR
CORRECT SSN(S) OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY
AND A 31% BACKUP WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION
PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU
MAY REQUEST SUCH FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
<TABLE>
<S> <C>
Sign Here,
(X) (X)
- --------------------------------------- -----------------------------------------------------
Signature Date Signature (if joint account, both must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 8
Investment Objectives and Policies................ 12
Additional Investment Information................. 14
Investment Limitations............................ 22
Management of the Fund............................ 22
Purchase of Shares................................ 25
Redemption of Shares.............................. 30
Shareholder Services.............................. 31
Valuation of Shares............................... 32
Performance Information........................... 33
Dividends and Capital Gains Distributions......... 33
Taxes............................................. 34
Portfolio Transactions............................ 36
General Information............................... 36
Account Registration Form
</TABLE>
EQUITY GROWTH PORTFOLIO
EMERGING GROWTH PORTFOLIO
AGGRESSIVE EQUITY PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
- ---------------------------------
- ---------------------------------
- ---------------------------------
- ---------------------------------
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
twenty-nine portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the U.S. Real Estate Portfolio (the "Portfolio"). The Class A and Class B shares
currently offered by the Portfolio have different minimum investment
requirements and fund expenses. Shares of the portfolios are offered with no
sales charge, exchange fee or redemption fee, (except that the International
Small Cap Portfolio may impose a transaction fee).
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity,
Technology, U.S Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield and Municipal Bond Portfolios; and (v)
MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional
information about the Fund is contained in a "Statement of Additional
Information" dated May 1, 1997, which is incorporated herein by reference. The
Statement of Additional Information and the prospectuses pertaining to the other
portfolios of the Fund are available upon request and without charge by writing
or calling the Fund at the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the U.S. Real Estate Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A......................................... None
Class B......................................... None
Maximum Sales Load Imposed on Reinvested Dividends
Class A......................................... None
Class B......................................... None
Deferred Sales Load
Class A......................................... None
Class B......................................... None
Redemption Fees
Class A......................................... None
Class B......................................... None
Exchange Fees
Class A......................................... None
Class B......................................... None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- --------------------------------------------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C>
Management Fee (Net of Fee Waiver)*
Class A......................................... 0.65%
Class B......................................... 0.65%
12b-1 Fees
Class A......................................... None
Class B......................................... 0.25%
Other Expenses
Class A......................................... 0.35%
Class B......................................... 0.35%
---------
Total Operating Expenses (Net of Fee Waivers)*
Class A......................................... 1.00%
Class B......................................... 1.25%
---------
---------
</TABLE>
- ------------------------
*The Adviser has agreed to waive its management fees and/or reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolio to exceed a specified percentage of its respective
average daily net assets. Absent the fee waiver, the management fee would be
0.80%. Absent the fee waiver and/or expense reimbursement, the Portfolio's
total operating expenses would be 1.14% of the average daily net assets of the
Class A shares and 1.37% of the average daily net assets of the Class B shares.
As a result of this reduction, the Management Fee stated above is lower than
the contractual fee stated under "Management of the Fund." The Adviser reserves
the right to terminate any of its fee waivers and/or expense reimbursements at
any time in its sole discretion. For further information on Fund expenses, see
"Management of the Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. Expenses and fees are based on actual figures for the period ended
December 31, 1996. Due to the continuous nature of Rule 12b-1 fees, long term
Class B shareholders may pay more than the equivalent of the maximum front-end
sales charges otherwise permitted by the National Association of Securities
Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolio charges
no redemption fees of any kind. The example is based on total operating expenses
of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Real Estate Portfolio
Class A.......................................................... $ 10 $ 32 $ 55 $ 122
Class B.......................................................... 13 40 69 151
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A and Class
B shares of the Portfolio for each of the periods presented. The audited
financial highlights for the Portfolio's shares for each of the periods
presented are part of the Fund's financial statements which appear in the Fund's
December 31, 1996 Annual Report to Shareholders and which are incorporated by
reference in the Fund's Statement of Additional Information. The Portfolio's
financial highlights for each of the periods presented have been audited by
Price Waterhouse LLP, whose unqualified report thereon is also incorporated by
reference in the Statement of Additional Information. Additional performance
information is included in the Annual Report. The Annual Report and the
financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. The following information
should be read in conjunction with the financial statements and notes thereto.
4
<PAGE>
U.S. REAL ESTATE PORTFOLIO
<TABLE>
<CAPTION>
CLASS B
CLASS A ---------
-------------------------- PERIOD
PERIOD FROM
FROM JANUARY
FEBRUARY 2,
24, 1995* 1996***
YEAR ENDED TO TO
DECEMBER DECEMBER DECEMBER
31, 1996 31, 1995 31, 1996
---------- --------- ---------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $11.42 $10.00 $11.50
---------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).................. 0.37 0.26 0.35
Net Realized and Unrealized Gain on
Investments............................... 4.02 1.84 3.92
---------- --------- ---------
Total from Investment Operations......... 4.39 2.10 4.27
---------- --------- ---------
DISTRIBUTIONS
Net Investment Income...................... (0.39) (0.24) (0.37)
Net Realized Gain.......................... (1.01) (0.44) (1.01)
---------- --------- ---------
Total Distributions...................... (1.40) (0.68) (1.38)
---------- --------- ---------
NET ASSET VALUE, END OF PERIOD............... $14.41 $11.42 $14.39
---------- --------- ---------
---------- --------- ---------
TOTAL RETURN................................. 39.56% 21.07% 38.23%
---------- --------- ---------
---------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $210,368 $69,509 $8,734
Ratio of Expenses to Average Net
Assets (1)................................ 1.00% 1.00%** 1.25%**
Ratio of Net Investment Income to Average
Net Assets (1)............................ 3.08% 4.04%** 2.91%**
Portfolio Turnover Rate.................... 171% 158% 171%
Average Commission Rate#................... $0.0568 N/A $0.0568
</TABLE>
- ------------------------------
<TABLE>
<C> <S> <C> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income............................... $0.02 $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets........ 1.14 % 1.33 %** 1.37 %**
Net Investment Income to Average Net
Assets............................... 2.93 % 3.71 %** 2.79 %**
</TABLE>
* Commencement of operations.
** Annualized.
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose the
average commission rate per share it paid for portfolio trades, on which
commisions were charged, during the period.
5
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-nine portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except for the
International Small Cap, Money Market and Municipal Money Market Portfolios,
also offers Class B shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. The investment objective of the
U.S. Real Estate Portfolio is as follows:
- 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.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The investment objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
- The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
- The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
- The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
- The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
- The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
- The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $1 billion.
6
<PAGE>
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
- The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
- The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
- The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of medium and
large capitalization companies.
- The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
- The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
- The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Portfolio's investment adviser, are expected to benefit from their
involvement in technology and technology-related industries.
- The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
- The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
- The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
- The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
- 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 three
highest rating categories of the recognized rating services.
- The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
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- The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal through by investing in
municipal obligations, the interest on which is exempt from federal income
tax.
MONEY MARKET:
- The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
- The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which at February 28, 1997, together with its affiliated
asset management companies, had approximately $176.9 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. The minimum initial investment, generally, is $500,000 for Class A
shares of the Portfolio and $100,000 for the Class B shares of the Portfolio.
The minimum initial investment amount is reduced for certain categories of
investors. For additional information on how to purchase shares and minimum
initial investments, see "Purchase of Shares."
HOW TO REDEEM
Shares of the Portfolio may be redeemed at any time, without cost, at the
net asset value per share of shares of the applicable class next determined
after receipt of the redemption request. The redemption price may be more or
less than the purchase price. Certain redemptions that cause the value of an
account to remain for a continuous 60-day period below the minimum investment
amount for Class A shares or for Class B shares may result in involuntary
redemption or automatic conversion. For additional information on how to redeem
shares and involuntary redemption or conversion, see "Purchase of Shares --
Minimum Account Sizes and Involuntary Redemption of Shares" and "Redemption of
Shares."
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RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. Because the Portfolio
invests primarily in the securities of companies principally engaged in the real
estate industry, its investments may be subject to the risks associated with the
direct ownership of real estate. The Portfolio's share price and investment
return fluctuate, and a shareholder's investment when redeemed may be worth more
or less than his original cost. Because it is expected that the Portfolio will
invest a substantial portion of its assets in real estate investment trusts
("REITs"), the Portfolio may also be subject to certain risks associated with
the direct investments of REITs. The Portfolio may invest in certain
derivatives, including options, futures and options on futures. These
investments entail certain costs and risks, including imperfect correlation
between the value of securities held by the Portfolio and the value of the
particular derivative instrument, and the risk that the Portfolio could not
close out a derivatives position when it would be most advantageous to do so.
Because the Portfolio is a non-diversified portfolio, the Portfolio will invest
a greater proportion of its assets in the securities of a smaller number of
issuers and, as a result, will be subject to a greater risk with respect to its
portfolio securities. Each of these investment strategies involves specific
risks which are described under "Investment Objectives and Policies" herein and
under "Investment Objectives and Policies" in the Statement of Additional
Information.
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio is 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
"REITs." Equity securities include common stocks, shares or units of beneficial
interest of REITs, limited partnership interests in master limited partnerships,
rights or warrants to purchase common stocks, securities convertible into common
stocks, and preferred stock. The Portfolio's investment objective is a
fundamental policy which may not be changed without the approval of a majority
of the Portfolio's outstanding voting securities. There is no assurance that the
Portfolio will attain its objectives. In addition to the investments and
strategies described below, the Portfolio may invest in certain securities and
obligations as set forth in "Additional Investment Information" below. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval.
Under normal circumstances, at least 65% of the Portfolio's total assets
will be invested in income producing equity securities of U.S. and non-U.S.
companies principally engaged in the U.S. real estate industry. For purposes of
the Portfolio's investment policies, a company is "principally engaged" in the
real estate industry if (i) it derives at least 50% of its revenues or profits
from the ownership, construction, management, financing or sale of residential,
commercial or industrial real estate or (ii) it has at least 50% of the fair
market value of its assets invested in residential, commercial or industrial
real estate. Companies in the real estate industry may include among others:
REITs, master limited partnerships that invest in interests in real estate, real
estate operating companies, and companies with substantial real estate holdings,
such as hotel companies, residential builders and land-rich companies. The
Portfolio seeks to invest in equity securities of companies that provide a
dividend yield that exceeds the composite dividend yield of securities
comprising the Standard & Poor's 500 Stock Price Index ("S&P 500").
A substantial portion of the Portfolio's total assets will be invested in
securities of REITs. REITs pool investors' funds for investment primarily in
income producing real estate or real estate related loans or interests. A REIT
is not taxed on income distributed to its shareholders or unitholders if it
complies with regulatory requirements relating to its organization, ownership,
assets and income, and with a regulatory requirement that it distribute to its
shareholders or unitholders at least 95% of its taxable income for each taxable
year. Generally, REITs can be classified as Equity REITs, Mortgage REITs or
Hybrid REITs. Equity REITs invest the majority of their assets directly in real
property and derive their income primarily from rents and capital gains from
appreciation realized through property sales. Equity REITs are further
categorized according to the types of real estate securities they own, e.g.,
apartment properties, retail shopping centers, office and industrial properties,
hotels, health-care facilities, manufactured housing and mixed-property types.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive their income primarily from interest payments. Hybrid REITs combine the
characteristics of both Equity and Mortgage REITs. The Portfolio will invest
primarily in Equity REITs. A shareholder in the Portfolio should realize that by
investing in REITs indirectly through the Portfolio, he will bear not only his
proportionate share of the expenses of the Portfolio, but also indirectly, the
management expenses of underlying REITs.
Under normal circumstances, the Portfolio may invest up to 35% of its total
assets in debt securities issued or guaranteed by real estate companies or
secured by real estate assets and rated, at time of purchase, in one of the four
highest rating categories by a nationally recognized statistical rating
organization ("NRSRO") or determined by the Adviser to be of comparable quality
at the time of purchase, high quality money market
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instruments, such as notes, certificates of deposit or bankers' acceptances
issued by domestic or foreign insures, or high-grade debt securities, consisting
of corporate debt securities and United States Government securities. Securities
rated in the lowest category of investment grade securities have speculative
characteristics. Investment grade securities are securities that are rated in
one of the four highest rating categories by an NRSRO.
Any remaining assets not invested as described above may be invested in
certain securities or obligations, including derivative securities, as set forth
in "Additional Investment Information" below. The Portfolio may concentrate in
the U.S. real estate industry, but may not invest more than 25% of its total
assets in securities of companies in any one other industry (for these purposes
the U.S. Government and its agencies and instrumentalities are not considered an
industry).
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. Because the Portfolio
invests primarily in the securities of companies principally engaged in the real
estate industry, its investments may be subject to the risks associated with the
direct ownership of real estate. These risks include: the cyclical nature of
real estate values, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, demographic trends and variations in rental income, changes
in zoning laws, casualty or condemnation losses, environmental risks, regulatory
limitations on rents, changes in neighborhood values, related party risks,
changes in the appeal of properties to tenants, increases in interest rates and
other real estate capital market influences. Generally, increases in interest
rates will increase the costs of obtaining financing, which could directly and
indirectly decrease the value of the Portfolio's investments. The Portfolio's
share price and investment return fluctuate, and a shareholder's investment when
redeemed may be worth more or less than his original cost.
Because it is expected that the Portfolio will invest a substantial portion
of its assets in REITs, the Portfolio will also be subject to certain risks
associated with the direct investments of REITs. REITs may be affected by
changes in the value of their underlying properties and by defaults by borrowers
or tenants. Mortgage REITs may be affected by the quality of the credit
extended. Furthermore, REITs are dependent on specialized management skills.
Some REITs may have limited diversification and may be subject to risks inherent
in investments in a limited number of properties, in a narrow geographic area,
or in a single property type. REITs depend generally on their ability to
generate cash flow to make distributions to shareholders or unitholders, and may
be subject to defaults by borrowers and to self-liquidations. In addition, the
performance of a REIT may be affected by its failure to qualify for tax-free
pass-through of income under the Internal Revenue Code of 1986, as amended (the
"Code"), or its failure to maintain exemption from registration under the
Investment Company Act of 1940, as amended (the "1940 Act"). Changes in
prevailing interest rates may inversely affect the value of the debt securities
in which the Portfolio will invest. Changes in the value of portfolio securities
will not necessarily affect cash income derived from these securities but will
affect a Portfolio's net asset value.
Because the Portfolio is a non-diversified portfolio, the Portfolio is not
limited by the 1940 Act in the proportion of its assets that may be invested in
the obligations of a single issuer. Thus, the Portfolio may invest a greater
proportion of its assets in the securities of a smaller number of issuers and,
as a result, will be subject to a greater risk with respect to its portfolio
securities. Any economic, political, or regulatory developments affecting the
value of the securities the Portfolio holds could have a greater impact on the
total value of the Portfolio's
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holdings than would be the case if the Portfolio's securities were diversified
among more issuers. The Portfolio, however, intends to comply with the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code") for qualification as a regulated investment company.
ADDITIONAL INVESTMENT INFORMATION
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may
purchase and sell futures contracts and options on futures contracts, including
but not limited to financial futures, securities index futures, foreign currency
exchange futures, and interest rate futures contracts. Futures contracts provide
for the sale by one party and purchase by another party of a specified amount of
a specific security, instrument or basket thereof, at a specific future date and
at a specified price. An option on a futures contract is a legal contract that
gives the holder the right to buy or sell a specified amount of futures
contracts at a fixed or determinable price upon the exercise of the option.
The Portfolio may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or purchase securities
index futures in order to gain market exposure. Subject to applicable laws, the
Portfolio may engage in transactions in securities index futures contracts (and
options thereon) which are traded on a recognized securities or futures
exchange, or may purchase or sell such instruments in the over-the-counter
market. There currently are limited securities index futures and options on such
futures in many countries, particularly emerging countries. The nature of the
strategies adopted by the Adviser, and the extent to which those strategies are
used, may depend on the development of such markets.
The Portfolio may engage in transactions involving foreign currency exchange
futures contracts. Such contracts involve an obligation to purchase or sell a
specific currency at a specified future date and at a specified price. The
Portfolio may engage in such transactions to hedge their respective holdings and
commitments against changes in the level of future currency rates or to gain
exposure to a particular currency.
The Portfolio may engage in transactions in interest rate futures
transactions. Interest rate futures contracts involve an obligation to purchase
or sell a specific debt security, instrument or basket thereof at a specified
future date at a specified price. The value of the contract rises and falls
inversely with changes in interest rates. The Portfolio may engage in such
transactions to hedge their holdings of debt instruments against future changes
in interest rates.
Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies, and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures contracts, the value of financial futures
contracts rises and falls inversely with changes in interest rates. The
Portfolio may engage in financial futures contracts for hedging and non-hedging
purposes.
Under rules adopted by the Commodity Futures Trading Commission, the
Portfolio may enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of the Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to
activities that do not constitute "bona fide" hedging. The
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Portfolio will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under such contracts, in
combination with its outstanding obligations with respect to options
transactions (including options to purchase securities or instruments) would
exceed 20% of its total assets.
Gains and losses on futures contracts and options thereon depend on the
Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by the Portfolio and the prices of futures and
options relating to investments purchased or sold by the Portfolio, and (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position. The risk that the Portfolio
will be unable to close out a futures position or options contract will be
minimized by only entering into futures contracts or options transactions for
which there appears to be a liquid exchange or secondary market. The risk of
loss in trading on futures contracts in some strategies can be substantial, due
both to the low margin deposits required and the extremely high degree of
leverage involved in futures pricing.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend their securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of its total assets.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
The Portfolio may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. The money market
investments permitted for the Portfolio include obligations of the U.S.
Government and its agencies and instrumentalities, other debt securities,
commercial paper, bank obligations including, certificates of deposit, and
repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolio may invest in securities that are neither listed on a
stock exchange nor traded over-the-counter. Such unlisted equity securities may
involve a higher degree of business and financial risk that can result in
substantial losses. As a result of the absence of a public trading market for
these securities, they may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid by
the Portfolio or less than what may be considered the fair value of such
securities. Further, companies whose securities are not publicly traded may not
be subject to the disclosure and other investor protection requirements which
might be applicable if their securities were publicly traded. If such securities
are required to be registered under the securities laws of one or more
jurisdictions before being resold, the Portfolio may be required to bear the
expenses of registration.
As a general matter, the Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Securities that are not registered under the
Securities Act of 1933, as amended (the "1933 Act"), but that can be offered and
sold to qualified institutional buyers under Rule 144A under the 1933 Act ("Rule
144A Securities") will not be included within
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the foregoing 15% restriction if the securities are determined to be liquid. The
Board of Directors has adopted guidelines and delegated to the Adviser, subject
to the supervision of the Board of Directors, the daily function of determining
and monitoring the liquidity of Rule 144A Securities. Rule 144A Securities may
become illiquid if qualified institutional buyers are not interested in
acquiring the securities.
OPTIONS TRANSACTIONS. The Portfolio may seek to increase its return or may
hedge its portfolio investments through options transactions with respect to
securities, instruments, indices or baskets thereof in which the Portfolio may
invest, as well as with respect to foreign currency. Purchasing a put option
gives the Portfolio the right to sell a specified security, currency or basket
of securities or currencies at the exercise price until the expiration of the
option. Purchasing a call option gives the Portfolio the right to purchase a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the option. The Portfolio may not
purchase call and put options to the extent that the value of its aggregate
investment in options exceeds 5% of its total assets.
The Portfolio also may write (i.e., sell) put and call options on
investments held in its portfolio, as well as with respect to foreign currency.
A Portfolio that has written an option receives a premium, which increases the
Portfolio's return on the underlying security or instrument in the event the
option expires unexercised or is closed out at a profit. However, by writing a
call option, the Portfolio will limit its opportunity to profit from an increase
in the market value of the underlying security or instrument above the exercise
price of the option for as long as the Portfolio's obligation as writer of the
option continues. The Portfolio may only write options that are "covered." A
covered call option means that so long as the Portfolio is obligated as the
writer of the option, it will own (i) the underlying security or instrument
subject to the option or (ii) securities or instruments convertible or
exchangeable without the payment of any consideration into the security or
instrument subject to the option.
By writing (or selling) a put option, the Portfolio incurs an obligation to
buy the security or instrument underlying the option from the purchaser of the
put at the option's exercise price at any time during the option period, at the
purchaser's election. Options written by the Portfolio may be exercisable by the
purchaser only on a specific date. A Portfolio that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option.
The Portfolio may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Adviser and
the extent to which those strategies are used will depend on the development of
such option markets. The primary risks associated with the use of options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by the Portfolio and the prices of options relating to
such investments; and (ii) possible lack of a liquid secondary market for an
option.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities, with a market value at least equal to the purchase
price (including accrued interest) as collateral and this value is maintained
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during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolio may not enter into
repurchase agreements with more than seven days to maturity if, as a result,
more than 15% of the market value of the Portfolio's net assets are invested in
these agreements and other investments for which market quotations are not
readily available or which are otherwise illiquid.
TEMPORARY INVESTMENTS. For temporary defensive purposes, when the Adviser
determines that market conditions warrant, the Portfolio may invest up to 100%
of its assets in dollar and non-dollar denominated money market instruments and
short- and medium-term debt securities that the Adviser believes to be of high
quality, or hold cash. The short- and medium-term debt securities in which the
Portfolio may invest consist of (a) obligations of the U.S. or foreign country
governments, their respective agencies or instrumentalities; (b) bank deposits
and bank obligations (including certificates of deposit, time deposits and
bankers' acceptances) of U.S. or foreign country banks denominated in any
currency; (c) floating rate securities and other instruments denominated in any
currency issued by international development agencies; (d) finance company and
corporate commercial paper and other short-term corporate debt obligations of
U.S. and foreign country corporations meeting the Portfolio's credit quality
standards; and (e) repurchase agreements with banks and broker-dealers with
respect to such securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment, but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the Custodian a separate account with a segregated portfolio of
cash or liquid securities in an amount at least equal to these commitments. The
payment obligation and the interest rates that will be received are each fixed
at the time the Portfolio enters into the commitment and no interest accrues to
the Portfolio until settlement. Thus, it is possible that the market value at
the time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. It is a current policy of the
Portfolio not to enter into when-issued commitments exceeding, in the aggregate,
15% of the market value of the Portfolio's total assets less liabilities other
than the obligations created by these commitments.
INVESTMENT LIMITATIONS
As a non-diversified investment company, the Portfolio is not limited by the
1940 Act in the proportion of its total assets that may be invested in the
obligations of a single issuer. Thus, the Portfolio may invest a greater
proportion of its total assets in the securities of a smaller number of issuers
and, as a result, will be subject to greater risk with respect to its portfolio
securities. However, the Portfolio intends to comply with the diversification
requirements imposed by the Code for qualification a regulated investment
company. See "Investment Limitations" in the Statement of Additional
Information.
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The Portfolio operates under certain investment restrictions that are deemed
fundamental limitations and may be changed only with the approval of the holders
of a majority of the Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
limitations, see "Investment Limitations" in the Statement of Additional
Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each portfolio. The Adviser provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the Portfolio's
investments. The Adviser is entitled to receive from the U.S. Real Estate
Portfolio an annual management fee, payable quarterly, equal to 0.80% of the
average daily net assets of the Portfolio.
The fees of the Portfolio are higher than most investment companies', but
the Adviser believes the fee is comparable to those of investment companies with
similar investment policies. The Adviser has agreed to a reduction in the fees
payable to it and to reimburse the Portfolio, if necessary, if such fees would
cause the total annual operating expenses of the Portfolio to exceed 1.00% of
the average daily net assets of the Class A shares of the Portfolio and 1.25% of
the average daily net assets of the Class B shares of the Portfolio.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. On February 5, 1997, Morgan Stanley Group Inc. and
Dean Witter, Discover & Co. announced that they had entered into an Agreement
and Plan of Merger to form Morgan Stanley, Dean Witter, Discover & Co. Morgan
Stanley Group Inc. is the direct parent of the Adviser and Morgan Stanley.
Subject to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, the Adviser and Morgan Stanley
will be subsidiaries of Morgan Stanley, Dean Witter, Discover & Co. At February
28, 1997, the Adviser, together with its affiliated asset management companies,
had approximately $176.9 billion in assets under management as an investment
adviser or as a Named Fiduciary or Fiduciary Adviser. See "Management of the
Fund" in the Statement of Additional Information.
PORTFOLIO MANAGER. -- RUSSELL C. PLATT. Mr. Platt joined Morgan Stanley in
1982 and currently is a Principal of the Firm. Russell Platt has primary
responsibility for managing the real estate securities investment business for
Morgan Stanley Asset Management ("MSAM") and serves as a member of the
Investment Committee of The Morgan Stanley Real Estate Fund ("MSREF").
Previously, Mr. Platt served as a Director of MSREF, where he was involved in
capital raising, acquisitions, oversight of investments and investor relations.
MSREF is a privately held limited partnership engaged in the acquisition of real
estate assets, portfolios and real estate operating companies with gross assets
of approximately $3.5 billion as of December 1994. From 1991 to 1993, Mr. Platt
was head of Morgan Stanley's Transaction Development Group, which was
responsible for identifying and structuring real estate investment opportunities
for the Firm and its clients worldwide. As part of these responsibilities, Mr.
Platt directed Morgan Stanley Realty's activities in Latin America and served as
U.S. liaison for Morgan Stanley Realty's Japanese real estate clients. From 1990
to 1991, Mr. Platt was based in Morgan Stanley Realty's London Office, where he
was responsible for European transaction development. Prior to this,
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he had extensive transaction responsibilities involving portfolio, retail,
office, hotel and apartment sales and financings. Mr. Platt graduated from
Williams College in 1982 with a B.A. in Economics and received his M.B.A. from
Harvard Business School in 1986. Mr. Platt is a member of the Board of Trustees
of The National Multi Housing Council and The Wharton Real Estate Center, and a
member of The Urban Land Institute (International Council), the National
Association of Real Estate Investment Trusts and the Pension Real Estate
Association.
THEODORE R. BIGMAN. Mr. Bigman joined Morgan Stanley Asset Management in
1995 as a Vice President. Together with Russell Platt, he is responsible for
MSAM's real estate securities research. Prior to joining MSAM, he was a Director
at CS First Boston, where he worked for eight years in the Real Estate Group.
Since 1992, Mr. Bigman established and managed the REIT effort at CS First
Boston, including primary responsibility for $2.5 billion of initial public
offering by real estate investment trusts. Previously, Mr. Bigman had extensive
real estate experience in a wide variety of transactions involving the financing
and sale of both individual assets and portfolios of real estate assets as well
as the acquisition and sale of several real estate companies. Mr. Bigman
graduated from Brandeis University in 1983 with a B.A. in Economics and received
his M.B.A. from Harvard University in 1987. He is a member of the National
Association of Real Estate Investment Trusts and International Council of
Shopping Centers.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the Officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of the Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank.
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The Officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Portfolio upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Portfolio.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
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The Fund has adopted a Plan of Distribution with respect to the Class B
shares of the Portfolio pursuant to Rule 12b-1 under the 1940 Act (the "Plan").
Under the Plan, the Distributor is entitled to receive from the Portfolio a
distribution fee, which is accrued daily and paid quarterly, of 0.25% of the
Class B shares' average daily net assets on an annualized basis. The Distributor
expects to reallocate most of its fee to its investment representatives. The
Distributor may, in its discretion, voluntarily waive from time to time all or
any portion of its distribution fee and each of the Distributor and the Adviser
is free to make additional payments out of its own assets to promote the sale of
Fund shares, including payments that compensate financial institutions for
distribution services or shareholder services.
The Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountant's fees, custodial fees, and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of the Portfolio may be purchased at the net
asset value per share next determined after receipt of the purchase order by the
Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio account opened on or after January 2, 1996 (a "New
Account"), the minimum initial investment and minimum account size are $500,000
for Class A shares and $100,000 for Class B shares. Certain advisory or asset
allocation accounts, such as Total Funds Management accounts, managed by Morgan
Stanley or its affiliates, including the Adviser ("Managed Accounts") may
purchase Class A shares without being subject to any minimum initial investment
or minimum account size requirements for a Portfolio account. Employees of the
Adviser and certain of its affiliates may purchase Class A Shares subject to
conditions, including a lower minimum initial investment, established by
Officers of the Fund.
If the value of a New Account, containing Class A shares falls below
$500,000 (but remains at or above $100,000) because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $500,000 (but remains at or above $100,000) for a continuous
60-day period, the Class A shares in such account will convert to Class B shares
and will be subject to the distribution fee and other features applicable to the
Class B shares. The Fund, however, will not convert Class A shares to Class B
shares based solely upon changes in the market that reduce the net asset value
of shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996
Account") were designated Class A shares on January 2, 1996. Shares in a
Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a
"Grandfathered Class A Account") remained Class A shares regardless of account
size thereafter. Except for shares in a Managed Account, shares in a Pre-1996
Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered
Class B account") converted to Class B shares on March 1, 1996. Grandfathered
Class A Accounts and Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
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Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution.
The minimum investment levels may be waived at the discretion of the Adviser
for (i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planners,
financial services firms, or investment advisers that have entered into an
agreement with Morgan Stanley or its affiliates; and (ii) retirement and
deferred compensation plans and trusts used to fund such plans, including, but
not limited to, those defined in Section 401(a), 403(b) or 457 of the Code and
"rabbi trusts". The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days
notice to shareholders.
The Adviser reserves the right in its sole discretion to determine which of
such advisory or asset allocation accounts shall be Managed Accounts. For
information regarding Managed Accounts, please contact your Morgan Stanley
account representative or the Fund at the telephone number provided on the cover
of this Prospectus.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a New Account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $100,000 for a continuous 60-day period, the shares in such
account are subject to redemption by the Fund and, if redeemed, the net asset
value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed
Accounts are not subject to involuntary redemption. The Fund reserves the right
to modify or terminate the involuntary redemption features of the shares as
stated above at any time upon 60-days notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to New Accounts containing Class A shares, as stated above.
The Fund reserves the right to modify or terminate this conversion feature at
any time upon 60-days notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
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1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of the Portfolio and $100,000 for Class B shares of the
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio
name]", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The class(es) of shares of
the Portfolio to be purchased should be designated on the Account Registration
Form. For purchases by check, the Fund is ordinarily credited with Federal
Funds within one business day. Thus, your purchase of shares by check is
ordinarily credited to your account at the net asset value per share of the
relevant Portfolio determined on the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected, and the account number
assigned to you) as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
The purchase price of the Class A and Class B shares of the Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the regular close of the New York Stock
Exchange ("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed
at the price computed on the date of receipt; an order received after the
regular close of the NYSE will be executed at the price computed on the next
day the NYSE is open as long as the Transfer Agent receives payment by check
or in Federal Funds prior to the regular close of the NYSE on such day.
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Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested
and, therefore, will not be earning dividends. Your bank may charge a service
fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000, except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund, Inc. -- [portfolio name]") at the above address or by wiring monies to the
Custodian Bank as outlined above. It is very important that your account name,
the portfolio name and the class selected be specified in the letter or wire to
assure proper crediting to your account. In order to ensure that your wire
orders are invested promptly, you are requested to notify one of the Fund's
representatives (toll free: 1-800-548-7786) prior to the wire date. Additional
investments will be applied to purchase additional shares in the same class held
by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of the Portfolio and raise its expenses. Consequently, in the
interest of all the stockholders of the Portfolio and the Portfolio's
performance, the Fund may in its discretion bar
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<PAGE>
a stockholder that engages in excessive trading of shares of any class of a
portfolio from further purchases of shares of the Fund for an indefinite period.
The Fund considers excessive trading to be more than one purchase and sale
involving shares of the same class of a portfolio of the Fund within any 120-day
period. As an example, exchanging shares of portfolios of the Fund as follows
amounts to excessive trading: exchanging shares of Portfolio A for shares of
Portfolio B, then exchanging shares of Portfolio B for shares of Portfolio C and
again exchanging shares of Portfolio C for shares of Portfolio B within a
120-day period. Two types of transactions are exempt from these excessive
trading restrictions: (1) trades exclusively between money market portfolios;
and (2) trades done in connection with an asset allocation service, such as TFM
Account or accounts managed or advised by the Adviser and/or any of its
affiliates.
INVESTMENT IN FUNDS THROUGH A TOTAL FUNDS MANAGEMENT ("TFM") ACCOUNT
In addition to the considerable diversification among individual securities
you receive by investing in a particular Portfolio, you can further reduce risk
by spreading your assets among several different Portfolios that each have
different risk and return characteristics. TFM is an active investment
management service managed by Morgan Stanley or its affiliates, including Morgan
Stanley Asset Management Inc. (each, a "TFM Adviser"), that allocates your
investments across a combination of either Class A or Class B shares of certain
of the Portfolios selected to meet your long-term investment objectives as well
as, in certain circumstances, your current income objectives.
The TFM Adviser has developed investment strategies for TFM Accounts to meet
the diverse financial needs of different investors. You can open a TFM Account
by meeting with one of the investment professionals of a Participating Dealer
who will review your situation and help you identify your long-term investment
and/or current income objectives. After using TFM criteria to determine your
long-term investment and/or current income objectives, you can choose one of
several TFM investment strategies. Based on your chosen strategy, your initial
investment will be allocated among a number of the Class A or Class B shares of
the Portfolios. Depending on market conditions, the TFM Adviser periodically
reallocates the combination of Portfolios or the percentage amounts invested in
the shares of each Portfolio to implement your TFM investment strategy. In
addition, your TFM Account will be periodically rebalanced to maintain your TFM
strategy's current asset allocation mix, if and when the performance of one or
more of the Portfolios unbalances the strategy's mix. You will pay the TFM
Adviser a fee for the TFM Account service that is in addition to and separate
from the fees and expenses you will pay directly or indirectly as an investor in
the Portfolios. See "Fund Expenses."
From time to time, one or more of the Portfolios used for investment by the
TFM Accounts may experience relatively large investments or redemptions due to
the TFM Account allocations or rebalancings recommended by the TFM Adviser.
These transactions will affect the Portfolios, since Portfolios that experience
redemptions as a result of reallocations or rebalancings may have to sell
portfolio securities and Portfolios that receive additional cash will have to
invest it in additional portfolio securities. While it is impossible to predict
the overall impact of these transactions over time, there could be adverse
effects on portfolio management to the extent that Portfolios may be required to
sell securities or invest cash at times when they would not otherwise do so.
These transactions could also have tax consequences if sales of securities
resulted in gains and could also increase transaction costs. The Adviser,
representing the interests of the Portfolios, is committed to minimizing the
impact of TFM Account transactions on the Portfolios. The Adviser, however, will
have a conflict in fulfilling this responsibility in that it also serves as a
TFM Adviser. In that capacity, the Adviser, representing the interests of the
TFM Accounts, also is committed to minimizing the impact of TFM Account
transactions on the Portfolios to
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the extent consistent with pursuing the investment objectives of the TFM
Accounts. In addition, an affiliate of the TFM Adviser, the Distributor is
compensated on the sale, and may be compensated for distribution or shareholder
services on the sale of shares of the Portfolios. See "Purchase of Shares" and
"Shareholder Services -- Exchange Features." The Adviser will monitor the impact
of TFM Account transactions on the Portfolios.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares or Class B shares of the Portfolio at the next determined net
asset value of shares of the applicable class. On days that both the NYSE and
the Custodian Bank are open for business, the net asset value per share of the
Portfolio is determined at the regular close of trading of the NYSE (currently
4:00 p.m. Eastern time). Shares of the Portfolio may be redeemed by mail or
telephone. No charge is made for redemption. Any redemption may be more or less
than the purchase price of your shares depending on, among other factors, the
market value of the investment securities held by the Portfolio.
BY MAIL
The Portfolio will redeem its Class A or Class B shares at the net asset
value determined on the date the request is received, if the request is received
in "good order" before the regular close of the NYSE. Your request should be
addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston,
Massachusetts 02208-2798, except that deliveries by overnight courier should be
addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global Funds
Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. In times of drastic market conditions, the telephone redemption option
may be difficult to implement. If you experience difficulty in making a
telephone redemption, your request may be made by regular mail or express mail
and it will be implemented at the net asset value next determined after it is
received. Redemption requests sent to the Fund through express mail must be
mailed to the address of the Dividend Disbursing and Transfer
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Agent listed under "General Information." The Fund and the Fund's transfer agent
(the "Transfer Agent") will employ reasonable procedures to confirm that the
instructions communicated by telephone are genuine. These procedures include
requiring the investor to provide certain personal identification information at
the time an account is opened and prior to effecting each transaction requested
by telephone. In addition, all telephone transaction requests will be recorded
and investors may be required to provide additional telecopied written
instructions regarding transaction requests. Neither the Fund nor the Transfer
Agent will be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to be
genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in the Portfolio for shares of any
other available portfolio(s) of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in
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<PAGE>
which you seek to invest. Because an exchange transaction is treated as a
redemption followed by a purchase, an exchange would be considered a taxable
event for shareholders subject to tax. The exchange privilege may be modified or
terminated by the Fund at any time upon 60-days notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the name(s) of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, P.O. Box 2798, Boston,
Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the current portfolio, the names of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the
class(es) of the portfolios involved in the exchange of the shares at the close
of business. Requests received after 4:00 p.m. (Eastern Time) are processed the
next business day based on the net asset value determined at the close of
business on such day. For additional information regarding responsibility for
the authenticity of telephoned instructions, see "Redemption of Shares -- By
Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
Transferring the registration of shares may affect the eligibility of your
account for a given class of the Portfolio's shares and may result in
involuntary conversion or redemption of your shares. See "Purchase of Shares"
above.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. 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 a
price within a range not exceeding the current asked price nor less than the
current bid price. The current bid and asked prices are determined based on the
average of the bid and asked prices quoted on such valuation date by reputable
brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the
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basis of prices provided by a pricing service when such prices are believed to
reflect the fair market value of such securities. The prices provided by a
pricing service are determined without regard to bid or last sale prices, but
take into account institutional-size, trading in similar groups of securities
and any developments related to the specific securities. Securities not priced
in this manner are valued at the most recently quoted bid price or, when
securities exchange valuations are used, at the latest quoted sale price on the
day of valuation. If there is no such reported sale, the latest quoted bid price
will be used. Securities purchased with remaining maturities of 60 days or less
are valued at amortized cost, if it approximates market value. In the event that
amortized cost does not approximate market value, market prices as determined
above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine the prices in
accordance with the above-stated procedures are determined in good faith at fair
value using methods determined by the Board of Directors. For purposes of
calculating net asset value per share, all assets and liabilities initially
expressed in foreign currencies will be translated into U.S. dollars at the mean
of the bid and asked price for such currencies against the U.S. dollar last
quoted by any major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE.
The portfolio may advertise "total return" which shows what an investment in
a class of the Portfolio would have earned over a specified period of time (such
as one, five or ten years), assuming that all distributions and dividends by the
Portfolio were reinvested in the same class on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes that may be payable on dividends and distributions or on redemption. The
Fund may also include comparative performance information in advertising or
marketing the Portfolio's shares, including data from Lipper Analytical
Services, Inc., other industry publications, business periodicals, rating
services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
that, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
may elect to receive income dividends and capital gains distributions in cash.
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The Portfolio expects to distribute substantially all of its taxable net
investment income in the form of quarterly dividends. Net realized capital gains
for the Portfolio, if any, after reduction for any available tax loss
carryforwards will also be distributed annually.
Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. It is the
Portfolio's intent to continue to qualify for the special tax treatment afforded
regulated investment companies under Subchapter M of the Code, so that the
Portfolio will be relieved of federal income tax on that part of its net
investment income and net capital gain that is distributed to shareholders.
The Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, the excess of net short-term
capital gain over net long-term capital loss) to shareholders. Dividends from
the Portfolio's net investment income are taxable to shareholders as ordinary
income, whether received in cash or in additional shares. The Portfolio will
report annually to its shareholders the amount of dividend income qualifying for
the corporate dividend received deduction.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. The
Portfolio will send reports annually to its shareholders of the federal income
tax status of all distributions made during the preceding year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
loss) prior to the end of each calendar year to avoid liability for federal
excise tax.
27
<PAGE>
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (1) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Application Form, (2) who is subject to backup withholding by the Internal
Revenue Service, or (3) who has not certified to the Fund that such shareholder
is not subject to backup withholding. This backup withholding is not an
additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, redemption or exchange of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceed or is
less than the shareholder's adjusted basis in the redeemed, exchanged or sold
shares. Any such taxable gain or loss generally will be treated as long-term
capital gain or loss if the shares have been held for more than one year and
otherwise generally will be treated as short-term capital gain or loss. If
capital gain distributions have been made with respect to shares that are sold
at a loss after being held for six months or less, however, then the loss is
treated as a long-term capital loss to the extent of the capital gain
distributions.
Conversion of shares between classes are not taxable events to the
Shareholder.
Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that the Portfolio is liable for foreign income taxes so withheld, the
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although the
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that the Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
28
<PAGE>
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolio generally does not invest for short-term trading purposes,
however, when circumstances warrant, the Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolio will not consider portfolio turnover rate a
limiting factor in making investment decisions consistent with its respective
objective and policies. For the fiscal year ended December 31, 1996, the U.S.
Real Estate Portfolio had a portfolio turnover rate of 171%. As portfolio
turnover increases, the Portfolio may expect to pay correspondingly increased
brokerage and trading costs. In addition to transaction costs, higher portfolio
turnover may result in the realization of capital gains. As discussed under
"Taxes," to the extent net short-term capital gains are realized, any
distributions resulting from such gains are considered ordinary income for
federal income tax purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 35 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
Portfolio are currently classified into two classes, the Class A shares and the
Class B shares, except for the International Small Cap Portfolio, Money Market
and Municipal Money Market Portfolios which offer only Class A shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no pre-emptive rights. The shares of the Portfolio have
non-cumulative rights, which means that the holders of more than 50% of the
shares voting for the election of Directors can elect 100% of the Directors if
they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of the Portfolio may be presumed to "control" (as defined in
the 1940 Act) the Portfolio. Under Maryland law, the Fund is not required to
hold an annual meeting of its shareholders unless required to do so under the
1940 Act.
29
<PAGE>
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser, or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits the annual financial statements of each portfolio.
LITIGATION
The Fund is not involved in any litigation.
30
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
U.S. REAL ESTATE PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
If you need assistance in filling out this form for the
ACCOUNT INFORMATION Morgan Stanley Institutional Fund, please contact your
Fill in where applicable Morgan Stanley representative or call us toll free
1-800-548-7786. Please print all items except signature, and
mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First
Name Initial Last Name
2.
First
Name Initial Last Name
First
Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien:
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<S> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual taxpayers, this is
IDENTIFICATION your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
<PAGE>
<TABLE>
<S> <S> <C> <C>
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor
1. TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER
NUMBER ("TIN") ("SSN")
2. TIN OR SSN
TIN OR SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your correct
TIN(s) or SSN(s). Accounts that have a missing or incorrect TIN(s) or SSN(s) will
be subject to backup withholding at a 31% rate on dividends, distributions and
other payments. If you have not provided us with your correct TIN(s) or SSN(s),
you may be subject to a $50 penalty imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of persons subject
to backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be obtained.
You may be notified that you are subject to backup withholding under Section
3406(a)(1)(C) of the Internal Revenue Code because you have underreported interest
or dividends or you were required to, but failed to, file a return which would
have included a reportable interest or dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following / / Class A Shares $ / / Class B Shares $
CLASS SECTION Portfolio:
(Class A shares minimum $500,000 for the U.S. Real Estate Portfolio
Portfolio and Class B shares minimum
$100,000 for the Portfolio). Please
indicate class and amount.
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate portfolio, manner of
payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone
AND EXCHANGE requests to wire redemption proceeds to
OPTION the commercial bank indicated at right
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests
shares by telephone. A are believed to be authentic.
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated
YOUR FUND ACCOUNT. by telephone are genuine. These
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal
NOT BE HONORED UNLESS THE BOX identification information at the time
IS CHECKED. an account is opened and prior to
effecting each transaction requested by
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
<CAPTION>
G)
Name of COMMERCIAL Bank (Not Savings Bank)
Bank Account No.
Bank ABA No.
Name(s) in which your Bank Account is Established
Bank's Street Address
City State Zip
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the
account statement sent to
my/our registered Address
address, I/we hereby
authorize the Fund to City State Zip Code
mail duplicate statements
to the name and address
provided at right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative
No. Branch
No.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity to purchase and redeem shares of the Fund and
affirm that I/we have received a current Prospectus of the Morgan Stanley Institutional Fund, Inc. and agree to be bound
by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF PERJURY THAT THE INFORMATION ON THIS APPLICATION IS
COMPLETE AND CORRECT AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE
ARE NOT SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE
HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE ARE SUBJECT TO BACKUP WITHHOLDING AS A
RESULT OF A FAILURE TO REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED ME/US THAT I AM/WE ARE NO
LONGER SUBJECT TO BACKUP WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE
SOCIAL SECURITY ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND THAT IF I/WE DO NOT PROVIDE EITHER NUMBER
TO CHASE GLOBAL FUNDS SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE DATE OF THIS APPLICATION OR IF I/WE FAIL
TO FURNISH MY/OUR CORRECT SSN(S) OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP WITHHOLDING ON
DISTRIBUTIONS AND REDEMPTION PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU MAY REQUEST SUCH
FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S. CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN
PERSONS AS DEFINED BY THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS
REQUIRED TO AVOID BACKUP WITHHOLDING.
(X) (X)
Signature Date Signature (if joint account, both must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 6
Investment Objective and Policies................. 10
Additional Investment Information................. 12
Investment Limitations............................ 15
Management of the Fund............................ 16
Purchase of Shares................................ 18
Redemption of Shares.............................. 23
Shareholder Services.............................. 24
Valuation of Shares............................... 25
Performance Information........................... 26
Dividends and Capital Gains Distributions......... 26
Taxes............................................. 27
Portfolio Transactions............................ 28
General Information............................... 29
Account Registration Form
</TABLE>
U.S. REAL ESTATE PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
U.S. REAL ESTATE PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
If you need assistance in filling out this form for the
ACCOUNT INFORMATION Morgan Stanley Institutional Fund, please contact your
Fill in where applicable Morgan Stanley representative or call us toll free
1-(800)-548-7786. Please print all items except signature,
and mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1. First Name Initial Last Name
------------------ ------ ---------------------
2. First Name Initial Last Name
------------------ ------ ---------------------
First Name Initial Last Name
------------------ ------ ---------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
<S> <C> <C> <C> <C>
Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
/ / TRUST ________________________ / / OTHER (Specify) ________________________
</TABLE>
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>
<TABLE>
<S> <C> <C>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
---------------------------------------------------------
City State Zip
--------------------------- ----------------- ---------------
Home Telephone No. Business Telephone No.
------------- -------------------
/ / Non-Resident Alien:
Permanent Address (Where you reside permanently for tax purposes)
Street Address
-------------------------------------------------------------
City Country
-------------------- ---------------------------
Postal Code
-------------------------
Home Telephone No. Business Telephone No.
------------- -------------------
Current Mailing Address (If different from Permanent Address)
Street Address
-------------------------------------------------------------
City Country
-------------------- ---------------------------
Postal Code
-------------------------
Home Telephone No. Business Telephone No.
------------- -------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual taxpayers, this is
IDENTIFICATION your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account 1. TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER
of a minor (Uniform NUMBER ("TIN") ("SSN")
Gifts/Transfers to Minor
Acts), give the Social ------------------------------------ -----------------------------
Security Number of 2. TIN OR SSN
the minor
------------------------------------ -----------------------------
TIN OR SSN
------------------------------------ -----------------------------
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your correct
TIN(s) or SSN(s). Accounts that have a missing or incorrect TIN(s) or SSN(s) will
be subject to backup withholding at a 31% rate on dividends, distributions and
other payments. If you have not provided us with your correct TIN(s) or SSN(s),
you may be subject to a $50 penalty imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of persons subject
to backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be obtained.
You may be notified that you are subject to backup withholding under Section
3406(a)(1)(C) of the Internal Revenue Code because you have underreported interest
or dividends or you were required to, but failed to, file a return which would
have included a reportable interest or dividend payment.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
D) PORTFOLIO AND For Purchase of the following
CLASS SECTION Portfolio:
(Class A shares minimum $500,000 for the U.S. Real Estate Portfolio / / Class A Shares $
Portfolio and Class B shares minimum ---------------------
$100,000 for the Portfolio). Please / / Class B Shares $
indicate class and amount. ---------------------
Total Initial Investment $
---------------------
</TABLE>
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
E) METHOD OF
INVESTMENT
Please indicate portfolio, manner of
payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From
---------------- -------------------------------- -------------------------- -----
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on
------------- --------------------------- -----
Date Account No. (Check
(Previously assigned by the Fund) Digit)
</TABLE>
<TABLE>
<S> <C> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone
AND EXCHANGE requests to wire redemption proceeds to
OPTION the commercial bank indicated at right
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests
shares by telephone. A are believed to be authentic.
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated
YOUR FUND ACCOUNT. by telephone are genuine. These
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal
NOT BE HONORED UNLESS THE BOX identification information at the time
IS CHECKED. an account is opened and prior to
effecting each transaction requested by
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
<CAPTION>
G)
------------------------------------------ -----------------------
Name of COMMERCIAL Bank (Not Savings Bank) Bank Account No.
-----------------------
Bank ABA No.
-------------------------------------------------------------------------
Name(s) in which your BANK Account is Established
-------------------------------------------------------------------------
Bank's Street Address
-------------------------------------------------------------------------
City State Zip
</TABLE>
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
H) INTERESTED PARTY
OPTION -----------------------------------------------------------------------
Name
In addition to the
account statement sent to -----------------------------------------------------------------------
my/our registered
address, I/we hereby -----------------------------------------------------------------------
authorize the fund to Address
mail duplicate statements
to the name and address
provided at right. ------------------------------------------------------------------------
City State Zip
</TABLE>
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
I) DEALER
INFORMATION
Representative Name Representative No. Branch No.
---------------------- ------------------------- ------------
</TABLE>
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here,
The undersigned certify that I/we have full authority and legal capacity to purchase and redeem shares of the Fund and
affirm that I/we have received a current Prospectus of the Morgan Stanley Institutional Fund, Inc. and agree to be bound
by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF PERJURY THAT THE INFORMATION ON THIS APPLICATION IS
COMPLETE AND CORRECT AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE
ARE NOT SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE
HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE ARE SUBJECT TO BACKUP WITHHOLDING AS A
RESULT OF A FAILURE TO REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED ME/US THAT I AM/WE ARE NO
LONGER SUBJECT TO BACKUP WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE
SOCIAL SECURITY ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND THAT IF I/WE DO NOT PROVIDE EITHER NUMBER
TO CHASE GLOBAL FUNDS SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE DATE OF THIS APPLICATION OR IF I/WE FAIL
TO FURNISH MY/OUR CORRECT SSN(S) OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP WITHHOLDING ON
DISTRIBUTIONS AND REDEMPTION PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU MAY REQUEST SUCH
FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S. CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN
PERSONS AS DEFINED BY THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS
REQUIRED TO AVOID BACKUP WITHHOLDING.
(X) (X)
- ---------------------------------------------------- ------------------------------------------------------------
Signature Date Signature (if joint account, both must sign) Date
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
twenty-nine portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and Class B shares of the
International Magnum Portfolio (the "Portfolio"). The Class A and Class B shares
currently offered by the Portfolio have different minimum investment
requirements and fund expenses. Shares of the portfolios are offered with no
sales charge, exchange fee or redemption fee, (except that the International
Small Cap Portfolio may impose a transaction fee).
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging-Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity,
Technology, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield and Municipal Bond Portfolios; and (v)
MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional
information about the Fund is contained in a "Statement of Additional
Information," dated May 1, 1997, which is incorporated herein by reference. The
Statement of Additional Information and the prospectuses pertaining to the other
portfolios of the Fund are available upon request and without charge by writing
or calling the Fund at the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
the International Magnum Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A................................................................................. None
Class B................................................................................. None
Maximum Sales Load Imposed on Reinvested Dividends
Class A................................................................................. None
Class B................................................................................. None
Deferred Sales Load
Class A................................................................................. None
Class B................................................................................. None
Redemption Fees
Class A................................................................................. None
Class B................................................................................. None
Exchange Fees
Class A................................................................................. None
Class B................................................................................. None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------------------------------------
<S> <C>
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (Net of Fee Waiver)*
Class A................................................................................. 0.26%
Class B................................................................................. 0.26%
12b-1 Fees
Class A................................................................................. None
Class B................................................................................. 0.25%
Other Expenses
Class A................................................................................. 0.74%
Class B................................................................................. 0.74%
-----------
Total Operating Expenses (Net of Fee Waivers)*
Class A................................................................................. 1.00%
Class B................................................................................. 1.25%
-----------
-----------
</TABLE>
- ------------------------
* The Adviser has agreed to waive its management fees and/or to reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolio to exceed a specified percentage of its average
daily net assets. Absent the fee waiver, the management fee would be 0.80%.
Absent the fee waiver and/or expense reimbursement, the Portfolio's total
operating expenses would be 1.54% of the average daily net assets of the Class
A shares and 1.69% of the average daily net assets of the Class B shares. As a
result of this reduction, the Management Fee stated above is lower than the
contractual fee stated under "Management of the Fund." The Adviser reserves
the right to terminate any of its fee waivers and/or expense reimbursements at
any time in its sole discretion. For further information on Fund expenses, see
"Management of the Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. Expenses and fees are based on actual figures for the fiscal year
ended December 31, 1996. Due to the continuous nature of Rule 12b-1 fees, long
term Class B shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by the National Association of
Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolio charges
no redemption fees of any kind. The following example is based on the total
operating expenses of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
International Magnum Portfolio
Class A.......................................................... $ 10 $ 32 $ * $ *
Class B.......................................................... 13 40 * *
</TABLE>
- ------------------------
* Because the Portfolio has recently commenced operations, the Fund has not
projected expenses for the Portfolio beyond the 3-year period shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A and Class
B shares of the Portfolio for each of the periods presented. The audited
financial highlights for the Portfolio's shares for the fiscal period ended
December 31, 1996 are part of the Fund's financial statements which appear in
the Fund's December 31, 1996 Annual Report to Shareholders and which are
incorporated by reference in the Fund's Statement of Additional Information. The
Portfolio's financial highlights for each of the periods presented have been
audited by Price Waterhouse LLP, whose unqualified report thereon is also
incorporated by reference in the Statement of Additional Information. Additional
performance information is included in the Annual Report. The Annual Report and
the financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. The following information
should be read in conjunction with the financial statements and notes thereto.
4
<PAGE>
INTERNATIONAL MAGNUM PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
--------- CLASS B
---------
PERIOD FROM
MARCH 15, 1996* TO
DECEMBER 31, 1996
--------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..................................................... $ 10.00 $ 10.00
--------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).............................................................. 0.06 0.01
Net Realized and Unrealized Gain on Investments........................................ 0.76 0.78
--------- ---------
Total from Investment Operations..................................................... 0.82 0.79
--------- ---------
DISTRIBUTIONS
Net Investment Income.................................................................. (0.13) (0.13)
In Excess of Net Investment Income..................................................... (0.02) (0.02)
Net Realized Gain...................................................................... (0.01) (0.01)
--------- ---------
Total Distributions.................................................................. (0.16) (0.16)
--------- ---------
NET ASSET VALUE, END OF PERIOD........................................................... $ 10.66 $ 10.63
--------- ---------
--------- ---------
TOTAL RETURN............................................................................. 8.25% 7.90%
--------- ---------
--------- ---------
RATIOS AND SUPPLEMENTAL DATA:............................................................
Net Assets, End of Period (Thousands).................................................. $ 85,316 $ 23,173
Ratio of Expenses to Average Net Assets (1)............................................ 1.00%** 1.25%**
Ratio of Net Investment Income to Average Net Assets (1)............................... 0.99%** 0.60%**
Portfolio Turnover Rate................................................................ 18% 18%
Average Commission Rate#............................................................... $0.0211 $0.0211
</TABLE>
- ------------------------
<TABLE>
<C> <S> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income.......................................... $0.03 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets...................................................... 1.54%** 1.69%**
Net Investment Income to Average Net Assets......................................... 0.44%** 0.15%**
</TABLE>
* Commencement of operations.
** Annualized
# For the period ended December 31, 1996, the average commission rate paid in
trades on which commissions were charged was 0.25% of the trade amount.
5
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-nine portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except the International
Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class
B shares. Each portfolio has its own investment objective and policies designed
to meet its specific goals. The investment objective of the Portfolio described
in this Prospectus is as follows:
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
of this Prospectus. The investment objectives of these other portfolios are
listed below.
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $1 billion.
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
6
<PAGE>
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
-The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Portfolio's investment adviser, are expected to benefit from their
involvement in technology and technology-related industries.
-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.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-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 three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
7
<PAGE>
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing primarily in
municipal obligations, the interest on which is exempt from federal income
tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high-quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly-owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at February 28, 1997 had approximately $176.9 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25%, on an
annualized basis, of the Class B shares' average daily net assets. Share
purchases may be made by sending investments directly to the Fund or through the
Distributor. The minimum initial investment, generally, is $500,000 for Class A
shares and $100,000 for Class B shares of the Portfolio. The minimum initial
investment amount is reduced for certain categories of investors. For additional
information on how to purchase shares and minimum initial investments, see
"Purchase of Shares."
HOW TO REDEEM
Shares of the Portfolio may be redeemed at any time, without cost, at the
net asset value per share of shares of the applicable class next determined
after receipt of the redemption request. The redemption price may be more or
less than the purchase price. Certain redemptions that cause the value of an
account to remain for a continuous 60-day period below the minimum investment
amount for Class A or for Class B shares may result in involuntary redemption or
automatic conversion. For additional information on how to redeem shares and
involuntary redemption or conversion, see "Purchase of Shares -- Minimum Account
Sizes and Involuntary Redemption of Shares" and "Redemption of Shares."
8
<PAGE>
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. The Portfolio will invest
in securities of foreign issuers, including issuers in emerging countries, which
are subject to certain risks not typically associated with domestic securities,
including (1) restrictions on foreign investment and on repatriation of capital
invested in foreign countries, (2) currency fluctuations, (3) the cost of
converting foreign currency into U.S. dollars, (4) potential price volatility
and lesser liquidity of shares traded on foreign country securities markets or
lack of a secondary trading market for such securities and (5) political and
economic risks, including the risk of nationalization or expropriation of assets
and the risk of war. In addition, accounting, auditing, financial and other
reporting standards in foreign countries are not equivalent to U.S. standards
and therefore, disclosure of certain material information may not be made and
less information may be available to investors investing in foreign countries
than in the United States. There is also generally less governmental regulation
of the securities industry in foreign countries than in the United States.
Moreover, it may be more difficult to obtain a judgment in a court outside the
United States. The Portfolio may invest in certain derivatives, including
options, futures and options on futures. These investments entail certain costs
and risks, including imperfect correlation between the value of securities held
by the Portfolio and the value of the particular derivative instrument, and the
risk that the Portfolio could not close out a derivatives position when it would
be most advantageous to do so. In addition, the Portfolio may invest illiquid or
restricted securities, investment companies and repurchase agreements, lend its
portfolio securities, purchase securities on a when-issued or delayed delivery
basis and invest in foreign currency forward contracts to hedge currency risk
associated with investment in non-U.S. dollar denominated securities. Each of
these investment strategies involves specific risks which are described under
"Investment Objective and Policies" and "Additional Investment Information."
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio is to provide long-term capital
appreciation. The production of any current income is incidental to this
objective. The Portfolio seeks to achieve its objective by investing primarily
in equity securities of non-U.S. issuers domiciled in the EAFE countries
(defined below). The countries in which the Portfolio will invest are those
comprising the Morgan Stanley Capital International EAFE Index (the "Index"),
which includes Australia, Japan, New Zealand, most nations located in Western
Europe and certain developed countries in Asia, such as Hong Kong and Singapore
(each an "EAFE country," and collectively the "EAFE countries"). At least 65% of
the total assets of the Portfolio will be invested in equity securities of
issuers in at least three different EAFE countries under normal circumstances.
The Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolio will attain its objective.
The Portfolio invests primarily in equity securities, which include common
and preferred stocks, convertible securities and rights and warrants to purchase
common stocks and may be denominated in any currency. In addition to the
investments and strategies described below, the Portfolio may invest in certain
securities and obligations as set forth in "Additional Investment Information"
below and as described under "Investment Objectives and Policies" in the
Statement of Additional Information. The investment policies described below are
not fundamental policies and may be changed without shareholder approval.
By analyzing a variety of macroeconomic and political factors, the Adviser
develops fundamental projections on comparative interest rates, currencies,
corporate profits and economic growth among the various regions represented in
the Index. These projections are used to establish regional allocation
strategies. Within these regional allocations, the Adviser then selects equity
securities among issuers of a region.
The Adviser's approach in selecting among equity securities within EAFE
countries is oriented to individual stock selection and is value driven. The
Adviser identifies those equity securities which it believes to be undervalued
in relation to the issuer's assets, cash flow, earnings and revenues. In
selecting investments, the Adviser utilizes the research of a number of sources,
including Morgan Stanley Capital International, an affiliate of the Adviser
located in Geneva, Switzerland. Portfolio holdings are regularly reviewed and
subjected to fundamental analysis to determine whether they continue to conform
to the Adviser's investment criteria. Equity securities which no longer conform
to such investment criteria are sold.
Although the Portfolio intends to invest primarily in equity securities
listed on stock exchanges in EAFE countries, the Portfolio may invest in equity
securities that are traded over the counter or that are not admitted to listing
on a stock exchange or dealt in a regulated market. As a result of the absence
of a public trading market, such securities may pose liquidity risks. The
Portfolio may also invest in private placements or initial public offerings.
Such investments generally entail short-term liquidity risks. See "Additional
Investment Information -- Non-Publicly Traded Securities, Private Placements and
Restricted Securities."
The Portfolio may invest up to 10% of its total assets in (i) investment
funds with investment objectives similar to that of the Portfolio and (ii) for
temporary purposes, money market funds and pooled investment vehicles. If the
Portfolio invests in other investment funds, stockholders will bear not only
their proportionate share of the expenses of the Portfolio (including operating
expenses and fees of the Adviser), but also will indirectly bear similar
expenses of the underlying investment fund.
10
<PAGE>
Although the Portfolio anticipates being fully invested in equity securities
of EAFE countries, the Portfolio may invest, under normal circumstances for cash
management purposes, up to 35% of its total assets in certain short-term (less
than twelve months to maturity) and medium-term (not greater than five years to
maturity) debt securities or hold cash. In addition, for temporary defensive
purposes during periods in which the Adviser believes changes in economic,
financial or political conditions make it advisable, the Portfolio may invest up
to 100% of its total assets in such short-term and medium-term debt securities
or hold cash as described in "Additional Investment Information -- Debt
Securities and Temporary Investments."
ADDITIONAL INVESTMENT INFORMATION
DEBT SECURITIES AND TEMPORARY INVESTMENTS. The short-term and medium-term
debt securities in which the Portfolio may invest consist of (a) obligations of
governments, agencies or instrumentalities of any member state of the
Organization for Economic Cooperation and Development ("OECD"), including the
United States; (b) bank deposits and bank obligations (including certificates of
deposit, time deposits and bankers' acceptances) of banks organized under the
laws of any member state of the OECD, including the United States, denominated
in any currency; (c) finance company and corporate commercial paper and other
short-term corporate debt obligations of corporations organized under the laws
of any member state of the OECD, including the United States, meeting the
Portfolio's credit quality standards, provided that no more than 20% of the
Portfolio's assets is invested in any one of such issuers. The short-term and
medium-term debt securities in which the Portfolio may invest will be rated
investment grade by recognized rating services such as Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P") (in the
case of Moody's and S&P, meaning rated A or higher by either), or if unrated,
will be determined to be of comparable quality by the Adviser. During periods in
which the Adviser believes changes in economic, financial or political
conditions make it advisable, for temporary defensive purposes the Portfolio may
reduce its holdings in equity and other securities and may invest in certain
short-term (less than twelve months to maturity) and medium-term (not greater
than five years to maturity) debt securities or may hold cash.
FOREIGN CURRENCY FORWARD CONTRACTS. The Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolio may
use such contracts to protect against a decline in a foreign currency against
the U.S. dollar between the trade date and settlement date when the Portfolio
purchases or sells securities, lock in the U.S. dollar value of dividends and
interest on securities held by the Portfolio, and generally to protect the U.S.
dollar value of securities held by the Portfolio against exchange rate
fluctuation. While forward contracts may limit losses as a result of exchange
rate fluctuations, they will also limit any gains that might otherwise have been
realized. The Portfolio's Custodian may be required to place cash or liquid
securities in a segregated account in an amount equal to the value of the
Portfolio's total assets committed to the consummation of forward contracts. If
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will be at least equal to the amount of the
Portfolio's commitments with respect to such contracts.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may
purchase and sell futures contracts and options on futures contracts, including
but not limited to financial futures, securities index futures, foreign currency
exchange futures, and interest rate futures contracts. Futures contracts provide
for the sale by one party and purchase by another party of a specified amount of
a specific security, instrument or basket
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thereof, at a specific future date and at a specified price. An option on a
futures contract is a legal contract that gives the holder the right to buy or
sell a specified amount of futures contracts at a fixed or determinable price
upon the exercise of the option.
The Portfolio may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or purchase securities
index futures in order to gain market exposure. Subject to applicable laws, the
Portfolio may engage in transactions in securities index futures contracts (and
options thereon) which are traded on a recognized securities or futures
exchange, or may purchase or sell such instruments in the over-the-counter
market. There currently are limited securities index futures and options on such
futures in many countries, particularly emerging countries. The nature of the
strategies adopted by the Adviser, and the extent to which those strategies are
used, may depend on the development of such markets.
The Portfolio may engage in transactions involving foreign currency exchange
futures contracts. Such contracts involve an obligation to purchase or sell a
specific currency at a specified future date and at a specified price. The
Portfolio may engage in such transactions to hedge their respective holdings and
commitments against changes in the level of future currency rates or to gain
exposure to a particular currency.
The Portfolio may engage in transactions in interest rate futures
transactions. Interest rate futures contracts involve an obligation to purchase
or sell a specific debt security, instrument or basket thereof at a specified
future date at a specified price. The value of the contract rises and falls
inversely with changes in interest rates. The Portfolio may engage in such
transactions to hedge their holdings of debt instruments against future changes
in interest rates.
Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies, and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures contracts, the value of financial futures
contracts rises and falls inversely with changes in interest rates. The
Portfolio may engage in financial futures contracts for hedging and non-hedging
purposes.
Under rules adopted by the Commodity Futures Trading Commission, the
Portfolio may enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of the Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to
activities that do not constitute "bona fide" hedging. The Portfolio will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under such contracts, in combination with its outstanding
obligations with respect to options transactions (including options to purchase
securities or instruments) would exceed 20% of its total assets.
Gains and losses on futures contracts and options thereon depend on the
Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by the Portfolio and the prices of futures and
options relating to investments purchased or sold by the Portfolio, and (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position. The risk that the Portfolio
will be unable to close out a futures position or options contract will be
minimized by only entering into futures contracts or options transactions for
which there
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appears to be a liquid exchange or secondary market. The risk of loss in trading
on futures contracts in some strategies can be substantial, due both to the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing.
FOREIGN INVESTMENT. The Portfolio may invest in U.S. dollar-denominated
securities of foreign issuers trading in U.S. markets and in non-U.S.
dollar-denominated securities of foreign issuers. Investment in securities of
foreign issuers involves somewhat different investment risks than those
affecting securities of U.S. domestic issuers. There may be limited publicly
available information with respect to foreign issuers, and foreign issuers are
not generally subject to uniform accounting, auditing and financial and other
reporting standards and requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the United
States. Many foreign securities markets have substantially less volume than U.S.
national securities exchanges, and securities of some foreign issuers are less
liquid and more volatile than securities of comparable domestic issuers.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. Dividends and interest
paid by foreign issuers may be subject to withholding and other foreign taxes,
which may decrease the net return on foreign investments as compared to
dividends and interest paid to the Portfolio by domestic companies. It is not
expected that the Portfolio or its shareholders would be able to claim a credit
for U.S. tax purposes with respect to any such foreign taxes. Additional risks
include future political and economic developments, the possibility that a
foreign jurisdiction might impose or change withholding taxes on income payable
with respect to foreign securities, possible seizure, nationalization or
expropriation of the foreign issuer or foreign deposits and the possible
adoption of foreign governmental restrictions such as exchange controls. Many
emerging countries may have less stable political environments than more
developed countries. Also, it may be more difficult to obtain a judgment in a
court outside the United States. Investments in securities of foreign issuers
are frequently denominated in foreign currencies, and the Portfolio may
temporarily hold uninvested reserves in bank deposits in foreign currencies.
Therefore, the value of the Portfolio's assets as measured in U.S. dollars may
be affected favorably or unfavorably by changes in currency rates and in
exchange control regulations, and the Portfolio may incur costs in connection
with conversions between various currencies.
INVESTMENT COMPANIES. Some foreign countries have laws and regulations that
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of companies
listed and traded on the stock exchanges in these countries is sometimes
permitted through investment companies which have been specifically authorized.
The Portfolio may invest in these investment companies subject to the provisions
of the Investment Company Act of 1940, as amended (the "1940 Act"), and other
applicable laws. If the Portfolio invests in such investment companies, the
Portfolio's shareholders will bear not only their proportionate share of the
expenses of the Portfolio (including operating expenses and the fees of the
Adviser), but also will indirectly bear similar expenses of the underlying
investment companies. Certain of these investment companies referred to in the
preceding paragraph are advised by the Adviser. The Portfolio may, to the extent
permitted under the 1940 Act and other applicable law, invest in these
investment companies.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market
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value of the securities loaned plus accrued interest or income. There may be
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. The Portfolio
will not enter into securities loan transactions exceeding in the aggregate
33 1/3% of the market value of the Portfolio's total assets.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
The Portfolio may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. See "Debt Securities
and Temporary Investments." The money market investments permitted for the
Portfolio include obligations of the U.S. Government and its agencies and
instrumentalities; obligations of foreign sovereignties; other debt securities;
commercial paper; bank obligations; certificates of deposit (including
Eurodollar certificates of deposit); and repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolio may invest in securities that are neither listed on a
stock exchange nor traded over-the-counter, including privately placed
securities. Such unlisted equity securities may involve a higher degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Portfolio or less than what may be
considered the fair value of such securities. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration.
As a general matter, the Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Nor as a general matter, may the Portfolio
invest more than 10% of its total assets in securities that are restricted from
sale to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act"). However, the Portfolio may
invest up to 25% of its total assets in liquid Restricted Securities that can be
offered and sold to qualified institutional buyers under Rule 144A under that
Act ("Rule 144A Securities"). The Board of Directors has adopted guidelines and
delegated to the Adviser, subject to the supervision of the Board of Directors,
the daily function of determining and monitoring the liquidity of Rule 144A
securities. Rule 144A securities may become illiquid if qualified institutional
buyers are not interested in acquiring the securities.
OPTIONS TRANSACTIONS. The Portfolio may seek to increase its return or may
hedge its portfolio investments through options transactions with respect to
securities, instruments, indices or baskets thereof in which the Portfolio may
invest, as well as with respect to foreign currency. Purchasing a put option
gives the Portfolio the right to sell a specified security, currency or basket
of securities or currencies at the exercise price until the expiration of the
option. Purchasing a call option gives the Portfolio the right to purchase a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the option. The Portfolio may not
purchase call and put options to the extent that the value of its aggregate
investment in options exceeds 5% of its total assets.
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The Portfolio also may write (i.e., sell) put and call options on
investments held in its portfolio, as well as with respect to foreign currency.
A Portfolio that has written an option receives a premium, which increases the
Portfolio's return on the underlying security or instrument in the event the
option expires unexercised or is closed out at a profit. However, by writing a
call option, the Portfolio will limit its opportunity to profit from an increase
in the market value of the underlying security or instrument above the exercise
price of the option for as long as the Portfolio's obligation as writer of the
option continues. The Portfolio may only write options that are "covered." A
covered call option means that so long as the Portfolio is obligated as the
writer of the option, it will own (i) the underlying security or instrument
subject to the option or (ii) securities or instruments convertible or
exchangeable without the payment of any consideration into the security or
instrument subject to the option.
By writing (or selling) a put option, the Portfolio incurs an obligation to
buy the security or instrument underlying the option from the purchaser of the
put at the option's exercise price at any time during the option period, at the
purchaser's election. Options written by the Portfolio may be exercisable by the
purchaser only on a specific date. A Portfolio that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option.
The Portfolio may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Adviser and
the extent to which those strategies are used will depend on the development of
such option markets. The primary risks associated with the use of options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by the Portfolio and the prices of options relating to
such investments; and (ii) possible lack of a liquid secondary market for an
option.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolio may not enter into
repurchase agreements with more than seven days to maturity if, as a result,
more than 15% of the market value of the Portfolio's net assets would be
invested in such repurchase agreements and in other investments for which market
quotations are not readily available or which are otherwise illiquid.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the custodian a separate account with a segregated portfolio of
cash or liquid securities in an amount at least equal to these commitments. The
payment obligation and the interest rates that will be received
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are each fixed at the time the Portfolio enters into the commitment and no
interest accrues to the Portfolio until settlement. Thus, it is possible that
the market value at the time of settlement could be higher or lower than the
purchase price if, among other factors, the general level of interest rates has
changed. It is a current policy of the Portfolio not to enter into when-issued
commitments exceeding in the aggregate 15% of the market value of the
Portfolio's total assets less liabilities, other than the obligations created by
these commitments.
INVESTMENT LIMITATIONS
The International Magnum Portfolio is a non-diversified investment company
under the 1940 Act, which means that the Portfolio is not limited by the 1940
Act in the proportion of its total assets that may be invested in the
obligations of a single issuer. Thus, the Portfolio may invest a greater
proportion of its total assets in the securities of a smaller number of issuers
and, as a result, will be subject to greater risk with respect to its respective
portfolio securities. Nevertheless, the Portfolio intends to comply with the
more limited diversification requirements imposed by the Internal Revenue Code
of 1986, as amended (the "Code"), for qualification as regulated investment
companies.
The Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares and certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on the fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and the Portfolio. The Adviser provides investment
advice and portfolio management services pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each of the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages each of the
Portfolio's investments. The Adviser is entitled to receive from the
International Magnum Portfolio an annual management fee, payable quarterly,
equal to 0.80% of the average daily net assets of the Portfolio.
The fees of the Portfolio are higher than those of most investment companies
because the Portfolio invests internationally. The Adviser believes that the
fees are comparable to those of other investment companies that invest
internationally. The Adviser has agreed to a reduction in the fees payable to it
and to reimburse the Portfolio, if necessary, if such fees would cause total
annual operating expenses of the Portfolio to exceed 1.00% of the average daily
net assets of the Class A shares of the Portfolio and 1.25% of the average daily
net assets of the Class B shares of the Portfolio.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. On February 5, 1997, Morgan Stanley Group Inc. and
Dean Witter, Discover & Co. announced that they had entered into an Agreement
and Plan of Merger to form Morgan Stanley, Dean Witter, Discover & Co. Morgan
Stanley Group Inc. is the direct parent of the Adviser and Morgan Stanley.
Subject to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, the Adviser and Morgan Stanley
will be subsidiaries of Morgan Stanley, Dean Witter,
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Discover & Co. At February 28, 1997, the Adviser, together with its affiliated
asset management companies, had approximately $176.9 billion in assets under
management as an investment manager or as a Named Fiduciary or Fiduciary
Adviser. See "Management of the Fund" in the Statement of Additional
Information.
PORTFOLIO MANAGER. FRANCINE J. BOVICH. Francine Bovich joined the Adviser
as a Principal in 1993. She is responsible for portfolio management and
communication of the Adviser's asset allocation strategy to institutional
investor clients. Previously, Ms. Bovich was a Principal and Executive Vice
President of Westwood Management Corp. ("Westwood"), a registered investment
adviser. Before joining Westwood, she was a Managing Director of Citicorp
Investment Management, Inc. (now Chancellor Capital Management), where she was
responsible for the Institutional Investment Management group. Ms. Bovich began
her investment career with Banker's Trust Company. She holds a B.A. in Economics
from Connecticut College and an M.B.A. in Finance from New York University.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the Officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of the Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The Officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Portfolio upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Fund.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan,
the Distributor is entitled to receive from the Portfolio a distribution fee,
which is accrued daily and paid quarterly, of 0.25% of the Class B shares'
average daily net assets on an annualized basis. The Distributor expects to
reallocate most of its fee to its investment
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<PAGE>
representatives. The Distributor may, in its discretion, voluntarily waive from
time to time all or any portion of its distribution fee and each of the
Distributor and the Adviser is free to make additional payments out of its own
assets to promote the sale of Fund shares, including payments that compensate
financial institutions for distribution services or shareholder services.
The Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of the Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio account, the minimum initial investment and minimum account
size is $500,000 for Class A shares and $100,000 for Class B shares. Certain
advisory or asset allocation accounts, such as Total Funds Management Accounts,
managed by Morgan Stanley or its affiliates including the Adviser ("Managed
Accounts") may purchase Class A shares without being subject to such minimum
initial investment or minimum account size requirements for a Portfolio account.
Employees of the Adviser and certain of its affiliates may purchase Class A
shares subject to conditions, including a lower minimum investment established
by Officers of the Fund.
If the value of a Portfolio account containing Class A shares falls below
$500,000 (but remains at or above $100,000) because of shareholder
redemption(s), the Fund will notify the shareholder, and if the account value
remains below $500,000 (but remains at or above $100,000) for a continuous
60-day period, the Class A shares in such account will convert to Class B shares
and will be subject to the distribution fee and other features applicable to the
Class B shares. The Fund, however, will not convert Class A shares to Class B
shares based solely upon changes in the market that reduce the net asset value
of shares. Under current tax law, conversions between share classes are not a
taxable event to the shareholder.
Investors may also invest in the Fund by purchasing shares through a trust
department, broker, dealer, agent, financial planner, financial services firm or
investment adviser. An investor may be charged an additional service or
transaction fee by that institution.
The minimum investment levels may be waived at the discretion of the Adviser
for (i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planners,
financial services firms, or investment advisers that have entered into an
agreement with Morgan Stanley or its affiliates; and (ii) retirement and
deferred compensation plans and trusts used to fund such plans, including, but
not limited to, those defined in Section 401(a), 403(b) or 457 of the Code and
"rabbi trusts." The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days
notice to shareholders.
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The Adviser reserves the right in its sole discretion to determine which of
such advisory or asset allocation accounts shall be Managed Accounts. For
information regarding Managed Accounts, please contact your Morgan Stanley
account representative or the Fund at the telephone number provided on the cover
of this Prospectus.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a Portfolio account falls below $100,000 because of
shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains below $100,000 for a continuous 60-day period, the shares
in such account are subject to redemption by the Fund and, if redeemed, the net
asset value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $500,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to Portfolio accounts containing Class A shares, as stated
above. The Fund reserves the right to modify or terminate this conversion
feature at any time upon 60-days notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
Class A shares of the Portfolio and $100,000 for Class B shares of the
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio
name]", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The classes of shares of the
Portfolio to be purchased should be designated on the Account Registration
Form. For purchases by check, the Fund is ordinarily credited with Federal
Funds within one business day. Thus your purchase of shares by check is
ordinarily credited to your account at the net asset value per share of the
Portfolio determined on the next business day after receipt.
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2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund prior
to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
The purchase price of the Class A and Class B shares of the Portfolio is the
net asset value next determined after the order is received. See "Valuation of
Shares." An order received prior to the close of the New York Stock Exchange
("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the
price computed on the date of receipt; an order received after the close of
the NYSE will be executed at the price computed on the next day the NYSE is
open as long as the Transfer Agent receives payment by check or in Federal
Funds prior to the regular close of the NYSE on such day.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested
and, therefore, will not be earning dividends. Your bank may charge a service
fee for wiring funds.
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ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000, except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund, Inc. -- [portfolio name]") at the above address or by wiring monies to the
Custodian Bank as outlined above. It is very important that your account name,
the portfolio name and the class selected be specified in the letter or wire to
assure proper crediting to your account. In order to ensure that your wire
orders are invested promptly, you are requested to notify one of the Fund's
representatives (toll-free 1-800-548-7786) prior to the wire date. Additional
investments will be applied to purchase additional shares in the same class held
by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolio and the Portfolio's performance, the
Fund may in its discretion bar a stockholder that engages in excessive trading
of shares of any class of a portfolio from further purchases of shares of the
Fund for an indefinite period. The Fund considers excessive trading to be more
than one purchase and sale involving shares of the same class of a portfolio of
the Fund within any 120-day period. As an example, exchanging shares of
portfolios of the Fund as follows amounts to excessive trading: exchanging
shares of Portfolio A for shares of Portfolio B, then exchanging shares of
Portfolio B for shares of Portfolio C and again exchanging shares of Portfolio C
for shares of Portfolio B within a 120-day period. Two types of transactions are
21
<PAGE>
exempt from these excessive trading restrictions: (1) trades exclusively between
money market portfolios; and (2) trades done in connection with an asset
allocation service, such as TFM Accounts or accounts managed or advised by the
Adviser and/or any of its affiliates.
INVESTMENT IN FUNDS THROUGH A TOTAL FUNDS MANAGEMENT ("TFM") ACCOUNT
In addition to the considerable diversification among individual securities
you receive by investing in a particular Portfolio, you can further reduce risk
by spreading your assets among several different Portfolios that each have
different risk and return characteristics. TFM is an active investment
management service managed by Morgan Stanley or its affiliates, including Morgan
Stanley Asset Management Inc. (each, a "TFM Adviser"), that allocates your
investments across a combination of either Class A or Class B shares of certain
of the Portfolios selected to meet your long-term investment objectives as well
as, in certain circumstances, your current income objectives.
The TFM Adviser has developed investment strategies for TFM Accounts to meet
the diverse financial needs of different investors. You can open a TFM Account
by meeting with one of the investment professionals of a Participating Dealer
who will review your situation and help you identify your long-term investment
and/or current income objectives. After using TFM criteria to determine your
long-term investment and/or current income objectives, you can choose one of
several TFM investment strategies. Based on your chosen strategy, your initial
investment will be allocated among a number of the Class A or Class B shares of
the Portfolios. Depending on market conditions, the TFM Adviser periodically
reallocates the combination of Portfolios or the percentage amounts invested in
the shares of each Portfolio to implement your TFM investment strategy. In
addition, your TFM Account will be periodically rebalanced to maintain your TFM
strategy's current asset allocation mix, if and when the performance of one or
more of the Portfolios unbalances the strategy's mix. You will pay the TFM
Adviser a fee for the TFM Account service that is in addition to and separate
from the fees and expenses you will pay directly or indirectly as an investor in
the Portfolios. See "Fund Expenses."
From time to time, one or more of the Portfolios used for investment by the
TFM Accounts may experience relatively large investments or redemptions due to
the TFM Account allocations or rebalancings recommended by the TFM Adviser.
These transactions will affect the Portfolios, since Portfolios that experience
redemptions as a result of reallocations or rebalancings may have to sell
portfolio securities and Portfolios that receive additional cash will have to
invest it in additional portfolio securities. While it is impossible to predict
the overall impact of these transactions over time, there could be adverse
effects on portfolio management to the extent that Portfolios may be required to
sell securities or invest cash at times when they would not otherwise do so.
These transactions could also have tax consequences if sales of securities
resulted in gains and could also increase transaction costs. The Adviser,
representing the interests of the Portfolios, is committed to minimizing the
impact of TFM Account transactions on the Portfolios. The Adviser, however, will
have a conflict in fulfilling this responsibility in that it also serves as a
TFM Adviser. In that capacity, the Adviser, representing the interests of the
TFM Accounts, also is committed to minimizing the impact of TFM Account
transactions on the Portfolios to the extent consistent with pursuing the
investment objectives of the TFM Accounts. In addition, an affiliate of the TFM
Adviser, the Distributor is compensated on the sale, and may be compensated for
distribution or shareholder services on the sale of shares of the Portfolios.
See "Purchase of Shares" and "Shareholder Services -- Exchange Features." The
Adviser will monitor the impact of TFM Account transactions on the Portfolios.
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<PAGE>
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
Class A shares or Class B shares of the Portfolio at the next determined net
asset value of shares of the applicable class. On days that both the NYSE and
the Custodian Bank are open for business, the net asset value per share of the
Portfolio is determined at the close of trading of the NYSE (currently 4:00 p.m.
Eastern Time). Shares of the Portfolio may be redeemed by mail or telephone. No
charge is made for redemption. Any redemption proceeds may be more or less than
the purchase price of your shares depending on, among other factors, the market
value of the investment securities held by the Portfolio.
BY MAIL
The Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your request
should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, MA 02208-2798, except that deliveries by overnight courier should be
addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global Funds
Services Company, 73 Tremont Street, Boston, MA 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the
class and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Fund's representatives for further
details. In times of drastic market conditions, the telephone redemption option
may be difficult to implement. If you experience difficulty in making a
telephone redemption, your request may be made by mail or express mail and it
will be implemented at the net asset value next determined after it is received.
Redemption requests sent to the Fund through express mail must be mailed to the
address of the Dividend Disbursing and Transfer Agent listed under "General
Information." The Fund and the Fund's transfer agent (the "Transfer Agent") will
employ reasonable procedures to confirm that the instructions communicated by
telephone are genuine. These procedures include requiring the investor to
provide certain personal identification information at the time an account is
opened and prior to effecting each transaction requested by telephone. In
addition, all telephone transaction requests
23
<PAGE>
will be recorded and investors may be required to provide additional telecopied
written instructions regarding transaction requests. Neither the Fund nor the
Transfer Agent will be responsible for any loss, liability, cost or expense for
following instructions received by telephone that either of them reasonably
believes to be genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in the Portfolio for shares of any
other available portfolio(s) of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in which you seek to invest. Because an
exchange transaction is treated as a redemption followed by a purchase, an
exchange would be considered a taxable event for shareholders subject to tax.
The exchange privilege may be modified or terminated by the Fund at any time
upon 60 days notice to shareholders.
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<PAGE>
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of the Portfolio, the
name(s) of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of your current Portfolio, the names of the portfolio(s) and
class(es) of shares into which you intend to exchange shares, your Social
Security number or Tax I.D. number, and your account address. Requests for
telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at
the close of business that same day based on the net asset value of the class of
the portfolios involved in the exchange of shares at the close of business.
Requests received after 4:00 p.m. are processed the next business day based on
the net asset value determined at the close of business on such day. For
additional information regarding responsibility for the authenticity of
telephoned instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, MA 02208-2798. As in the case of redemptions, the written request must
be received in good order before any transfer can be made. Transferring the
registration of shares may affect the eligibility of your account for a given
class of the Portfolio's shares and may result in involuntary conversion or
redemption of your shares. See "Purchase of Shares" above.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of each class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the close of the NYSE
on each day that the NYSE is open for business. Price information on listed
securities is taken from the exchange where the security is primarily traded.
Securities listed on a U.S. securities exchange for which market quotations are
available are valued at the last quoted sale price on the day the valuation is
made. 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 a price within a
range not exceeding the current asked price nor less than the current bid price.
The current bid and asked prices are determined based on the average of the bid
and asked prices quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices, but take into account institutional size, trading in similar groups of
securities and any developments related to the
25
<PAGE>
specific securities. Securities not priced in this manner are valued at the most
recently quoted bid price or, when securities exchange valuations are used, at
the latest quoted sale price on the day of valuation. If there is no such
reported sale, the latest quoted bid price will be used. Securities purchased
with remaining maturities of 60 days or less are valued at amortized cost, if it
approximates market value. In the event that amortized cost does not approximate
market value, market prices as determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine prices in accordance
with the above-stated procedure are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid and asked
price of such currencies against the U.S. dollar last quoted by any major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE.
"Total return" shows what an investment in a class of the Portfolio would
have earned over a specified period of time (such as one, five or ten years),
assuming that all distributions and dividends by the Portfolio were reinvested
in the same class on the reinvestment dates during the period. Total return does
not take into account any federal or state income taxes that may be payable on
dividends and distributions or on redemption. The Fund may also include
comparative performance information in advertising or marketing the Portfolio's
shares, including data from Lipper Analytical Services, Inc., other industry
publications, business periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares of such class at net asset
value, except that, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder may elect to receive income dividends and capital gains
distributions in cash.
The Portfolio expects to distribute substantially all of its taxable net
investment income in the form of annual dividends. Net realized capital gains,
if any, after reduction for any available tax loss carryforwards will also be
distributed annually.
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<PAGE>
Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
The Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from the Portfolio's net investment income are taxable
to shareholders as ordinary income, whether received in cash or reinvested in
additional shares. Such dividends paid by the Portfolio will generally not
qualify for the 70% dividends-received deduction for corporate shareholders. The
Portfolio will report annually to its shareholders the amount of dividend income
qualifying for such treatment.
Distributions of net capital gain (i.e., net long-term capital gain in
excess of net short-term capital losses) are taxable to shareholders as
long-term capital gain, regardless of how long the shareholder has held the
Portfolio's shares. The Portfolio will send reports annually to shareholders of
the federal income tax status of all distributions made during the preceding
year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
losses, including any available capital loss carryforwards) prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
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The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (1) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Application Form, (2) who is subject to backup withholding by the Internal
Revenue Service, or (3) who has not certified to the Fund that such shareholder
is not subject to backup withholding. This backup withholding is not an
additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceed or are
less than the shareholder's adjusted basis in the sold, exchanged or redeemed
shares. If capital gain distributions have been made with respect to shares that
are sold at a loss after being held for six months or less, then the loss is
treated as a long-term capital loss to the extent of the capital gain
distributions.
Conversion of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that the Portfolio is liable for foreign income taxes so withheld, the
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although the
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that the Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other
28
<PAGE>
remuneration paid to Morgan Stanley or other affiliates must be fair and
reasonable in comparison to those of other broker-dealers for comparable
transactions involving similar securities being purchased or sold during a
comparable time period.
PORTFOLIO TURNOVER
The Portfolio generally does not invest for short-term trading purposes,
however, when circumstances warrant, the Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolio will not consider portfolio turnover rate a
limiting factor in making investment decisions consistent with its respective
objective and policies. As portfolio turnover increases, the Portfolio
necessarily will experience increased transaction costs and additional
realization of capital gains.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 35 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
portfolio are currently classified into two classes, the Class A shares and the
Class B shares, except for the International Small Cap, Money Market and
Municipal Money Market Portfolios which offer only Class A shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no pre-emptive rights. The shares of the Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of the Portfolio may be presumed to "control" (as that term
is defined in the 1940 Act) the Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
29
<PAGE>
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
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<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
INTERNATIONAL MAGNUM PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, please contact your Morgan Stanley representative
or call us toll free 1-800-548-7786. Please print all items except
signature, and mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First Name Initial Last Name
2.
First Name Initial Last Name
First Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien:
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor
OR
1. TAXPAYER IDENTIFICATION SOCIAL SECURITY
NUMBER ("TIN") NUMBER ("SSN")
OR
2. TIN
SSN
OR
TIN
SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your
correct TIN(s) or SSN(s). Accounts that have a missing or incorrect
TIN(s) or SSN(s) will be subject to backup withholding at a 31% rate on
dividends, distributions and other payments. If you have not provided us
with your correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of
persons subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained.
You may be notified that you are subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code because you have
underreported interest or dividends or you were required to, but failed
to, file a return which would have included a reportable interest or
dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following
CLASS SECTION Portfolio: / / Class A Shares $ / / Class B Shares $
(Class A shares minimum $500,000 International Magnum Portfolio
for the Portfolio and Class B
shares minimum $100,000 for the
Portfolio). Please indicate class
and amount.
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate
portfolio, manner of
payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the account
statement sent to my/our registered
address, I/we hereby authorize the Address
Fund to mail duplicate statements
to the name and address provided at City State Zip Code
right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative No. Branch
No.
</TABLE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE ARE
SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE
APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL SECURITY
ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND THAT IF
I/ WE DO NOT PROVIDE EITHER NUMBER TO CHASE GLOBAL FUNDS
SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE DATE OF THIS
APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR CORRECT SSN(S)
OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP
WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION PROCEEDS. (PLEASE
PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU MAY REQUEST SUCH
FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 6
Investment Objective and Policies................. 10
Additional Investment Information................. 11
Investment Limitations............................ 16
Management of the Fund............................ 16
Purchase of Shares................................ 18
Redemption of Shares.............................. 23
Shareholder Services.............................. 24
Valuation of Shares............................... 25
Performance Information........................... 26
Dividends and Capital Gains Distributions......... 26
Taxes............................................. 27
Portfolio Transactions............................ 28
General Information............................... 29
Account Registration Form
</TABLE>
INTERNATIONAL MAGNUM PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and nondiversified investment portfolios ("portfolios").
The Fund is designed to provide clients with attractive alternatives for meeting
their investment needs. The Fund currently consists of twenty-nine portfolios
representing a broad range of investment choices. This prospectus (the
"Prospectus") pertains to the Class A and Class B shares of the Technology
Portfolio (the "Portfolio"). The Class A and Class B shares currently offered by
the Portfolio have different minimum investment requirements and fund expenses.
Shares of the portfolios are offered with no sales charge, exchange fee or
redemption fee, (except that the International Small Cap Portfolio may impose a
transaction fee).
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity,
Global Equity, Gold, International Equity, International Magnum, International
Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY --
Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity,
Technology, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED
INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield and Municipal Bond Portfolios; and (v)
MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional
information about the Fund is contained in a "Statement of Additional
Information," dated May 1, 1997, which is incorporated herein by reference. The
Statement of Additional Information and the prospectuses pertaining to the other
portfolios of the Fund are available upon request and without charge by writing
or calling the Fund at the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
the Technology Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A................................................................................... None
Class B................................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
Class A................................................................................... None
Class B................................................................................... None
Deferred Sales Load
Class A................................................................................... None
Class B................................................................................... None
Redemption Fees
Class A................................................................................... None
Class B................................................................................... None
Exchange Fees
Class A................................................................................... None
Class B................................................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- --------------------------------------------------------------------------------------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C>
Management Fee (Net of Fee Waiver)*
Class A................................................................................... 0.00%
Class B................................................................................... 0.00%
12b-1 Fees
Class A................................................................................... None
Class B................................................................................... 0.25%
Other Expenses
Class A................................................................................... 1.25%
Class B................................................................................... 1.25%
---------
Total Operating Expenses (Net of Fee Waivers or Expense Reimbursements)*
Class A................................................................................... 1.25%
Class B................................................................................... 1.50%
---------
---------
</TABLE>
- --------------
*The Adviser has agreed to waive its management fees and/or reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolio to exceed a specified percentage of its respective
average daily net assets. Absent the fee waiver, the management fee would be
1.00%. Absent the fee waivers and/or expense reimbursements, the Portfolio's
total operating expenses would be 8.51% of the average daily net assets of the
Class A shares and 9.14% of the average daily net assets of the Class B shares.
As a result of this reduction, the Management Fee stated above is lower than
the contractual fee stated under "Management of the Fund." The Adviser reserves
the right to terminate any of its fee waivers and/or expense reimbursements at
any time in its sole discretion. For further information on Portfolio expenses,
see "Management of the Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. Expenses and fees for the Portfolio are based on actual figures for
the fiscal period ended December 31, 1996. Due to the continuous nature of Rule
12b-1 fees, long term Class B shareholders may pay more than the equivalent of
the maximum front-end sales charges otherwise permitted by the National
Association of Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolio charges
no redemption fees of any kind. The following example is based on the total
operating expenses of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Technology Portfolio
Class A........................................................ $ 13 $ 40 $ * $ *
Class B........................................................ 15 47 * *
</TABLE>
- ------------------
*Because the Portfolio is new, the Fund has not projected expenses for the
Portfolio beyond the 3-year period shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. THE PORTFOLIO IS NEW AND ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A and Class
B shares for the Technology Portfolio. The audited financial highlights for the
Portfolio's shares for the fiscal period ended December 31, 1996 are included in
the Fund's financial statements which appear in the Fund's December 31, 1996
Annual Report to Shareholders and which are incorporated by reference in the
Fund's Statement of Additional Information. The Portfolio's financial highlights
have been audited by Price Waterhouse LLP, whose unqualified report thereon is
also incorporated by reference in the Statement of Additional Information.
Additional information is included in the Annual Report. The Annual Report and
the financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. The following information
should be read in conjunction with the financial statements and notes thereto.
4
<PAGE>
THE TECHNOLOGY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
------------- -------------
PERIOD FROM PERIOD FROM
SEPTEMBER 16, SEPTEMBER 16,
1996* TO 1996* TO
DECEMBER 31, DECEMBER 31,
1996 1996
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................................................ $ 10.00 $ 10.00
------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)......................................................... (0.02) (0.02)
Net Realized and Unrealized Gain on Investments................................... 0.73 0.73
------------- -------------
Total from Investment Operations................................................ 0.71 0.71
------------- -------------
NET ASSET VALUE, END OF PERIOD...................................................... $ 10.71 $ 10.71
------------- -------------
------------- -------------
TOTAL RETURN........................................................................ 7.10% 7.10%
------------- -------------
------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)............................................. $ 3,595 $ 1,487
Ratio of Expenses to Average Net Assets (1)....................................... 1.25%** 1.50%**
Ratio of Net Investment Income to Average Net Assets (1).......................... (0.70)%** (1.00)%**
Portfolio Turnover Rate........................................................... 77% 77%
Average Commission Rate........................................................... $ 0.0374 $ 0.0374
- ------------------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income..................................... $0.22 $0.19
Ratios before expense limitation:
Expenses to Average Net Assets................................................. 8.51%** 9.14%**
Net Investment Income to Average Net Assets (7.96)%** (8.65)%**
</TABLE>
* Commencement of operations.
** Annualized
5
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-nine portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and, except for the
International Small Cap, Money Market and Municipal Money Market Portfolios,
also offers Class B shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. This Prospectus pertains to the
Class A and Class B shares of the Technology Portfolio, the investment objective
of which is as follows:
-The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Portfolio's investment adviser, are expected to benefit from their
involvement in technology and technology-related industries.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
of this Prospectus. The investment objectives of these other portfolios are
listed below.
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $1 billion.
6
<PAGE>
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized
companies.
-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.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed
income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-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 three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
7
<PAGE>
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing primarily in
municipal obligations, the interest on which is exempt from federal income
tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly-owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at February 28, 1997 had approximately $176.9 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. The minimum initial investment, generally, is $250,000 for Class A
shares of the Portfolio and $50,000 for Class B shares of the Portfolio. The
minimum initial investment amount is reduced for certain categories of
investors. For additional information on how to purchase shares and minimum
initial investments, see "Purchase of Shares."
HOW TO REDEEM
Shares of the Portfolio may be redeemed at any time, without cost, at the
net asset value per share of shares of the applicable class next determined
after receipt of the redemption request. The redemption price may be more or
less than the purchase price. Certain redemptions that cause the value of an
account to remain for a continuous 60-day period below the minimum investment
amount for Class A shares or for Class B shares may result in involuntary
redemption or automatic conversion. For additional information on how to redeem
shares and involuntary redemption or conversion, see "Purchase of Shares --
Minimum Account Sizes and Involuntary Redemption of Shares" and "Redemption of
Shares."
8
<PAGE>
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. In particular, the
Portfolio's concentration in technology securities presents special risk
considerations. For example, the value of the Portfolio's shares may be
susceptible to factors affecting technology and technology-related industries
and to greater risk and market fluctuation than an investment in a portfolio
that invests in a broader range of portfolio securities. In certain instances,
technology companies may experience dramatic price movements precipitated by
investors' excessive optimism or pessimism with little or no basis in
fundamental economic conditions. Technology and technology-related industries
may produce or use products or services that prove commercially unsuccessful,
become obsolete quickly or become adversely affected by U.S. or foreign
government regulation. Additionally, these companies may be subject to risks of
developing technologies, competitive pressure and other factors and may be
dependent upon consumer and business acceptance as new technologies evolve. The
Portfolio will invest in securities of foreign issuers, including issuers in
emerging countries, which are subject to certain risks not typically associated
with domestic securities, including (1) restrictions on foreign investment and
on repatriation of capital invested in foreign countries, (2) currency
fluctuations, (3) the cost of converting foreign currency into U.S. dollars, (4)
potential price volatility and lesser liquidity of shares traded on foreign
country securities markets or lack of a secondary trading market for such
securities and (5) political and economic risks, including the risk of
nationalization of expropriation of assets and the risk of war. In addition,
accounting, auditing, financial and other reporting standards in foreign
countries are not equivalent to U.S. standards and therefore, disclosure of
certain material information may not be made and less information may be
available to investors investing in foreign countries than in the United States.
There is also generally less governmental regulation of the securities industry
in foreign countries than the United States. Moreover, it may be more difficult
to obtain a judgment in a court outside the United States. The Portfolio may
invest in certain derivatives, including options, futures and options on
futures. These investments entail certain costs and risks, including imperfect
correlation between the value of securities held by the Portfolio and the value
of the particular derivative instrument, and the risk that the Portfolio could
not close out a derivatives position when it would be most advantageous to do
so. In addition, the Portfolio may engage in short sales, purchase securities on
a when-issued or delayed delivery basis and invest in foreign currency forward
contracts to hedge currency risk associated with investment in non-U.S. dollar
denominated securities. Each of these investment strategies involves specific
risks which are described under "Investment Objective and Policies" and
"Additional Investment Information."
9
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio is to provide long-term capital
appreciation. The production of any current income is incidental to this
objective. The Portfolio seeks to achieve its objective by investing primarily
in equity securities of companies that, in the opinion of the Adviser, are
expected to benefit from their investment in technology and technology related
industries. At least 65% of the total assets of the Portfolio will be invested
in the equity securities of such "technology" companies under normal
circumstances. The Portfolio expects to invest in companies in a broad range of
technology and technology related industries including, but not limited to:
computers, software and peripheral products; electronics; communications
equipment and services; entertainment; multimedia; and information services.
With respect to the Portfolio, equity securities include common and preferred
stocks, convertible securities, rights and warrants to purchase common stocks,
and any similar equity interests, such as trust or partnership interests. Such
equity securities may or may not pay dividends or distributions and may or may
not carry voting rights. The Portfolio's investment objective is a fundamental
policy which may not be changed without the approval of a majority of the
Portfolio's outstanding voting securities. There is no assurance that the
Portfolio will attain its objectives. Other investment policies described below
are not fundamental policies and may be changed without shareholder approval. In
addition to the investments and strategies described below, the Portfolio may
invest in certain securities and obligations as set forth in "Additional
Investment Information" below and as described under "Investment Objectives and
Policies" in the Statement of Additional Information.
The Portfolio may invest up to 35% of its total assets in the equity or debt
securities of foreign issuers to permit the Portfolio to participate
sufficiently in the global technology market. The Portfolio may invest in
Depositary Receipts, including American Depositary Receipts, Global Depositary
Receipts or similar securities that are convertible into securities of foreign
issuers and that evidence ownership of the underlying foreign security.
Depositary Receipts may not be denominated in the same currency as the
underlying securities into which they may be converted. In the event that
Depositary Receipts are not available for a particular security, the Portfolio
may invest directly in that security, which may or may not be listed on a
foreign exchange. The securities in which the Portfolio may invest may be
denominated in any currency. The Portfolio may enter into foreign currency
forward contracts in connection with the settlement of foreign securities
transactions or to hedge the underlying currency exposure related to foreign
investments. The Portfolio will not enter into these commitments for speculative
purposes. Investors should recognize that investing in foreign companies
involves certain special considerations that are not typically associated with
investing in U.S. companies.
The Portfolio may invest in the equity securities of both large and small
companies. While the Adviser believes that smaller companies can provide greater
growth potential than larger, more established firms, investing in the
securities of smaller companies also involves greater risk and portfolio price
volatility. Among the reasons for this greater price volatility are the lower
degree of market liquidity (the securities of companies with small stock market
capitalizations may trade less frequently and in limited volume) and the greater
sensitivity of small companies to changing economic conditions.
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ADDITIONAL INVESTMENT INFORMATION
CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES. The
Portfolio may invest in securities such as convertible securities, preferred
stock, warrants or other securities exchangeable under certain circumstances for
shares of common stock. Warrants are instruments giving holders the right, but
not the obligation, to buy shares of a company at a given price during a
specified period.
The Portfolio may invest in equity-linked securities, which are securities
that are convertible into, or the value of which is based upon the value of,
equity securities upon certain terms and conditions. The amount received by an
investor at maturity of such securities is not fixed but is based on the price
of the underlying common stock. It is impossible to predict whether the price of
the underlying common stock will rise or fall. Trading prices of the underlying
common stock will be influenced by the issuer's operational results, by complex,
interrelated political, economic, financial, or other factors affecting the
capital markets, the stock exchanges on which the underlying common stock is
traded and the market segment of which the issuer is a part. In addition, it is
not possible to predict how equity-linked securities will trade in the secondary
market, which is fairly developed and liquid. The market for such securities may
be shallow, however, and high volume trades may be possible only with
discounting. In addition to the foregoing risks, the return on such securities
depends on the creditworthiness of the issuer of the securities, which may be
the issuer of the underlying securities or a third party investment bank or
other lender. The creditworthiness of such third party issuer of equity-linked
securities may, and often does, exceed the creditworthiness of the issuer of the
underlying securities. The advantage of using equity-linked securities over
traditional equity and debt securities is that the former are income producing
vehicles that may provide a higher income than the dividend income on the
underlying equity securities while allowing some participation in the capital
appreciation of the underlying equity securities. Another advantage of using
equity-linked securities is that they may be used for hedging to reduce the risk
of investing in the generally more volatile underlying equity securities.
DEPOSITARY RECEIPTS. The Portfolio may invest in Depositary Receipts,
including American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") and other Depositary Receipts
(which, together with ADRs, GDRs and EDRs, are hereinafter collectively referred
to as "Depositary Receipts"), to the extent that such Depositary Receipts are or
become available. ADRs are securities typically issued by a U.S. financial
institution (a "depositary"), that evidence ownership interests in a security or
pool of securities issued by a foreign issuer (the "underlying issuer") and
deposited with the depositary. ADRs include American Depositary Shares and New
York Shares and may be "sponsored" or "unsponsored." Sponsored ADRs are
established jointly by a depositary and the underlying issuer, whereas
unsponsored ADRs may be established by a depositary without participation by the
underlying issuer. The issuers of the stock of unsponsored ADRs are not
obligated to disclose material information in the United States and therefore,
there may not be a correlation between such information and the market value of
the ADR. GDRs, EDRs and other types of Depositary Receipts are typically issued
by foreign depositaries, although they may also be issued by U.S. depositaries,
and evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation. Generally, Depositary Receipts in
registered form are designed for use in the U.S. securities market and
Depositary Receipts in bearer form are designed for use in securities markets
outside the United States. The Portfolio may invest in sponsored and unsponsored
Depositary Receipts. For purposes of the Portfolio's investment policies, the
Portfolio's investments in Depositary Receipts will be deemed to be investments
in the underlying securities.
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FOREIGN CURRENCY FORWARD CONTRACTS. The Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolio may
use such contracts to protect against a decline in a foreign currency against
the U.S. dollar between the trade date and settlement date when the Portfolio
purchases or sells securities, lock in the U.S. dollar value of dividends and
interest on securities held by the Portfolio, and generally to protect the U.S.
dollar value of securities held by the Portfolio against exchange rate
fluctuation. While forward contracts may limit losses as a result of exchange
rate fluctuations, they will also limit any gains that might otherwise have been
realized. The Portfolio's Custodian may be required to place cash or liquid
securities in a segregated account in an amount equal to the value of the
Portfolio's total assets committed to the consummation of forward contracts. If
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will be at least equal to the amount of the
Portfolio's commitments with respect to such contracts.
FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign
currency exchange rate risks, the Portfolio may enter into foreign currency
futures contracts and options on such contracts. Purposes for which futures
contracts may be used include protecting against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells securities, locking in the U.S. dollar value of
dividends declared on securities held by the Portfolio and generally protecting
the U.S. dollar value of securities held by the Portfolio against exchange rate
fluctuations. The Portfolio may also enter into futures contracts and options on
futures contracts to remain fully invested, to reduce transaction costs and as a
hedge against fluctuations in the price of a security it holds or intends to
acquire, but not for speculation or for achieving leverage.
A foreign currency futures contract is a standardized contract for the
future delivery of a specified amount of a foreign currency at a future date at
a price set at the time of the contract. Foreign currency futures contracts
traded in the U.S. are traded on regulated exchanges. Parties to a futures
contract must make initial "margin" deposits to secure performance of the
contract, which generally range from 2% to 5% of the contract price. There also
are requirements to make "variation" margin deposits as the value of the futures
contract fluctuates. The Portfolio may not enter into foreign currency futures
contracts if the aggregate amount of initial margin deposits on the Portfolio's
futures positions would exceed 5% of the value of the Portfolio's total assets.
The Portfolio also will be required to segregate assets to cover its futures
contracts obligations.
At the maturity of a futures contract, the Portfolio may either accept or
make delivery of the currency specified in the contract or, prior to maturity,
enter into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to futures
contracts are effected on an exchange. The Portfolio will only enter into a
futures contract if it is expected that there will be a liquid market in which
to close out such contract. There can, however, be no assurance that a liquid
market will exist in which to close a forward or futures contract, in which case
the Portfolio may suffer a loss.
The Portfolio may purchase and write call and put options on futures
contracts that are traded on any international exchange, traded over-the-counter
or which are synthetic options or futures or equity swaps, may enter into
closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right (in
return for the premium paid) to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the term of the option. The
Portfolio will purchase and write options on futures
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contracts for identical purposes to those set forth above for the purchase of a
futures contract (purchase of a call option or sale of a put option) and the
sale of a futures contract (purchase of a put option or sale of a call option),
or to close out a long or short position in the future contracts. While futures
contracts may limit losses to the Portfolio as a result of exchange rate
fluctuation, they will also limit any gains that may otherwise have been
realized. The primary risks associated with the use of futures and options on
futures are (i) imperfect correlation between the change in market value of the
securities held by the Portfolio and the prices of futures and options relating
to the securities purchased or sold by the Portfolio; and (ii) possible lack of
a liquid secondary market for an option or a futures contract and the resulting
inability to close a futures position which could have an adverse impact on the
Portfolio's ability to hedge. In the opinion of the Board of Directors, the risk
that the Portfolio will be unable to close out a futures position or options
contract will be minimized by only entering into futures contracts or options on
futures contracts for which there appears to be a liquid secondary market.
FOREIGN INVESTMENT. The Portfolio may invest in securities of foreign
issuers. Investment in obligations of foreign issuers, especially in securities
of issuers in emerging countries, involves somewhat different investment risks
than those affecting obligations of U.S. issuers. As used in this Prospectus, an
emerging country is any country that the International Bank for Reconstruction
and Development (more commonly known as the World Bank) has determined to have a
low or middle income economy. There may be limited publicly available
information with respect to foreign issuers, and foreign issuers are not
generally subject to uniform accounting, auditing and financial standards and
requirements comparable to those applicable to U.S. companies. There may also be
less government supervision and regulation of foreign securities exchanges,
brokers and listed companies than in the United States. Many foreign securities
markets have substantially less volume than U.S. national securities exchanges,
and securities of some foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the United States. Dividends and interest paid by foreign issuers may be subject
to withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid to the Portfolio
by domestic companies. It is not expected that the Portfolio or its shareholders
would be able to claim a credit for U.S. tax purposes with respect to any such
foreign taxes. Additional risks include future political and economic
developments, the possibility that a foreign jurisdiction might impose or change
withholding taxes on income payable with respect to foreign securities, possible
seizure, nationalization or expropriation of the foreign issuer or foreign
deposits and the possible adoption of foreign governmental restrictions such as
exchange controls. Emerging countries may have less stable political
environments than more developed countries. Also, it may be more difficult to
obtain judgment in a court outside the United States.
Such investments in securities of foreign issuers are frequently denominated
in foreign currencies, and since the Portfolio may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the value of the Portfolio's
assets as measured in U.S. dollars may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and the Portfolio
may incur costs in connection with conversions between various currencies.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may
purchase and sell futures contracts and options on futures contracts, including
but not limited to financial futures, securities index futures, foreign currency
exchange futures, and interest rate futures contracts. Futures contracts provide
for the sale by one party and purchase by another party of a specified amount of
a specific security, instrument or basket
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thereof, at a specific future date and at a specified price. An option on a
futures contract is a legal contract that gives the holder the right to buy or
sell a specified amount of futures contracts at a fixed or determinable price
upon the exercise of the option.
The Portfolio may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or purchase securities
index futures in order to gain market exposure. Subject to applicable laws, the
Portfolio may engage in transactions in securities index futures contracts (and
options thereon) which are traded on a recognized securities or futures
exchange, or may purchase or sell such instruments in the over-the-counter
market. There currently are limited securities index futures and options on such
futures in many countries, particularly emerging countries. The nature of the
strategies adopted by the Adviser, and the extent to which those strategies are
used, may depend on the development of such markets.
The Portfolio may engage in transactions involving foreign currency exchange
futures contracts. Such contracts involve an obligation to purchase or sell a
specific currency at a specified future date and at a specified price. The
Portfolio may engage in such transactions to hedge their respective holdings and
commitments against changes in the level of future currency rates or to gain
exposure to a particular currency.
The Portfolio may engage in transactions in interest rate futures
transactions. Interest rate futures contracts involve an obligation to purchase
or sell a specific debt security, instrument or basket thereof at a specified
future date at a specified price. The value of the contract rises and falls
inversely with changes in interest rates. The Portfolio may engage in such
transactions to hedge their holdings of debt instruments against future changes
in interest rates.
Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies, and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures contracts, the value of financial futures
contracts rises and falls inversely with changes in interest rates. The
Portfolio may engage in financial futures contracts for hedging and non-hedging
purposes.
Under rules adopted by the Commodity Futures Trading Commission, the
Portfolio may enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of the Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to
activities that do not constitute "bona fide" hedging. The Portfolio will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under such contracts, in combination with its outstanding
obligations with respect to options transactions (including options to purchase
securities or instruments) would exceed 20% of its total assets.
Gains and losses on futures contracts and options thereon depend on the
Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by the Portfolio and the prices of futures and
options relating to investments purchased or sold by the Portfolio, and (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position. The risk that the Portfolio
will be unable to close out a futures position or options contract will be
minimized by only entering into futures contracts or options transactions for
which there
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appears to be a liquid exchange or secondary market. The risk of loss in trading
on futures contracts in some strategies can be substantial, due both to the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing.
INVESTMENT FUNDS. Some foreign countries have laws and regulations that
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of companies
listed and traded on the stock exchanges in these countries is permitted by
certain foreign countries through investment companies which have been
specifically authorized. The Portfolio may invest in these investment companies
subject to the provisions of the Investment Company Act of 1940, as amended (the
"1940 Act"), and other applicable laws. If the Portfolio invests in such
investment companies, the Portfolio's shareholders will bear not only their
proportionate share of the expenses of the Portfolio (including operating
expenses and the fees of the Adviser), but also will indirectly bear similar
expenses of the underlying investment companies.
Certain of the investment companies referred to in the preceding paragraph
are advised by the Adviser. The Portfolio may, to the extent permitted under the
1940 Act and other applicable law, invest in these investment companies. If the
Portfolio does elect to make an investment in such an investment company, it
will only purchase the securities of such investment company in the secondary
market.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets.
LOWER RATED DEBT SECURITIES. The Portfolio may invest up to 15% of its net
assets in lower rated or unrated debt securities, commonly referred to as "junk
bonds." In addition, the emerging country debt securities in which the Portfolio
may invest will not be required to meet a minimum rating standard and may not be
rated. Fixed income securities are subject to the risk of an issuer's inability
to meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (market risk). Lower rated or unrated securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general level
of interest rates. The market values of fixed-income securities tend to vary
inversely with the level of interest rates. Yields and market values of lower
rated and unrated debt securities will fluctuate over time, reflecting not only
changing interest rates but the market's perception of credit quality and the
outlook for economic growth. When economic conditions appear to be
deteriorating, medium to lower rated securities may decline in value due to
heightened concern over credit quality, regardless of prevailing interest rates.
Fluctuations in the value of the Portfolio's investments will be reflected in
the Portfolio's net asset value per share. The Adviser considers both credit
risk and market risk in making investment decisions for the Portfolio. Investors
should carefully consider the relative risks of investing in lower rated and
unrated debt securities and understand that such securities are not generally
meant for short-term investing.
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The market for lower rated and unrated debt securities is relatively new and
its recent growth paralleled a long period of economic expansion and an increase
in merger, acquisition and leveraged buyout activity. Adverse economic
developments may disrupt the market for U.S. corporate lower rated and unrated
debt securities and for emerging country debt securities. Such disruptions may
severely affect the ability of issuers, especially highly leveraged issuers, to
service their debt obligations or to repay their obligations upon maturity. In
addition, the secondary market for lower rated and unrated debt securities,
which is concentrated in relatively few market makers, may not be as liquid as
the secondary market for more highly rated securities. As a result, the Adviser
could find it more difficult to sell these securities or may be able to sell the
securities only at prices lower than if such securities were widely traded. In
addition there may be limited trading markets for debt securities of issuers
located in emerging countries. Prices realized upon the sale of such lower rated
or unrated securities, under these circumstances, may be less than the prices
used in calculating the Portfolio's net asset value.
Prices for lower rated and unrated debt securities may be affected by
legislative and regulatory developments. These laws could adversely affect the
Portfolio's net asset value and investment practices, the secondary market for
lower rated and unrated debt securities, the financial condition of issuers of
such securities and the value of outstanding lower rated and unrated debt
securities. For example, U.S. federal legislation requiring the divestiture by
federally insured savings and loan associations of their investments in lower
rated and unrated debt securities and limiting the deductibility of interest by
certain corporate issuers of lower rated and unrated debt securities adversely
affected the market in recent years.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Portfolio
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Portfolio's investment portfolio
and increasing the exposure of the Portfolio to the risks of lower rated and
unrated debt securities.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
The Portfolio may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. See "Temporary
Investments." The money market investments permitted for the Portfolio include
obligations of the U.S. Government and its agencies and instrumentalities;
obligations of foreign sovereignties; other debt securities; commercial paper;
bank obligations; certificates of deposit (including Eurodollar certificates of
deposit); and repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolio may invest in securities that are neither listed on a
stock exchange nor traded over the counter. Such unlisted equity securities may
involve a higher degree of business and financial risk that can result in
substantial losses. As a result of the absence of a public trading market for
these securities, they may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid by
the Portfolio or less than what may be considered the fair value of such
securities. Further, companies whose securities are not publicly traded may not
be subject to the disclosure and other investor protection requirements which
might be applicable if their securities were publicly traded. If such securities
are required to be registered under the securities laws of one or more
jurisdictions before being resold, the Portfolio may be required to bear the
expenses of registration.
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As a general matter, the Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Securities that are not registered under the
Securities Act of 1933, as amended, but that can be offered and sold to
qualified institutional buyers under Rule 144A under that Act ("Rule 144A
Securities") will not be included within the foregoing 15% restriction if the
securities are determined to be liquid. The Board of Directors has adopted
guidelines and delegated to the Adviser, subject to the supervision of the Board
of Directors, the daily function of determining and monitoring the liquidity of
Rule 144A securities. Rule 144A securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities. In
addition, the Portfolio may invest up to 10% of its total assets in restricted
securities, and up to 25% of its total assets in restricted securities that are
Rule 144A securities.
OPTIONS TRANSACTIONS. The Portfolio may seek to increase its return or may
hedge its portfolio investments through options transactions with respect to
securities, instruments, indices or baskets thereof in which the Portfolio may
invest, as well as with respect to foreign currency. Purchasing a put option
gives the Portfolio the right to sell a specified security, currency or basket
of securities or currencies at the exercise price until the expiration of the
option. Purchasing a call option gives the Portfolio the right to purchase a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the option. The Portfolio may not
purchase call and put options to the extent that the value of its aggregate
investment in options exceeds 5% of its total assets.
The Portfolio also may write (i.e., sell) put and call options on
investments held in its portfolio, as well as with respect to foreign currency.
A Portfolio that has written an option receives a premium, which increases the
Portfolio's return on the underlying security or instrument in the event the
option expires unexercised or is closed out at a profit. However, by writing a
call option, the Portfolio will limit its opportunity to profit from an increase
in the market value of the underlying security or instrument above the exercise
price of the option for as long as the Portfolio's obligation as writer of the
option continues. The Portfolio may only write options that are "covered." A
covered call option means that so long as the Portfolio is obligated as the
writer of the option, it will own (i) the underlying security or instrument
subject to the option or (ii) securities or instruments convertible or
exchangeable without the payment of any consideration into the security or
instrument subject to the option.
By writing (or selling) a put option, the Portfolio incurs an obligation to
buy the security or instrument underlying the option from the purchaser of the
put at the option's exercise price at any time during the option period, at the
purchaser's election. Options written by the Portfolio may be exercisable by the
purchaser only on a specific date. A Portfolio that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option.
The Portfolio may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by the Adviser and
the extent to which those strategies are used will depend on the development of
such option markets. The primary risks associated with the use of options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by the Portfolio and the prices of options relating to
such investments; and (ii) possible lack of a liquid secondary market for an
option.
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REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolio may not enter into
repurchase agreements with more than seven days to maturity if, as a result,
more than 15% of the market value of the Portfolio's net assets are invested in
these agreements and other investments for which market quotations are not
readily available or which are otherwise illiquid.
SMALL AND MEDIUM-SIZED COMPANIES. Because the Portfolio may invest a
substantial portion of its assets in small-to medium-sized companies, which
companies are more vulnerable to financial and other risks than larger more
established companies, investments in the Portfolio may involve a higher degree
of risk and price volatility than the general equity markets.
SHORT SALES. The Portfolio may from time to time sell securities short
consistent with applicable legal requirements. A short sale is a transaction in
which the Portfolio sells securities it owns or has the right to acquire at no
added cost (i.e., "against the box") or does not own (but has borrowed) in
anticipation of a decline in the market price of the securities. To deliver the
securities to the buyer, the Portfolio arranges through a broker to borrow the
securities and, in so doing, the Portfolio becomes obligated to replace the
securities borrowed at their market price at the time of replacement. When the
Portfolio makes a short sale of borrowed securities, the proceeds it receives
from the sale will be held on behalf of a broker until the Portfolio replaces
the borrowed securities. The Portfolio may have to pay a premium to borrow the
securities and must pay any dividends or interest payable on the securities
until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash or other liquid securities. In addition, if the short sale is
not "against the box", the Portfolio will place in a segregated account with the
Custodian an amount of cash or other liquid securities 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 or other liquid securities deposited as
collateral with the broker in connection with the short sale. Short sales by the
Portfolio involve certain risks and special considerations. Possible losses from
short sales differ from losses that could be incurred from a purchase of a
security, because losses from short sales may be unlimited, whereas losses from
purchases can equal only the total amount invested.
TEMPORARY INVESTMENTS. For temporary defensive purposes, when the Adviser
determines that market conditions warrant, each Portfolio may invest up to 100%
of its assets in dollar and non-dollar denominated money market instruments and
short- and medium-term debt securities that the Adviser believes to be of high
quality, or hold cash. The short- and medium-term debt securities in which a
Portfolio may invest consist of (a) obligations of the U.S. or foreign country
governments, their respective agencies or instrumentalities; (b) bank deposits
and bank obligations (including certificates of deposit, time deposits and
bankers' acceptances)
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of U.S. or foreign country banks denominated in any currency; (c) floating rate
securities and other instruments denominated in any currency issued by
international development agencies; (d) finance company and corporate commercial
paper and other short-term corporate debt obligations of U.S. and foreign
country corporations meeting the Portfolio's credit quality standards; and (e)
repurchase agreements with banks and broker-dealers with respect to such
securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the custodian a separate account with a segregated portfolio of
high-grade debt securities or equity securities or cash or liquid securities in
an amount at least equal to these commitments. The payment obligation and the
interest rates that will be received are each fixed at the time the Portfolio
enters into the commitment and no interest accrues to the Portfolio until
settlement. Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if, among other factors, the
general level of interest rates has changed. It is a current policy of the
Portfolio not to enter into when-issued commitments exceeding in the aggregate
15% of the market value of the Portfolio's total assets less liabilities, other
than the obligations created by these commitments.
INVESTMENT LIMITATIONS
The Portfolio is a non-diversified portfolio under the 1940 Act, which means
that the Portfolio is not limited by the 1940 Act in the proportion of its
assets that may be invested in the obligations of a single issuer. Thus, the
Portfolio may invest a greater proportion of its assets in the securities of a
small number of issuers and as a result will be subject to greater risk with
respect to its portfolio securities. However, the Portfolio intends to comply
with diversification requirements imposed by the Internal Revenue Code of 1986,
as amended (the "Code"), for qualification as a regulated investment company.
See "Investment Limitations" in the Statement of Additional Information.
The Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each Portfolio. The Adviser provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each of the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages each of the
Portfolio's investments. The Adviser is entitled to receive from the Technology
Portfolio an annual management fee, payable quarterly, equal to 1.00% of the
average daily net assets of the
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Portfolio. The Adviser has agreed to a reduction in the fees payable to it and
to reimburse the Portfolio, if necessary, if such fees would cause total annual
operating expenses of the Portfolio to exceed 1.25% of the average daily net
assets of the Class A shares of the Portfolio and 1.50% of the average daily net
assets of the Class B shares of the Portfolio.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. On February 5, 1997, Morgan Stanley Group Inc. and
Dean Witter, Discover & Co. announced that they had entered into an Agreement
and Plan of Merger to form Morgan Stanley, Dean Witter, Discover & Co. Morgan
Stanley Group Inc. is the direct parent of the Adviser and Morgan Stanley.
Subject to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, the Adviser and Morgan Stanley
will be subsidiaries of Morgan Stanley, Dean Witter, Discover & Co. At February
28, 1997, the Adviser, together with its affiliated asset management companies,
had approximately $176.9 billion in assets under management as an investment
manager or as a Named Fiduciary or Fiduciary Adviser. See "Management of the
Fund" in the Statement of Additional Information.
PORTFOLIO MANAGER. CHRISTOPHER R. BLAIR. Christopher Blair joined the
Adviser in 1993 as the Technology and Telecommunications Analyst for the
emerging growth stock group. Previously, he had been a Financial Analyst for two
years in Morgan Stanley's Corporate Finance Department, where he focused on the
telecommunications and technology sectors. Mr. Blair graduated with distinction
from McGill University, where he received a B.A. in Political Science and
Economics. Mr. Blair has had primary management responsibility for the Portfolio
since its inception.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the Officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide the Fund dividend disbursing
and transfer agent services to the Fund. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15% of the average daily net assets of the Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The Officers of the Fund conduct and supervise its daily business
operations.
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<PAGE>
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Portfolio upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of any Portfolio.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan,
the Distributor is entitled to receive from the Portfolio a distribution fee,
which is accrued daily and paid quarterly, of 0.25% of the Class B shares'
average daily net assets on an annualized basis. The Distributor expects to
reallocate most of its fee to its investment representatives. The Distributor
may, in its discretion, voluntarily waive from time to time all or any portion
of its distribution fee and each of the Distributor and the Adviser is free to
make additional payments out of its own assets to promote the sale of Fund
shares, including payments that compensate financial institutions for
distribution services or shareholder services.
The Plan is designed to compensate the Distributor for its services, not to
reimburse the Distributor for its expenses, and the Distributor may retain any
portion of the fee that it does not expend in fulfillment of its obligations to
the Fund.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Class A and Class B shares of the Portfolio may be purchased at the net
asset value per share next determined after receipt of the purchase order by the
Portfolio. See "Valuation of Shares."
MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES
For a Portfolio account, the minimum initial investment and minimum account
size are $250,000 for Class A shares and $50,000 for Class B shares. Certain
advisory or asset allocation accounts, such as Total Funds Management accounts,
managed by Morgan Stanley or its affiliates, including the Adviser ("Managed
Accounts") may purchase Class A shares without being subject to such minimum
initial investment or minimum account size requirements for a Portfolio account.
Employees of the Adviser and certain of its affiliates may purchase Class A
shares subject to conditions, including a lower minimum initial investment,
established by Officers of the Fund.
If the value of a Portfolio account containing Class A shares falls below
$250,000 (but remains at or above $50,000) because of shareholder redemption(s),
the Fund will notify the shareholder, and if the account value remains below
$250,000 (but remains at or above $50,000) for a continuous 60-day period, the
Class A shares in such account will convert to Class B shares and will be
subject to the distribution fee and other features applicable to the Class B
shares. The Fund, however, will not convert Class A shares to Class B shares
based
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<PAGE>
solely upon changes in the market that reduce the net asset value of shares.
Under current tax law, conversions between share classes are not a taxable event
to the shareholder. Managed Accounts are not subject to conversion from Class A
shares to Class B shares.
Investors may also invest in the Portfolio by purchasing shares through a
trust department, broker, dealer, agent, financial planner, financial services
firm or investment adviser. An investor may be charged an additional service or
transaction fee by that institution.
The minimum investment levels may be waived at the discretion of the Adviser
for (i) certain employees and customers of Morgan Stanley or its affiliates and
certain trust departments, brokers, dealers, agents, financial planners,
financial services firms, or investment advisers that have entered into an
agreement with Morgan Stanley or its affiliates; and (ii) retirement and
deferred compensation plans and trusts used to fund such plans, including, but
not limited to, those defined in Section 401(a), 403(b) or 457 of the Code and
"rabbi trusts." The Fund reserves the right to modify or terminate the
conversion features of the shares as stated above at any time upon 60-days
notice to shareholders.
The Adviser reserves the right in its sole discretion to determine which of
such advisory or asset allocation accounts shall be Managed Accounts. For
information regarding Managed Accounts, please contact your Morgan Stanley
account representative or the Fund at the telephone number provided on the cover
of this Prospectus.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES
If the value of a Portfolio account falls below $50,000 because of
shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains below $50,000 for a continuous 60-day period, the shares
in such account are subject to redemption by the Fund and, if redeemed, the net
asset value of such shares will be promptly paid to the shareholder. The Fund,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
The Fund reserves the right to modify or terminate the involuntary
redemption features of the shares as stated above at any time upon 60-days
notice to shareholders.
CONVERSION FROM CLASS B TO CLASS A SHARES
If the value of Class B shares in a Portfolio account increases, whether due
to shareholder share purchases or market activity, to $250,000 or more, the
Class B shares will convert to Class A shares. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements
that are applicable to Portfolio accounts containing Class A shares, as stated
above. The Fund reserves the right to modify or terminate this conversion
feature at any time upon 60-days notice to shareholders.
INITIAL PURCHASES DIRECTLY FROM THE FUND
The Fund's determination of an investor's eligibility to purchase shares of
a given class will take precedence over the investor's selection of a class.
Assuming the investor is eligible for the class, the Fund will select the most
favorable class for the investor, if the investor has not done so.
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<PAGE>
INITIAL INVESTMENTS
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($250,000 minimum for
Class A shares of the Portfolio and $50,000 for Class B shares of the
Portfolio, with certain exceptions for Morgan Stanley employees and select
customers) payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio
name]" to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for payment
by other currencies is given by the Fund. The classes of shares of the Portfolio
to be purchased should be designated on the Account Registration Form. For
purchases by check, the Fund is ordinarily credited with Federal Funds within
one business day. Thus, your purchase of shares by check is ordinarily credited
to your account at the net asset value per share of the Portfolio determined on
the next business day after receipt.
2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the class selected, the amount being
wired, and by which bank. We will then provide you with a Fund account
number. (Investors with existing accounts should also notify the Fund
prior to wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected, the class selected and the account number
assigned to you) as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
C. Complete and sign the Account Registration Form and mail it to the address
shown thereon.
The purchase price of the Class A and Class B shares of the Portfolio is the
net asset value next determined after the order is received. See "Valuation
of Shares." An order received prior to the close of the New York Stock
Exchange ("NYSE"), which is currently 4:00 p.m. Eastern Time, will be
executed at the price computed on the date of receipt; an order received
after the regular close of the NYSE will be executed at the price computed on
the next day the NYSE is open as long as the Transfer Agent receives payment
by check or in Federal Funds prior to the regular close of the NYSE on such
day.
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Federal Funds purchase orders will be accepted only on a day on which the Fund
and Chase (the "Custodian Bank") are open for business. Your bank may charge a
service fee for wiring Federal Funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion, an investor's money will not be invested
and, therefore, will not be earning dividends. Your bank may charge a service
fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000, except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund, Inc. -- [portfolio name]") at the above address or by wiring monies to the
Custodian Bank as outlined above. It is very important that your account name,
the portfolio name and the class selected be specified in the letter or wire to
assure proper crediting to your account. In order to ensure that your wire
orders are invested promptly, you are requested to notify one of the Fund's
representatives (toll-free 1-800-548-7786) prior to the wire date. Additional
investments will be applied to purchase additional shares in the same class held
by a shareholder in a Portfolio account.
OTHER PURCHASE INFORMATION
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B shares will generally be
lower than the net asset value of Class A shares as a result of the distribution
expense charged to Class B shares. It is expected, however, that the net asset
value per share of the two classes will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is cancelled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through the
Distributor.
EXCESSIVE TRADING
Frequent trades involving either substantial portfolio assets or a
substantial portion of your account or accounts controlled by you can disrupt
management of a Portfolio and raise its expenses. Consequently, in the interest
of all the stockholders of the Portfolio and the Portfolio's performance, the
Fund may in its discretion bar
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<PAGE>
a stockholder that engages in excessive trading of shares of any class of a
portfolio from further purchases of shares of the Fund for an indefinite period.
The Fund considers excessive trading to be more than one purchase and sale
involving shares of the same class of a Portfolio of the Fund within any 120-day
period. As an example, exchanging shares of portfolios of the Fund as follows
amounts to excessive trading: exchanging shares of Portfolio A for shares of
Portfolio B, then exchanging shares of Portfolio B for shares of Portfolio C and
again exchanging shares of Portfolio C for shares of Portfolio B within a
120-day period. Two types of transactions are exempt from these excessive
trading restrictions: (1) trades exclusively between money market portfolios;
and (2) trades done in connection with an asset allocation service, such as TFM
Accounts or accounts managed or advised by the Adviser and/or any of its
affiliates.
INVESTMENT IN FUNDS THROUGH A TOTAL FUNDS MANAGEMENT ("TFM") ACCOUNT
In addition to the considerable diversification among individual securities
you receive by investing in a particular Portfolio, you can further reduce risk
by spreading your assets among several different Portfolios that each have
different risk and return characteristics. TFM is an active investment
management service managed by Morgan Stanley or its affiliates, including Morgan
Stanley Asset Management Inc. (each, a "TFM Adviser"), that allocates your
investments across a combination of either Class A or Class B shares of certain
of the Portfolios selected to meet your long-term investment objectives as well
as, in certain circumstances, your current income objectives.
The TFM Adviser has developed investment strategies for TFM Accounts to meet
the diverse financial needs of different investors. You can open a TFM Account
by meeting with one of the investment professionals of a Participating Dealer
who will review your situation and help you identify your long-term investment
and/or current income objectives. After using TFM criteria to determine your
long-term investment and/or current income objectives, you can choose one of
several TFM investment strategies. Based on your chosen strategy, your initial
investment will be allocated among a number of the Class A or Class B shares of
the Portfolios. Depending on market conditions, the TFM Adviser periodically
reallocates the combination of Portfolios or the percentage amounts invested in
the shares of each Portfolio to implement your TFM investment strategy. In
addition, your TFM Account will be periodically rebalanced to maintain your TFM
strategy's current asset allocation mix, if and when the performance of one or
more of the Portfolios unbalances the strategy's mix. You will pay the TFM
Adviser a fee for the TFM Account service that is in addition to and separate
from the fees and expenses you will pay directly or indirectly as an investor in
the Portfolios. See "Fund Expenses."
From time to time, one or more of the Portfolios used for investment by the
TFM Accounts may experience relatively large investments or redemptions due to
the TFM Account allocations or rebalancings recommended by the TFM Adviser.
These transactions will affect the Portfolios since Portfolios that experience
redemptions as a result of reallocations or rebalancings may have to sell
portfolio securities and Portfolios that receive additional cash will have to
invest it in additional portfolio securities. While it is impossible to predict
the overall impact of these transactions over time, there could be adverse
effects on portfolio management to the extent that Portfolios may be required to
sell securities or invest cash at times when they would not otherwise do so.
These transactions could also have tax consequences if sales of securities
resulted in gains and could also increase transaction costs. The Adviser,
representing the interests of the Portfolios, is committed to minimizing the
impact of TFM Account transactions on the Portfolios. The Adviser, however, will
have a conflict in fulfilling this responsibility in that it also serves as a
TFM Adviser. In that capacity, the Adviser, representing the interests of the
TFM Accounts, also is committed to minimizing the impact of TFM Account
transactions on the Portfolios to
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<PAGE>
the extent consistent with pursuing the investment objectives of the TFM
Accounts. In addition, an affiliate of the TFM Adviser, the Distributor is
compensated on the sale, and may be compensated for distribution or shareholder
services on the sale of shares of the Portfolios. See "Purchase of Shares" and
"Shareholder Services -- Exchange Features." The Adviser will monitor the impact
of TFM Account transactions on the Portfolios.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until the payment of the purchase price has been
collected, which may take up to eight business days after purchase. The Fund
will redeem Class A shares or Class B shares of the Portfolio at the next
determined net asset value of shares of the applicable class. On days that both
the NYSE and the Custodian Bank are open for business, the net asset value per
share of the Portfolio is determined at the regular close of trading of the NYSE
(currently 4:00 p.m. Eastern Time). Shares of the Portfolio may be redeemed by
mail or telephone. No charge is made for redemption. Any redemption proceeds may
be more or less than the purchase price of your shares depending on, among other
factors, the market value of the investment securities held by the Portfolio.
BY MAIL
The Portfolio will redeem its Class A shares or Class B shares at the net
asset value determined on the date the request is received, if the request is
received in "good order" before the regular close of the NYSE. Your request
should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, MA 02208-2798, except that deliveries by overnight courier should be
addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global Funds
Services Company, 73 Tremont Street, Boston, MA 02108-3913.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the class
and number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension
and profit-sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. In times of drastic market conditions, the telephone redemption option
may be difficult to implement. If you experience difficulty in making a
telephone redemption, your request may be made by regular mail or express mail
and it will be implemented at the net asset value next determined after it is
received. Redemption requests sent to the Fund through express mail must be
mailed to the address of the Dividend Disbursing and Transfer
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<PAGE>
Agent listed under "General Information." The Fund and the Fund's transfer agent
(the "Transfer Agent") will employ reasonable procedures to confirm that the
instructions communicated by telephone are genuine. These procedures include
requiring the investor to provide certain personal identification information at
the time an account is opened and prior to effecting each transaction requested
by telephone. In addition, all telephone transaction requests will be recorded
and investors may be required to provide additional telecopied written
instructions regarding transaction requests. Neither the Fund nor the Transfer
Agent will be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to be
genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase. The Fund may suspend the right
of redemption or postpone the date upon which redemptions are effected at times
when the NYSE is closed, or under any emergency circumstances as determined by
the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
You may exchange shares that you own in the Portfolio for shares of any
other available portfolio(s) of the Fund (other than the International Equity
Portfolio, which is closed to new investors). In exchanging for shares of a
portfolio with more than one class, the class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares
and will not be based on the class of shares surrendered for the exchange.
Consequently, the same minimum initial investment and minimum account size for
determining the class of shares received in the exchange will apply. See
"Purchase of Shares." Shares of the portfolios may be exchanged by mail or
telephone. The privilege to exchange shares by telephone is automatic and made
available without shareholder election. Before you make an exchange, you should
read the prospectus of the portfolio(s) in
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<PAGE>
which you seek to invest. Because an exchange transaction is treated as a
redemption followed by a purchase, an exchange would be considered a taxable
event for shareholders subject to tax. The exchange privilege may be modified or
terminated by the Fund at any time upon 60-days notice to shareholders.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name, class of shares and account number of your current Portfolio,
the name(s) of the portfolio(s) and class(es) of shares into which you intend to
exchange shares, and the signatures of all registered account holders. Send the
exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name, class of shares
and account number of the Portfolio, the names of the portfolio(s) and class(es)
of shares into which you intend to exchange shares, your Social Security number
or Tax I.D. number, and your account address. Requests for telephone exchanges
received prior to 4:00 p.m. (Eastern Time) are processed at the close of
business that same day based on the net asset value of the class(es) of the
portfolios involved in the exchange of shares at the close of business. Requests
received after 4:00 p.m. (Eastern Time) are processed the next business day
based on the net asset value determined at the close of business on such day.
For additional information regarding responsibility for the authenticity of
telephoned instructions, see "Redemption of Shares -- By Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798,
Boston, MA 02208-2798. As in the case of redemptions, the written request must
be received in good order before any transfer can be made. Transferring the
registration of shares may affect the eligibility of your account for a given
class of the Portfolio's shares and may result in involuntary conversion or
redemption of your shares. See "Purchase of Shares" above.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the regular close of
the NYSE on each day that the NYSE is open for business. Price information on
listed securities is taken from the exchange where the security is primarily
traded. Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day the
valuation is made. 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 a
price within a range not exceeding the current asked price nor less than the
current bid price. The current bid and asked prices are determined based on the
average of the bid and asked prices quoted on such valuation date by reputable
brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the
28
<PAGE>
basis of prices provided by a pricing service when such prices are believed to
reflect the fair market value of such securities. The prices provided by a
pricing service are determined without regard to bid or last sale prices, but
take into account institutional size, trading in similar groups of securities
and any developments related to the specific securities. Securities not priced
in this manner are valued at the most recently quoted bid price or when
securities exchange valuations are used, at the latest quoted sale price on the
day of valuation. If there is no such reported sale, the latest quoted bid price
will be used. Securities purchased with remaining maturities of 60 days or less
are valued at amortized cost, if it approximates market value. In the event that
amortized cost does not approximate market value, market prices as determined
above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine prices in accordance
with the above-stated procedure are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid and asked
price of such currencies against the U.S. dollar last quoted by any major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE.
"Total return" shows what an investment in a class of the Portfolio would
have earned over a specified period of time (such as one, five or ten years),
assuming that all distributions and dividends by the Portfolio were reinvested
in the same class on the reinvestment dates during the period. Total return does
not take into account any federal or state income taxes that may be payable on
dividends and distributions or on redemption. The Fund may also include
comparative performance information in advertising or marketing the Portfolio's
shares, including data from Lipper Analytical Services, Inc., other industry
publications, business periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
that, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
may elect to receive income dividends and capital gains distributions in cash.
29
<PAGE>
The Portfolio expects to distribute substantially all of its taxable net
investment income in the form of annual dividends. Net realized capital gains,
if any, after reduction for any available tax loss carryforwards will also be
distributed annually.
Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
The Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, the excess of net short-term
capital gain over net long-term capital loss) to shareholders. Dividends from
the Portfolio's net investment income are taxable to shareholders as ordinary
income, whether received in cash or in additional shares. Such dividends paid by
the Portfolio will generally qualify for the 70% dividends-received deduction
for corporate shareholders to the extent of qualifying dividend income received
by the Portfolio from U.S. corporations. The Portfolio will report annually to
its shareholders the amount of dividend income qualifying for such treatment.
Distributions of net capital gains (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long the shareholder has held the Portfolio's
shares. The Portfolio will send reports annually to shareholders of the federal
income tax status of all distributions made during the preceding year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
loss, including any available capital loss carryforwards), prior to the end of
each calendar year to avoid liability for federal excise tax.
30
<PAGE>
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (1) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Application Form, (2) who is subject to backup withholding by the Internal
Revenue Service, or (3) who has not certified to the Fund that such shareholder
is not subject to backup withholding. This backup withholding is not an
additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, redemption or exchange of shares will result in taxable gain or
loss to the selling, redeeming or exchanging shareholder, depending upon whether
the fair market value of the sale, redemption or exchange proceeds exceed or is
less than the shareholder's adjusted basis in the sold, redeemed or exchanged
shares. If capital gain distributions have been made with respect to shares that
are sold at a loss after being held for six months or less, then the loss is
treated as a long-term capital loss to the extent of the capital gain
distributions.
Conversion of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other
31
<PAGE>
remuneration paid to Morgan Stanley or other affiliates must be fair and
reasonable in comparison to those of other broker-dealers for comparable
transactions involving similar securities being purchased or sold during a
comparable time period.
PORTFOLIO TURNOVER
The Portfolio generally does not invest for short-term trading purposes,
however, when circumstances warrant, the Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolio will not consider portfolio turnover rate a
limiting factor in making investment decisions consistent with their respective
objective and policies. As portfolio turnover increases, the Portfolio may
expect to pay correspondingly increased brokerage and trading costs. In addition
to transaction costs, higher portfolio turnover may result in the realization of
capital gains. As discussed under "Taxes," to the extent net short-term capital
gains are realized, any distributions resulting from such gains are considered
ordinary income for federal income tax purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 35 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
portfolio are currently classified into two classes, the Class A shares and the
Class B shares, except for the Money Market, Municipal Money Market and
International Small Cap Portfolios, which offers only Class A shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no pre-emptive rights. The shares of the Portfolio have
non-cumulative rights, which means that the holders of more than 50% of the
shares voting for the election of Directors can elect 100% of the Directors if
they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of the Portfolio may be presumed to "control" (as that term
is defined in the 1940 Act) the Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
32
<PAGE>
CUSTODIAN
Chase is the Fund's Custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
33
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
TECHNOLOGY PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
If you need assistance in filling out this form for the
ACCOUNT INFORMATION Morgan Stanley Institutional Fund, please contact your
Fill in where applicable Morgan Stanley representative or call us toll free
1-800-548-7786. Please print all items except signature, and
mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF
SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First
Name Initial Last Name
2.
First
Name Initial Last Name
First
Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund
for additional documents
that may be required to
set up account and to
authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in
completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien:
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<S> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF
SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
<PAGE>
<TABLE>
<S> <S> <C> <C>
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor
OR
1. TAXPAYER SOCIAL SECURITY NUMBER
IDENTIFICATION NUMBER ("SSN")
("TIN")
OR
2. TIN SSN
OR
TIN SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer)
with your correct TIN(s) or SSN(s). Accounts that have a
missing or incorrect TIN(s) or SSN(s) will be subject to
backup withholding at a 31% rate on dividends, distributions
and other payments. If you have not provided us with your
correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability
of persons subject to backup withholding will be reduced by
the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
You may be notified that you are subject to backup withholding
under Section 3406(a)(1)(C) of the Internal Revenue Code
because you have underreported interest or dividends or you
were required to, but failed to, file a return which would
have included a reportable interest or dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C>
D) PORTFOLIO AND For Purchase of the following
CLASS SECTION Portfolio(s): / / Class A Shares
(Class A shares minimum Technology Portfolio $ / / Class B Shares $
$250,000 for the Total Initial Investment
Portfolio and Class B $
shares minimum $50,000
for the Portfolio).
Please indicate class and
amount.
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate
portfolio, manner of
payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the
account statement sent to
my/our registered Address
address, I/we hereby
authorize the Fund to City State Z
mail duplicate statements Code
to the name and address
provided at right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative
No. Branch
No.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE
ARE SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE
HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL
SECURITY ADMINISTRATION FOR A TIN OR A SSN AND I/WE
UNDERSTAND THAT IF I/WE DO NOT PROVIDE EITHER NUMBER TO CHASE
GLOBAL FUNDS SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE
DATE OF THIS APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR
CORRECT SSN(S) OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY
AND A 31% BACKUP WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION
PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU
MAY REQUEST SUCH FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 6
Investment Objective and Policies................. 10
Additional Investment Information................. 11
Investment Limitations............................ 19
Management of the Fund............................ 20
Purchase of Shares................................ 22
Redemption of Shares.............................. 26
Shareholder Services.............................. 27
Valuation of Shares............................... 28
Performance Information........................... 29
Dividends and Capital Gains Distributions......... 29
Taxes............................................. 30
Portfolio Transactions............................ 31
General Information............................... 32
Account Registration Form
</TABLE>
TECHNOLOGY PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
INCORPORATED
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load,
open-end management investment company with diversified and non-diversified
series ("Portfolios"). The Fund currently consists of twenty-nine Portfolios
offering a broad range of investment choices. The Fund is designed to
provide clients with attractive alternatives for meeting their investment
needs. Each Portfolio, except the Money Market, Municipal Money Market,
International Small Cap and China Growth Portfolios, offers two classes of
shares, the Class A shares and the Class B shares (each, a "Multiclass
Portfolio"). The Class A shares and the Class B shares currently offered by
each Multiclass Portfolio have different minimum investment requirements and
fund expenses. Shares of each Portfolio are offered with no sales charge or
exchange or redemption fee (except that the International Small Cap Portfolio
may impose a transaction fee). This Statement of Additional Information
addresses information of the Fund applicable to all of the Fund's Portfolios,
except the Technology Portfolio.
This Statement is not a prospectus but should be read in conjunction with
the several prospectuses of the Fund's Portfolios (the "Prospectuses"). To
obtain any of the Prospectuses, please call the Morgan Stanley Institutional
Fund, Inc. Services Group at 1-800-548-7786.
TABLE OF CONTENTS
PAGE
----
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . . 2
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
General Regulated Investment Company Qualifications . . . . . . . . . . . 25
General Tax Treatment of Qualifying RICs and Shareholders. . . . . . . . . 26
Special Tax Considerations Relating to Municipal Bond and
Municipal Money Market Portfolios . . . . . . . . . . . . . . . . . . . 28
Special Tax Considerations Relating to Foreign Investments . . . . . . . . 30
Taxes and Foreign Shareholders . . . . . . . . . . . . . . . . . . . . . . 30
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Investment Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Determining Maturities of Certain Instruments. . . . . . . . . . . . . . . 35
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Net Asset Value for Money Market Portfolios. . . . . . . . . . . . . . . . 51
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . . 51
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Description of Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1997
Prospectus for the International Magnum Portfolio, dated May 1, 1997
Prospectus for the U.S. Real Estate Portfolio, dated May 1, 1997
Prospectus for the Fixed Income Portfolio, Municipal Bond Portfolio,
Mortgage-Backed Securities Portfolio, Money Market Portfolio and
Municipal Money Market Portfolio, dated May 1, 1997
Prospectus for the Equity Growth Portfolio, Emerging Growth Portfolio,
MicroCap Portfolio and Aggressive Equity Portfolio, dated May 1, 1997
Prospectus for the Small Cap Value Equity Portfolio, Value Equity
Portfolio, Balanced Portfolio, Global Fixed Income Portfolio and High
Yield Portfolio, dated May 1, 1997
Prospectus for the Global Equity Portfolio, International Equity Portfolio,
International Small Cap Portfolio, Asian Equity Portfolio, European Equity
Portfolio, Japanese Equity Portfolio and Latin American Portfolio, dated
May 1, 1997
Prospectus for the Emerging Markets Portfolio and Emerging Markets Debt
Portfolio, dated May 1, 1997
Prospectus for the Active Country Allocation Portfolio, dated May 1, 1997
Prospectus for the Gold Portfolio, dated May 1, 1997
Prospectus for the China Growth Portfolio, dated May 1, 1995.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the investment objectives and policies
set forth in the Fund's Prospectuses:
BRADY BONDS.
The Emerging Markets Debt Portfolio may invest in certain debt
obligations customarily referred to as "Brady Bonds," which are created
through the exchange of existing commercial bank loans to foreign entities
for new obligations in connection with debt restructuring under a plan
introduced by former U.S. Secretary of the Treasury Nicholas F. Brady (the
"Brady Plan"). Brady Bonds have been issued only recently and, accordingly,
do not have a long payment history. They may be collateralized or
uncollateralized and issued in various currencies (although most are U.S.
dollar-denominated) and they are actively traded in the over-the-counter
secondary market. The Portfolio may purchase Brady Bonds either in the
primary or secondary markets. The price and yield of Brady Bonds purchased
in the secondary market will reflect the market conditions at the time of
purchase, regardless of the stated face amount and the stated interest rate.
With respect to Brady Bonds with no or limited collateralization, the
Portfolio will rely for payment of interest and principal primarily on the
willingness and ability of the issuing government to make payment in
accordance with the terms of the bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal due at maturity by U.S. Treasury zero coupon obligations
which have the same maturity as the Brady Bonds. Interest payments on these
Brady Bonds generally are collateralized by cash or securities in an amount
that, in the case of fixed rate bonds, is equal to at least one year of rolling
interest payments or, in the case of floating rate bonds, initially is equal to
at least one year's rolling interest payments based on the applicable interest
rate at that time and is adjusted at regular intervals thereafter. Certain
Brady Bonds are entitled to "value recovery payments" in certain circumstances,
which in effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event
of a default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held to the scheduled maturity of the
defaulted Brady Bonds by the collateral agent, at which time the face amount of
the collateral will equal the principal payments which would have then been due
on the Brady Bonds in the normal course. In addition, in light of the residual
risk of the Brady Bonds and, among other factors, the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds should be viewed as speculative.
Brady Plan debt restructuring totalling approximately $73 billion have been
implemented to date in Argentina, Bulgaria, Costa Rica, Ecuador, Mexico,
Nigeria, the Philippines, Uruguay and Venezuela, with the largest proportion of
Brady Bonds having been issued to date by Mexico and Venezuela. Brazil and
Poland have announced plans to issue Brady Bonds aggregating approximately $52
billion, based on current estimates. There can be no assurance that the
circumstances regarding the issuance of Brady Bonds by these countries will not
change.
2
<PAGE>
CURRENCY SWAPS
The China Growth Portfolio may enter into currency swaps for hedging purposes
and non-hedging purposes. Inasmuch as swaps are entered into for good faith
hedging purposes and are offset by a segregated account as described below,
the Portfolio believes that swaps do not constitute senior securities as
defined in the Investment Company Act of 1940 (the "1940 Act") and,
accordingly, will not treat them as being subject to the Portfolio's
borrowing restrictions. An amount of cash or liquid securities having an
aggregate net asset value at least equal to the gross payments which the
Portfolio is obligated to make under the currency swap will be maintained in
a segregated account by the Fund's Custodian. The Portfolio will not enter
into any currency swap unless the credit quality of the unsecured senior debt
or the claims-paying ability of the other party thereto is considered to be
investment grade by Morgan Stanley Asset Management Inc. ("MSAM" or the
"Adviser"). If there is a default by the other party to such a transaction,
the Portfolio will have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in
recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation.
As a result, the swap market has become relatively liquid in comparison with
the markets for other similar instruments which are traded in the interbank
market.
EMERGING COUNTRY EQUITY AND DEBT SECURITIES
GENERAL. Each of the Active Country Allocation, Latin American,
International Magnum, Active Country Allocation, Global Equity, International
Equity, International Small Cap, Asian Equity, European Equity, Emerging
Markets and Emerging Markets Debt Portfolios' definition of emerging country
equity or debt securities includes securities of companies that may have
characteristics and business relationships common to companies in a country
or countries other than an emerging country. As a result, the value of the
securities of such companies may reflect economic and market forces
applicable to other countries, as well as to an emerging country. The
Adviser believes, however, that investment in such companies will be
appropriate because the Portfolio will invest only in those companies which,
in its view, have sufficiently strong exposure to economic and market forces
in an emerging country that their value will tend to reflect developments in
such emerging country to a greater extent than developments in another
country or countries. For example, the Portfolio may invest in companies
organized and located in countries other than an emerging country, including
companies having their entire production facilities outside of an emerging
country, when securities of such companies meet one or more elements of the
Portfolio's definition of an emerging country equity or debt security and so
long as the Adviser believes at the time of investment that the value of the
company's securities principally reflects conditions in such emerging country.
The Emerging Markets Debt Portfolio is subject to no restrictions on the
maturities of the emerging country debt securities it holds; those maturities
may range from overnight to 30 years. The value of debt securities held by the
Portfolio generally will vary inversely to changes in prevailing interest rates.
The Portfolio's investments in fixed-rated debt securities with longer terms to
maturity are subject to greater volatility than the Portfolio's investments in
shorter-term obligations. Debt obligations acquired at a discount are subject
to greater fluctuations of market value in response to changing interest rates
than debt obligations of comparable maturities which are not subject to such
discount.
3
<PAGE>
Investments in emerging country government debt securities involve
special risks. Certain emerging countries have historically experienced, and
may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations, large amounts of external debt, balance of
payments and trade difficulties and extreme poverty and unemployment. The
issuer or governmental authority that controls the repayment of an emerging
country's debt may be unable or unwilling to repay the principal and/or
interest when due in accordance with the terms of such debt. As a result of
the foregoing, a government obligor may default on its obligations. If such
an event occurs, the Portfolio may have limited legal recourse against the
issuer and/or guarantor. Remedies must, in some cases, be pursued in the
courts of the defaulting party itself, and the ability of the holder of
foreign government debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to
the holders of other foreign government debt obligations in the event of
default under their commercial bank loan agreements.
EQUITY-LINKED SECURITIES
The Aggressive Equity Portfolio may invest in equity-linked securities,
including, among others, PERCS, ELKS or LYONs, which are securities that are
convertible into or the value of which is based upon the value of, equity
securities upon certain terms and conditions. The amount received by an
investor at maturity of such securities is not fixed but is based on the
price of the underlying common stock. It is impossible to predict whether the
price of the underlying common stock will rise or fall. Trading prices of the
underlying common stock will be influenced by the issuer's operational
results, by complex, interrelated political, economic, financial, or other
factors affecting the capital markets, the stock exchanges on which the
underlying common stock is traded and the market segment of which the issuer
is a part. In addition, it is not possible to predict how equity-linked
securities will trade in the secondary market, which is fairly developed and
liquid. The market for such securities may be shallow, however, and high
volume trades may be possible only with discounting. In addition to the
foregoing risks, the return on such securities depends on the
creditworthiness of the issuer of the securities, which may be the issuer of
the underlying securities or a third party investment banker or other lender.
The creditworthiness of such third party issuer of equity-linked securities
may, and often does, exceed the creditworthiness of the issuer of the
underlying securities. The advantage of using equity-linked securities over
traditional equity and debt securities is that the former are income
producing vehicles that may provide a higher income than the dividend income
on the underlying equity securities while allowing some participation in the
capital appreciation of the underlying equity securities. Another advantage
of using equity-linked securities is that they may be used for hedging to
reduce the risk of investing in the generally more volatile underlying equity
securities.
The following are three examples of equity-linked securities. The
Portfolio may invest in the securities described below or other similar
equity-linked securities.
PERCS. Preferred Equity Redemption Cumulative Stock ("PERCS")
technically is preferred stock with some characteristics of common stock.
PERCS are mandatorily convertible into common stock after a period of time,
usually three years, during which the investors' capital gains are capped,
usually at 30%. Commonly, PERCS may be redeemed by the issuer at any time or
if the issuer's common stock is trading at a specified price level or better.
The redemption price starts at the beginning of the PERCS duration period at
a price that is above the cap by the amount of the extra dividends the PERCS
holder is entitled to receive relative to the common stock over the duration
of the PERCS and declines to the cap price shortly before maturity of the
PERCS. In exchange for having the cap on capital gains and giving the issuer
the option to redeem the PERCS at any time or at the specified common stock
price level, the Portfolio may be compensated with a substantially higher
dividend yield than that on the underlying common stock. Investors, such as
the Portfolio, that seek current income find PERCS attractive because
PERCS provide a higher dividend income than that paid with respect to a
company's common stock.
ELKS. Equity-Linked Securities ("ELKS") differ from ordinary debt
securities, in that the principal amount received at maturity is not fixed
but is based on the price of the issuer's common stock. ELKS are debt
securities commonly issued in fully registered form for a term of three years
under an indenture trust. At maturity, the holder of ELKS will be entitled to
receive a principal amount equal to the lesser of a cap amount, commonly in
the range of 30% to 55% greater than the current price of the issuer's common
stock, or the average closing price per share of the issuer's common stock,
subject to adjustment as a result of certain dilution events, for the 10
trading days immediately prior to maturity. Unlike PERCS, ELKS are commonly
not subject to redemption prior to maturity. ELKS usually bear interest
during the three-year term at a substantially higher rate than the dividend
yield on the underlying common stock. In exchange for having the cap on the
return that might have been received as capital gains on the underlying
common stock, the Portfolio may be compensated with the higher yield,
contingent on how well the underlying common stock does. Investors, such as
the Portfolio, that seek current income, find ELKS attractive because ELKS
provide a higher dividend income than that paid with respect to a company's
common stock.
LYONs. Liquid Yield Option Notes ("LYONs") differ from ordinary debt
securities, in that the amount received prior to maturity is not fixed but is
based on the price of the issuer's common stock. LYONs are zero-coupon notes
that sell at a large discount from face value. For an investment in LYONs,
the Portfolio will not receive any interest payments until the notes mature,
typically in 15 to 20 years, when the notes are redeemed at face, or par,
value. The yield on LYONs, typically, is lower-than-market rate for debt
securities of the same maturity, due in part to the fact that the LYONs are
convertible into common stock of the issuer at any time at the option of the
holder of the LYONs. Commonly, the LYONs are redeemable by the issuer at any
time after an initial period or if the issuer's common stock is trading at a
specified price level or better or, at the option of the holder, upon
certain fixed dates. The redemption price typically is the purchase price of
the LYONs plus accrued original issue discount to the date of redemption,
which amounts to the lower-than-market yield. The Portfolio will receive only
the lower-than-market yield unless the underlying common stock increases in
value at a substantial rate. LYONs are attractive to investors like the
Portfolio when it appears that they will increase in value due to the rise
in value of the underlying common stock.
4
<PAGE>
FOREIGN CURRENCY FORWARD CONTRACTS
The U.S. dollar value of the assets of the Global Equity, International
Equity, International Small Cap, Asian Equity, European Equity, Japanese Equity,
Latin American, International Magnum, Global Fixed Income, Active Country
Allocation, China Growth, Emerging Markets, Emerging Markets Debt and Gold
Portfolios and, to the extent they invest in securities denominated in foreign
currencies, the assets of the Equity Growth, Emerging Growth, MicroCap,
Aggressive Equity, Small Cap Value Equity, Value Equity, Balanced, Fixed Income
and High Yield Portfolios may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations, and the
Portfolios may incur costs in connection with conversions between various
currencies. The Portfolios will conduct their foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward contracts
to purchase or sell foreign currencies. A foreign currency forward contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for such trades. The Gold Portfolio may also enter into precious metals
forward contracts. See "Precious Metals Forward and Futures Contracts and
Options on Futures Contracts" below.
The Portfolios may enter into foreign currency forward contracts in
several circumstances. When a Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when a
Portfolio anticipates the receipt in a foreign currency of dividends or
interest payments on a security which it holds, the Portfolio may desire to
"lock-in" the U.S. dollar price of the security or the U.S. dollar equivalent
of such dividend or interest payment, as the case may be. By entering into a
forward contract for a fixed amount of dollars, for the purchase or sale of
the amount of foreign currency involved in the underlying transactions, the
Portfolio will be able to protect itself against a possible loss resulting
from an adverse change in the relationship between the U.S. dollar and the
subject foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment
is declared, and the date on which such payments are made or received.
Additionally, when any of these Portfolios anticipates that the currency of
a particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract for a fixed amount of dollars, to
sell the amount of foreign currency approximating the value of some or all of
such Portfolio's securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of these securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. None of the Portfolios intend to enter
into such forward contracts to protect the value of portfolio securities on a
continuous basis. The Portfolios will not enter into such forward contracts or
maintain a net exposure to such contracts where the consummation of the
contracts would obligate such Portfolio to deliver an amount of foreign
currency in excess of the value of such Portfolio's securities or other assets
denominated in that currency.
5
<PAGE>
Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the long-term investment decisions made
with regard to overall diversification strategies. However, the management
of the Fund believes that it is important to have the flexibility to enter
into such forward contracts when it determines that the best interests of the
performance of each Portfolio will thereby be served. Except under
circumstances where a segregated account is not required under the 1940 Act
or the rules adopted thereunder, the Fund's Custodian will place cash or
liquid securities into a segregated account of a Portfolio in an amount
equal to the value of such Portfolio's total assets committed to the
consummation of forward currency exchange contracts. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value
of the account will be equal to the amount of such Portfolio's commitments
with respect to such contracts.
The Portfolios generally will not enter into a forward contract with a term
of greater than one year. At the maturity of a forward contract, a Portfolio
may either sell the portfolio security and make delivery of the foreign
currency, or it may retain the security and terminate its contractual obligation
to deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly,
it may be necessary for a Portfolio to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that such Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If a Portfolio retains the portfolio security and engages in an offsetting
transaction, such Portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward prices decline during the period between a Portfolio entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, such Portfolio
will realize a gain to the extent that the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, such Portfolio would suffer a loss to the extent that
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Portfolios are not required to enter into such transactions with regard
to their foreign currency-denominated securities. It also should be realized
that this method of protecting the value of portfolio securities against a
decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange
which one can achieve at some future point in time. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time, they tend to limit any potential gain which
might result should the value of such currency increase. For a discussion of
the special risks associated with foreign currency transactions, see "Risks
Associated with Foreign Currency Transactions," below in this SAI.
6
<PAGE>
RISKS ASSOCIATED WITH FOREIGN CURRENCY TRANSACTIONS
Transactions in foreign currency forward contracts, foreign currency
futures contracts and options thereon, and options on foreign currencies, are
subject to the risk of governmental actions affecting trading in or the
prices of currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on the value of
positions held by the Portfolios permitted to engage in such hedging
transactions. In addition, the value of such positions could be adversely
affected by a number of other complex political and economic factors
applicable to the countries issuing the underlying currencies.
Furthermore, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying forward contracts, futures contracts and options. As a
result, the available information on which a Portfolio's trading systems will be
based may not be as complete as the comparable data on which such Portfolio
makes investment and trading decisions in connection with securities and other
transactions. Moreover, because the foreign currency market is a global,
twenty-four hour market, events could occur on that market which will not be
reflected in the forward, futures or options markets until the following day,
thereby preventing a Portfolio from responding to such events in a timely
manner.
Settlement of over-the-counter ("OTC") forward contracts or the exercise
of foreign currency options generally must occur within the country issuing
the underlying currency, which in turn requires parties to such contracts to
accept or make delivery of such currencies in conformity with any United
States or foreign restrictions and regulations regarding the maintenance of
foreign banking relationships, fees, taxes or other charges.
Unlike currency futures contracts and exchange-traded options, OTC
options on foreign currencies and foreign currency forward contracts are not
traded on contract markets or national securities exchanges regulated by the
Commodity Futures Trading Commission ("CFTC") or the Securities and Exchange
Commission (the "Commission"), respectively. In an OTC trading environment,
many of the protections associated with transactions on exchanges will not be
available.
For example, there are no daily price fluctuation limits, and adverse
market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount
could be lost. Moreover, an option writer could lose amounts substantially in
excess of its initial investment due to the margin and collateral
requirements associated with such option positions. Similarly, there is no
limit on the amount of potential losses on forward contracts to which a
Portfolio is a party.
In addition, OTC transactions can only be entered into with a financial
institution willing to take the opposite side, as principal, of a Portfolio's
position unless the institution acts as broker and is able to find another
counterparty willing to enter into the transaction with such Portfolio. Where
no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the
trading of OTC contracts, and a Portfolio may be unable to close out options
purchased or written, or forward contracts entered into, until their
exercise, expiration or maturity. This in turn could limit a Portfolio's
ability to realize profits or to reduce losses on open positions and could
result in greater losses.
7
<PAGE>
Furthermore, OTC transactions are not backed by the guarantee of an
exchange's clearing corporation. A Portfolio will therefore be subject to
the risk of default by, or the bankruptcy of, the financial institution
serving as its counterparty. One or more of such institutions also may
decide to discontinue its role as market-maker in a particular currency,
thereby restricting a Portfolio's ability to enter into desired hedging
transactions. A Portfolio will enter into OTC transactions only with parties
whose creditworthiness has been reviewed and found satisfactory by the
Adviser.
OTC options on foreign currencies are within the exclusive regulatory
jurisdiction of the CFTC. The CFTC currently permits the trading of such
options, but only subject to a number of conditions regarding the commercial
purpose of the purchaser of such options. The Portfolios are not able to
determine at this time whether or to what extent the CFTC may impose
additional restrictions on the trading of over-the-counter options on foreign
currencies at some point in the future, or the effect that any restrictions
may have on the hedging strategies to be implemented by the Portfolios.
Forward contracts and currency swaps are not presently subject to regulation
by the CFTC, although the CFTC may in the future assert or be granted
authority to regulate such instruments. In such event, a Portfolio's ability
to utilize forward contracts and currency swaps in the manner set forth above
and in the applicable Prospectus could be restricted.
Options on foreign currencies traded on a national securities exchange
are within the jurisdiction of the Commission, as are other securities traded
on such exchanges. As a result, many of the protections provided to traders
on organized exchanges will be available with respect to such transactions.
In particular, all foreign currency options positions entered into on a
national securities exchange are cleared and guaranteed by the Options
Clearing Corporation ("OCC"), thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the OTC market,
potentially permitting a Portfolio to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of adverse
market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effect of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures for
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on exercise.
8
<PAGE>
FOREIGN INVESTMENTS
The Active Country Allocation, International Equity, International Fixed
Income, Global Equity, Global Fixed Income, Asian Equity, European Equity,
Japanese Equity, International Small Cap, Latin American and China Growth
Portfolios will invest, and the Emerging Growth, Emerging Markets, Emerging
Markets Debt, Value Equity, Equity Growth, MicroCap, Balanced, Small Cap
Value Equity, International Magnum, Fixed Income, High Yield, Aggressive
Equity and Gold Portfolios may invest in securities of foreign issuers.
Investors should recognize that investing in such foreign securities involves
certain special considerations which are not typically associated with
investing in U.S. issuers. For a description of the effect on the Portfolios
of currency exchange rate fluctuation, see "Foreign Currency Forward Contracts"
above. As foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards and may have policies that are not
comparable to those of domestic issuers, there may be less information
available about certain foreign companies than about domestic issuers.
Securities of some foreign issuers are generally less liquid and more
volatile than securities of comparable domestic issuers. There is generally
less government supervision and regulation of stock exchanges, brokers and
listed issuers than in the United States. In addition, with respect to certain
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect U.S. investments in those countries. Foreign securities not
listed on a recognized domestic or foreign exchange are regarded as not
readily marketable and therefore such investments will be limited to 15% of a
Portfolio's net asset value at the time of purchase.
Although the Portfolios will endeavor to achieve the most favorable
execution costs in their portfolio transactions, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges.
Certain foreign governments levy withholding or other taxes on dividend
and interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. Except in the case of
the International Equity, Global Equity, European Equity, Japanese Equity, Asian
Equity, Global Fixed Income, International Fixed Income, International Magnum,
International Small Cap, Latin American and China Growth Portfolios, it is not
expected that a Portfolio or its shareholders would be able to claim a credit
for U.S. tax purposes with respect to any such foreign taxes. However, these
foreign withholding taxes may not have a significant impact on such Portfolios,
because each Portfolio's investment objective is to seek long-term capital
appreciation and any dividend or interest income should be considered
incidental.
FUTURES CONTRACTS
The Equity Growth, Aggressive Equity, Value Equity, Balanced, Small Cap
Value Equity, Active Country Allocation, Gold, Latin American, U.S. Real
Estate, Emerging Markets, Emerging Markets Debt, International Magnum, Fixed
Income and China Growth Portfolios may enter into futures contracts and
options on futures contracts for the purpose of remaining fully invested and
reducing transaction costs. The Fixed Income, Municipal Bond,
Mortgage-Backed Securities, High Yield, Active Country Allocation, Municipal
Bond, Mortgage-Backed Securities, Global Fixed Income, Equity Growth,
Aggressive Equity, Gold, Latin American, U.S. Real Estate,
Emerging Markets, Emerging Markets Debt, International Magnum and China
Growth Portfolios may also enter into futures contracts for hedging purposes.
No Portfolio will enter into futures contracts or options thereon for
speculative purposes. The Gold Portfolio may also enter into futures
contracts and options thereon on precious metals. See "Precious Metals
Forward and Futures Contracts and Options" below. Futures contracts provide
for the future sale by one party and purchase by another party of a specified
amount of a specific security at a specified future time and at a specified
price. Futures contracts, which are standardized as to maturity date and
underlying financial instrument, are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act
by the CFTC.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or
taking of delivery. Closing out an open futures position is done by taking
an opposite position ("buying" a contract which has previously been "sold" or
"selling" a contract previously "purchased") in an identical contract to
terminate the position. Brokerage commissions are incurred when a futures
contract is bought or sold.
Futures contracts on securities indices or other indices do not require
the physical delivery of securities, but merely provide for profits and
losses resulting from changes in the market value of a contract to be
credited or debited at the close of each trading day to the respective
accounts of the parties to the contract. On the contract's expiration date a
final cash settlement occurs and the futures position is simply closed out.
Changes in the market value of a particular futures contract reflect changes
in the level of the index on which the futures contract is based.
Futures traders are required to make a good faith margin deposit in cash
or government securities with a broker or custodian to initiate and maintain
open positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying
security) if it is not terminated prior to the specified delivery date.
Minimal initial margin requirements are established by the futures exchange
and may be changed. Brokers may establish deposit requirements which are
higher than the exchange minimums. Futures contracts are customarily
purchased and sold for prices that may range upward from less than 5% of the
value of the contract being traded.
After a futures contract position is opened, the value of the contract
is marked to market daily. If the futures contract price changes to the
extent that the margin on deposit does not satisfy margin requirements,
payment of an additional "variation" margin will be required. Conversely, a
change in the contract value may reduce the required margin, resulting in a
repayment of excess margin to the contract holder. Variation margin payments
are made to and from the futures broker for as long as the contract remains
open. The Portfolios expect to earn interest income on their margin
deposits. With respect to each long position in a futures contract or option
thereon, the underlying commodity value of such contract will always be
covered by cash and cash equivalents set aside plus accrued profits held at
the futures commission merchant.
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The Portfolios may purchase and write call and put options on futures
contracts which are traded on a U.S. Exchange (and in the case of the Active
Country Allocation, Emerging Markets, Emerging Markets Debt, International
Magnum, U.S. Real Estate, China Growth and Latin American Portfolios, on any
recognized securities or futures exchange to the extent permitted by the
CFTC) and enter into closing transactions with respect to such options to
terminate an existing position. An option on a futures contract gives the
purchaser the right (in return for the premium paid) to assume a position in
a futures contract (a long position if the option is a call and a short
position if the option is a put) at a specified exercise price at any time
during the term of the option. Upon exercise of the option, the delivery of
the accumulated balance in the writer's futures margin account, which
represents the amount by which the market price of the futures contract at
the time of exercise exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the futures contract.
The Portfolios will purchase and write options on futures contracts for
identical purposes to those set forth above for the purchase of a futures
contract (purchase of a call option or sale of a put option) and the sale of a
futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in futures contracts.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the underlying securities with futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from market
fluctuations. The Portfolios intend to use futures contracts only for hedging
purposes.
Regulations of the CFTC applicable to the Portfolios require that all
futures transactions constitute bona fide hedging transactions except that a
Portfolio may engage in futures transactions that do not constitute bona fide
hedging to the extent that not more than 5% of the liquidation value of a
Portfolio's total assets are required as margin deposits or premiums for such
transactions. The Portfolios will only sell futures contracts to protect
securities owned against declines in price or purchase contracts to protect
against an increase in the price of securities intended for purchase. As
evidence of this hedging interest, the Portfolios expect that approximately 75%
of their futures contracts will be "completed"; that is, equivalent amounts of
related securities will have been purchased or are being purchased by the
Portfolios upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolios' exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While the Portfolios will incur commission expenses in both opening and closing
out futures positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. None of the Portfolios will
enter into futures contract transactions to the extent that, immediately
thereafter, the sum of its initial margin deposits on open contracts exceeds
5% of the market value of its total assets. In addition, none of the
Portfolios, except the Fixed Income and Global Fixed Income Portfolios, will
enter into futures contracts to the extent that its outstanding obligations
to purchase securities under futures contracts and options on futures
contracts (and in the case of the Active Country Allocation, Equity Growth,
Gold, Latin American and China Growth Portfolios, under options, futures
contracts and options on futures contracts) would exceed 20% of its
respective total assets.
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RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contracts at any specific time. Thus, it may
not be possible to close a futures position. In the event of adverse price
movements, the Portfolios would continue to be required to make daily cash
payments to maintain their required margin. In such situations, if a Portfolio
has insufficient cash, it may have to sell portfolio securities to meet its
daily margin requirement at a time when it may be disadvantageous to do so. In
addition, a Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the Portfolio's ability
to effectively hedge.
The Portfolios will minimize the risk that they will be unable to close
out a futures contract by only entering into futures which are traded on
recognized international or national futures exchanges and for which there
appears to be a liquid secondary market except that the Equity Growth,
Aggressive Equity, U.S. Real Estate, Technology and Active Country Allocation
Portfolios may enter into over-the-counter futures transactions to the extent
permitted by applicable law.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if, at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
Portfolios engage in futures strategies only for hedging purposes, the Adviser
does not believe that the Portfolios are subject to the risks of loss frequently
associated with futures transactions. A Portfolio would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying security or currency and sold it after the decline.
Utilization of futures transactions by the Portfolios does involve the risk
of imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities or currencies being
hedged. It is also possible that a Portfolio could both lose money on futures
contracts and also experience a decline in value of its portfolio securities.
There is also the risk of loss by a Portfolio of margin deposits in the event of
bankruptcy of a broker with whom the Portfolio has an open position in a futures
contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses. For a discussion of the special risks
associated with foreign currency transactions, see "Risks Associated with
Foreign Currency Transactions" in this SAI.
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LOAN PARTICIPATIONS AND ASSIGNMENTS.
The Emerging Markets and Emerging Markets Debt Portfolio may also 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"). The Portfolio's investments in Loans are
expected in most instances to be in the form of participations in Loans
("Participations") and assignments of all or a portion of Loans
("Assignments") from third parties. The Portfolio's investment in
Participations typically will result in the Portfolio having a contractual
relationship only with the Lender and not with the borrower. The Portfolio
will have the right to receive payments of principal, interest and any fees
to which it is entitled only from the Lender selling the Participation and
only upon receipt by the Lender of the payments from the borrower. In
connection with purchasing Participations, the Portfolio generally will have
no right to enforce compliance by the borrower with the terms of the loan
agreement relating to the Loan, nor any rights of set-off against the
borrower, and the Portfolio may not directly benefit from any collateral
supporting the Loan in which it has purchased the Participation. As a result,
the Portfolio may be subject to the credit risk of both the borrower and the
Lender that is selling the Participation. In the event of the insolvency of
the Lender selling a Participation, the Portfolio may be treated as a general
creditor of the Lender and may not benefit from any set-off between the
Lender and the borrower. Certain Participations may be structured in a manner
designed to avoid purchasers of Participations being subject to the credit
risk of the Lender with respect to the Participation, but even under such a
structure, in the event of the Lender's insolvency, the Lender's servicing of
the Participation may be delayed and the assignability of the Participation
impaired. The Portfolio will acquire Participations only if the Lender
interpositioned between the Portfolio and the borrower is determined by the
Adviser to be creditworthy.
When the Portfolio purchases Assignments from Lenders it will acquire
direct rights against the borrower on the Loan. Because Assignments are arranged
through private negotiations between potential assignees and potential
assignors, however, 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. The assignability of certain sovereign debt
obligations is restricted by the governing documentation as to the nature of the
assignee such that the only way in which the Portfolio may acquire an interest
in a loan is through a Participation and not an Assignment. The Portfolio may
have difficulty disposing of Assignments and Participations because to do so it
will have to assign such securities to a third party. Because there is no
liquid market for such securities, the Portfolio anticipates that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market may have an adverse impact on the value of
such securities and the Portfolio's ability to dispose of particular Assignments
or Participations when necessary to meet the Portfolio's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Portfolio
to assign a value to these securities for purposes of valuing the Portfolio's
securities and calculating its net asset value.
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MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX
The investment objective of the Active Country Allocation Portfolio and
the International Magnum Portfolio is to provide long-term capital
appreciation. The Active Country Allocation Portfolio seeks to achieve its
objective by investing in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices, in accordance with country
weightings determined by the Adviser. The Adviser utilizes a top-down
approach in selecting investments for the Active Country Allocation Portfolio
that emphasizes country selection and weighing rather than individual stock
selection. The Active Country Allocation Portfolio invests, INTER ALIA, in
industrialized countries throughout the world that comprise the Morgan
Stanley Capital International EAFE (Europe, Australia and the Far East) Index
(the "EAFE Index"). The International Magnum Portfolio seeks to achieve its
objective by investing primarily in equity securities of non-U.S. issuers
domiciled in EAFE countries (defined below). After establishing regional
allocation strategies, the Adviser then selects equity securities among issuers
of a region. The International Magnum Portfolio invests in countries
comprising the EAFE Index (each an "EAFE country").
The EAFE Index is one of seven International Indices, twenty National
Indices and thirty-eight International Industry Indices making up the Morgan
Stanley Capital International Indices. The EAFE Index is based on the share
prices of 1,066 companies listed on the stock exchanges of Europe, Australia,
New Zealand and the Far East. "Europe" includes Austria, Belgium, Denmark,
Finland, France, Germany, Italy, The Netherlands, Norway, Spain, Sweden,
Switzerland and the United Kingdom. "Far East" includes Japan, Hong Kong and
Singapore/Malaysia.
MORTGAGE-BACKED SECURITIES
Mortgage-Backed Securities are securities that, directly or
indirectly, represent a participation in, or are secured by and payable from,
mortgage loans on real property. Mortgage-backed securities include
collateralized mortgage obligations, pass-through securities issued or
guaranteed by agencies or instrumentalities of the U.S. government or by
private sector entities.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage
obligations ("CMOs") are debt obligations or multiclass pass-through
certificates issued by agencies or instrumentalities of the U.S. government or
by private originators or investors in mortgage loans. They are backed by
Mortgage Pass-Through Securities (discussed below) or whole loans (all such
assets, the "Mortgage Assets") and are evidenced by a series of bonds or
certificates issued in multiple classes or "tranches." The principal and
interest on the underlying Mortgage Assets may be allocated among the several
classes of a series of CMOs in many ways.
CMOs may be issued by agencies or instrumentalities of the U.S.
government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. CMOs that
are issued by private sector entities and are backed by assets lacking a
guarantee of an entity having the credit status of a governmental agency or
instrumentality are generally structured with one or more types of credit
enhancement as described below. An issuer of CMOs may elect to be treated, for
federal income tax purposes, as a Real Estate Mortgage Investment Conduit (a
"REMIC"). An issuer of CMOs issued after 1991 must elect to be treated as a
REMIC or it will be taxable as a corporation under rules regarding taxable
mortgage pools.
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In a CMO, a series of bonds or certificates are issued in multiple
classes. Each tranche may be issued with a specific fixed or floating
coupon rate and has a stated maturity or final scheduled distribution date.
Principal prepayments on the underlying Mortgage Assets may cause the CMOs to
be retired substantially earlier than their stated maturities or final
scheduled distribution dates. Interest is paid or accrues on CMOs on a
monthly, quarterly or semi-annual basis. The principal of and interest on
the Mortgage Assets may be allocated among the several classes of a CMO in
many ways. The general goal in allocating cash flows on Mortgage Assets to
the various classes of a CMO is to create certain tranches on which the
expected cash flows have a higher degree of predictability than the
underlying Mortgage Assets. As a general matter, the more predictable the
cash flow is on a particular CMO tranche, the lower the anticipated yield
will be on that tranche at the time of issuance relative to prevailing market
yields on Mortgage Assets. As part of the process of creating more
predictable cash flows on certain tranches of a CMO, one or more tranches
generally must be created that absorb most of the changes in the cash flows
on the underlying Mortgage Assets. The yields on these tranches are
generally higher than prevailing market yields on Mortgage-Backed Securities
with similar average lives. Because of the uncertainty of the cash flows on
these tranches, the market prices of and yields on these tranches are more
volatile.
Included within the category of CMOs are PAC Bonds. PAC Bonds are a
type of CMO tranche or series designed to provide relatively predictable
payments of principal provided that, among other things, the actual prepayment
experience on the underlying mortgage loans falls within a predefined range. If
the actual prepayment experience on the underlying mortgage loans is at a rate
faster or slower than the predefined range or if deviations from other
assumptions occur, principal payments on the PAC Bond may be earlier or later
than predicted. The magnitude of the predefined range varies from one PAC Bond
to another; a narrower range increases the risk that prepayments on the PAC Bond
will be greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risks of prepayment than are other types of
mortgage-backed securities.
MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities in
which the Mortgage-Backed Securities Portfolio may invest include
pass-through securities issued or guaranteed by agencies or instrumentalities
of the U.S. government or by private sector entities. Mortgage pass-through
securities issued or guaranteed by private sector originators of or investors
in mortgage loans and are structured similarly to governmental pass-through
securities. Because private pass-throughs typically lack a guarantee by an
entity having the credit status of a governmental agency or instrumentality,
they are generally structured with one or more types of credit enhancement
described below. Federal National Mortgage Association ("FNMA" or "Fannie
Mae") and Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac")
obligations are not backed by the full faith and credit of the U.S.
government as Government National Mortgage Association ("GNMA" or "Ginnie
Mae") certificates are, but FNMA and FHLMC securities are supported by the
instrumentalities' right to borrow from the U.S. Treasury. Each of GNMA,
FNMA and FHLMC guarantees timely distributions of interest to certificate
holders. Each of GNMA and FNMA also guarantees timely distributions of
scheduled principal. FHLMC has in the past guaranteed only the ultimate
collection of principal of the underlying mortgage loan; however, FHLMC now
issues Mortgage-Backed Securities (FHLMC Gold Pcs) which also guarantee
timely payment of monthly principal reductions. REFCORP obligations are
backed, as to principal payments, by zero coupon U.S. Treasury bonds, and as
to interest payment, ultimately by the U.S. Treasury. Obligations issued by
such U.S. governmental agencies and instrumentalities are described more
fully below.
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GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934, as amended (the "Housing Act"),
authorizes Ginnie Mae to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of mortgage
loans insured by the Federal Housing Administration under the Housing Act, or
Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the
Department of Veterans Affairs under the Servicemen's Readjustment Act of 1944,
as amended ("VA Loans"), or by pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the United States
government is pledged to the payment of all amounts that may be required to be
paid under any guaranty. In order to meet its obligations under such guaranty,
Ginnie Mae is authorized to borrow from the U.S. Treasury with no
limitations as to amount.
Each Ginnie Mae Certificate will represent a pro rata interest in one or
more of the following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multi-family residential
properties under construction; (vi) mortgage loans on completed multi-family
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodical changes in interest rates or in
other payment terms of the mortgage loans; and (ix) mortgage-backed serial
notes. All of these mortgage loans will be FHA Loans or VA Loans and, except as
otherwise specified above, will be fully-amortizing loans secured by first liens
on one- to four-family housing units.
FANNIE MAE CERTIFICATES. Fannie Mae is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act of 1938. The obligations of Fannie Mae are not
backed by the full faith and credit of the U.S. government.
Each Fannie Mae Certificate will represent a pro rata interest in one or
more pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate and adjustable mortgage loans secured by
multi-family projects.
FREDDIE MAC CERTIFICATES. Freddie Mac is a corporate instrumentality of
the United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations
solely of Freddie Mac and are not backed by the full faith and credit of the
U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac.
The mortgage loans underlying the Freddie Mac Certificates will consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity of
between ten and thirty years, substantially all of which are secured by first
liens on one- to four-family residential properties or multi-family projects.
Each mortgage loan must meet the applicable standards set forth in the FHLMC
Act. A Freddie Mac Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
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CREDIT ENHANCEMENT. Mortgage-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
To lessen the effect of failure by obligors on underlying assets to make
payments, such securities may contain elements of credit support. Such credit
support falls into two categories: (i) liquidity protection and (ii) protection
against losses resulting from ultimate default by an obligor on the underlying
assets. Liquidity protection generally refers to the provision of advances,
typically by the entity administering the pool of assets, to ensure that the
pass-through of payments due on the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default enhances the
likelihood of ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties (referred to herein as "third party credit support"), through
various means of structuring the transaction or through a combination of such
approaches. The Mortgage-Backed Securities Portfolio will not pay any
additional fees for such credit support, although the existence of credit
support may increase the price the Portfolio pays for a security.
The ratings of mortgage-backed securities for which third-party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency and loss
experience on the underlying pool of assets is better than expected.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with defaults on the underlying assets
being borne first by the holders of the most subordinated class), creation of
"reserve funds" (where cash or investments, sometimes funded from a portion of
the payments on the underlying assets, are held in reserve against future
losses) and "over-collateralization" (where the scheduled payments on, or the
principal amount of, the underlying assets exceed those required to make payment
of the securities and pay any servicing or other fees). The degree of credit
support provided for each security is generally based on historical information
with respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such a security.
MUNICIPAL BONDS
Municipal Bonds generally include debt obligations issued by states and
their political subdivisions, and duly constituted authorities and corporations,
to obtain funds to construct, repair or improve various public facilities such
as airports, bridges, highways, hospitals, housing, schools, streets and water
and sewer works. Municipal Bonds may also be issued to refinance outstanding
obligations as well as to obtain funds for general operating expenses and for
loans to other public institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special tax" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other tax, but not
from general tax revenues. The Municipal Bond Portfolio and the Municipal Money
Market Portfolio may also invest in tax-exempt industrial development bonds,
short-term municipal obligations, project notes, demand notes and tax-exempt
commercial paper in accordance with the Portfolio's investment objectives and
policies.
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Industrial revenue bonds (i.e., private activity bonds) in most cases
are revenue bonds and generally do not have the pledge of the credit of the
issuer. The payment of the principal and interest on such industrial revenue
bonds is dependent solely on the ability of the user of the facilities financed
by the bonds to meet its financial obligations and the pledge, if any, of real
and personal property so financed as security for such payment. Short-term
municipal obligations issued by states, cities, municipalities or municipal
agencies include Tax Anticipation Notes, Revenue Anticipation Notes, Bond
Anticipation Notes, Construction Loan Notes and Short-Term Discount Notes.
Project Notes are instruments guaranteed by the Department of Housing and Urban
Development but issued by a state or local housing agency. While the issuing
agency has the primary obligation on such Project notes, they are also secured
by the full faith and credit of the United States.
Note obligations with demand or put options may have a stated maturity
in excess of one year, but allow any holder to demand payment of principal
plus accrued interest upon a specified number of days notice. Frequently,
such obligations are secured by letters of credit or other credit support
arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to repay in its discretion the
outstanding principal of the notes plus accrued interest upon a specific
number of days notice to the bondholders. The interest rate on a demand note
may be based upon a known lending rate, such as a bank's prime rate, and may
be adjusted when such rate changes, or the interest rate on a demand note may
be a market rate that is adjusted at specified intervals. The demand notes
in which the Municipal Money Market Portfolio will invest are payable on not
more than one year's notice.
The yields of Municipal Bonds depend on, among other things, general
money market conditions, conditions in the Municipal Bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's and S&P represent their opinions of the quality
of the Municipal Bonds. It should be emphasized that such ratings are general
and are not absolute standards of quality. Consequently, Municipal Bonds with
the same maturity, coupon and rating may have different yields, while Municipal
Bonds of the same maturity and coupon, but with different ratings, may have the
same yield. It will be the responsibility of the Adviser to appraise
independently the fundamental quality of the bonds held by the Municipal Bond
Portfolio and the Municipal Money Market Portfolio.
Municipal Bonds are sometimes purchased on a "when issued" basis meaning
the buyer has committed to purchasing certain specified securities at an
agreed-upon price when they are issued. The period between commitment date and
issuance date can be a month or more. It is possible that the securities will
never be issued and the commitment canceled.
From time to time proposals have been introduced before Congress to
restrict or eliminate the Federal income tax exemption for interest on Municipal
Bonds. Similar proposals may be introduced in the future. If any such proposal
were enacted, it might restrict or eliminate the ability of either the Municipal
Bond Portfolio or the Municipal Money Market Portfolio to achieve its investment
objective. In that event, the Fund's Directors and officers would reevaluate
its investment objective and policies and consider recommending to its
shareholders changes in such objective and policies.
Similarly, from time to time proposals have been introduced before State
and local legislatures to restrict or eliminate the State and local income tax
exemption (to the extent such an exemption applies, which may not apply in all
cases) for interest on Municipal Bonds. Similar proposals may be introduced in
the future. If any such proposal were enacted, it might restrict or eliminate
the ability of either of the Municipal Bond Portfolio or the Municipal Money
Market Portfolio to achieve its investment objective. In that event, the Fund's
Directors and officers would reevaluate the Portfolio's investment objective and
policies and consider recommending to its shareholders changes in such objective
and policies.
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OPTIONS TRANSACTIONS
GENERAL INFORMATION. As stated in the applicable Prospectus, the Active
Country Allocation, Emerging Markets, Emerging Markets Debt, Equity Growth,
Aggressive Equity, Global Fixed Income, Gold, Small Cap Value Equity, Value
Equity, Balanced, Latin American, U.S. Real Estate, International Magnum,
Fixed Income and China Growth Portfolios may purchase and sell
options on portfolio securities and the Fixed Income, Global Fixed Income,
China Growth and Latin American Portfolios also may purchase and sell
options on securities indices. Additional information with respect to
option transactions is set forth below. Call and put options on equity
securities are listed on various U.S. and foreign securities exchanges
("listed options") and are written in over-the-counter
transactions ("OTC Options").
Listed options are issued or guaranteed by the exchange on which they trade
or by a clearing corporation, such as Options Clearing Corporation ("OCC") in
the United States. Ownership of a listed call option gives the fund the right
to buy from the clearing corporation or exchange, the underlying security
covered by the option at the state exercise price (the price per unit of the
underlying security or currency) by filing an exercise notice prior to the
expiration date of the option. The writer (seller) of the option would then
have the obligation to sell to the clearing corporation or exchange, the
underlying security or currency at that exercise price prior to the expiration
date of the option, regardless of the current market price. Ownership of
listed put option would give the Portfolio the right to sell the underlying
security or currency to the clearing corporation or exchange at the state
exercise price. Upon notice of exercise of the put option, the writer of the
option would have the obligation to purchase the underlying security from the
clearing corporation or exchange at the exercise price.
OTC options are purchased from or sold (written) to dealers of financial
institutions which have entered into direct agreements with the Portfolio. With
OTC options, such variables as expiration date, exercise price and premium will
be agreed upon between the Portfolio and the transactions dealer, without the
intermediation of a third party such as a clearing corporation or exchange. If
the transacting dealer fails to make or take delivery of the securities
underlying an option it has written, in accordance with the terms of that
option, the Portfolio would lose the premium paid for the option as well as any
anticipated benefit of the transaction.
COVERED CALL WRITING. Each of the Portfolios may write (i.e., sell) covered
call options on portfolio securities. By doing so, the Portfolio would become
obligated during the terms of the option to deliver the securities underlying
the option should the option holder choose to exercise the option before the
option's termination date. In return for the call it has written, the Portfolio
will receive from the purchaser (or option holder) a premium which is the price
of the option, less a commission charged by a broker. The Portfolio will keep
the premium regardless of whether the option is exercised. A call option is
"covered" if the Portfolio owns the security underlying the option it has
written or has an absolute or immediate right to acquire the security by holding
a call option on such security, or maintains a sufficient amount of cash, cash
equivalents or liquid securities to purchase the underlying security. When the
Portfolio writes covered call options, it augments its income by the premiums
received and is thereby hedged to the extent of that amount against a decline in
the price of the underlying securities and the premiums received will offset a
portion of the potential loss incurred by the Portfolio if the securities
underlying the options are ultimately sold by the Portfolio at a loss. However,
during the option period, the Portfolio has, in return for the premium on the
option, given up the opportunity for capital appreciation above the exercise
price should the market price of the underlying security increase, but has
retained the risk of loss should the price of the underlying security decline.
The size of premiums will fluctuate with varying market conditions.
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COVERED PUT WRITING. Each of the Portfolios may write covered put options on
portfolio securities. By doing so, the Portfolio incurs an obligation to buy
the security underlying the option from the purchaser of the put at the option's
exercise price at any time during the option period, at the purchaser's election
(certain listed and OTC options written by the Portfolio will be exercisable by
the purchaser only on a specific date). Generally, a put option is "covered" if
the Portfolio maintains cash or other liquid securities equal to the exercise
price of the option or if the Portfolio holds a put option on the same
underlying security with a similar or higher exercise price.
Each of the Portfolios may write put options to receive the premiums paid
by purchasers; when the Adviser (and also the Sub-Adviser with respect to the
Gold Portfolio) wishes to purchase the security underlying the option at a price
lower than its current market price, in which case it will write the covered put
at an exercise price reflecting the lower purchase price sought; and to close
out long put option positions.
PURCHASE OF PUT AND CALL OPTIONS. Each of the Portfolios may purchase listed or
OTC put or call options on its portfolio securities in amounts exceeding no more
than 5% of its total assets. When the Portfolio purchases a call option it
acquires the right to purchase a designated security at a designated price (the
"exercise price"), and when the Portfolio purchases a put option it acquires the
right to sell a designated security at the exercise price, in each case on
or before a specified date (the "termination date"), usually not more than nine
months from the date the option is issued.
The Portfolio may purchase call options to close out a covered call
position or to protect against an increase in the price of a security it
anticipates purchasing. The Portfolio may purchase put options on securities
which it holds in its portfolio only to protect itself against a decline in the
value of the security. If the value of the underlying security were to fall
below the exercise price of the put purchased in an amount greater than the
premium paid for the option, the Portfolio would incur no additional loss. The
Portfolio may also purchase put options to close out written put positions in a
manner similar to call option closing purchase transactions.
The amount the Portfolio pays to purchase an option is called a "premium",
and the risk assumed by the Portfolio when it purchases an option is the loss of
this premium. Because the price of an option tends to move with that of its
underlying security, if the Portfolio is to make a profit, the price of the
underlying security must change and the change must be sufficient to cover the
premium and commissions paid. A price change in the security underlying the
option does not assure a profit since prices in the options market may not
always reflect such a change.
OPTIONS ON SECURITIES INDICES. The China Growth and Latin American Portfolios
may purchase and write put and call options on securities indices and enter into
related closing transactions in order to hedge against the risk of market
price fluctuations or to increase income to the Portfolio.
Call and put options on indices are similar to options on securities except
that, rather than the right to purchase or sell particular securities at a
specified price, options on an index give the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the underlying
index is greater than (or less than, in the case of puts) the exercise price of
the option. This amount of cash is equal to the difference between the closing
price of the index and the exercise price of the option, expressed in dollars
multiplied by a specified number. Thus, unlike options on individual
securities, all settlements are in cash, and gain or loss depends on price
movements in the particular market represented by the index generally (or in a
particular industry or segment of the market) rather than the price movements in
individual securities.
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All options written on indices must be covered. When the Portfolio writes
an option on an index, it will establish a segregated account containing cash
or liquid securities with its custodian in an amount at least equal to the
market value of the option and will maintain the account while the option is
open or will otherwise cover the transaction.
The Portfolio may choose to terminate an option position by entering into a
closing transaction. The ability of the Portfolio to enter into closing
transactions depends upon the existence of a liquid secondary market for such
transactions.
OPTIONS ON CURRENCIES. The Fixed Income, Global Fixed Income China Growth,
Emerging Markets Debt, International Magnum and Latin American
Portfolios may purchase and write put and call options on foreign
currencies (traded on U.S. and foreign exchanges or over-the-counter
markets) to manage the Portfolio's exposure to changes in dollar
exchange rates. Call options on foreign currency written by the
Portfolio will be "covered," which means that the Portfolio will own an equal
amount of the underlying foreign currency. With respect to put options on
foreign currency written by the Portfolio, the Portfolio will establish a
segregated account with the Fund's Custodian consisting of cash
or liquid securities in an amount equal to the amount the Portfolio would be
required to pay upon exercise of the put.
RISK FACTORS IN OPTIONS TRANSACTIONS. The use of options also involves
additional risks. Compared to the purchase or sale of futures contracts, the
purchase of call or put options involves less potential risk to a Portfolio
because the maximum amount of risk is the premium paid for the option. The
writing of a call option generates a premium which may partially offset a
decline in the value of a Portfolio's portfolio assets. By writing a call
option, the Portfolio becomes obligated to sell the underlying instrument,
which may have a value higher than the exercise price. Conversely, the
writing of a put option generates a premium, but the Portfolio becomes
obligated to purchase the underlying instrument, which may have a value lower
than the exercise price. Thus, the loss incurred by a Portfolio in writing
options may exceed the amount of the premium received.
The effective use of options strategies is dependent, among other
things, on a Portfolio's ability to terminate options positions at a time
when the portfolio manager deems it desirable to do so. Although a Portfolio
will enter into options positions only if the portfolio manager believes that
a liquid secondary market exists for such options, there is no assurance that
the Portfolio will be able to effect closing transactions at any particular
time or at an acceptable price.
A Portfolio's purchase or sale of put or call options will be based upon
predictions as to anticipated market trends and/or interest rate movements by
the portfolio manager, which could prove to be inaccurate. Even if the
expectations of the portfolio manager are correct, there may be an imperfect
correlation between the change in the value of the options and of the
Portfolio's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the
case of a put option; the writer may be assigned an exercise notice at any
time prior to the termination of the obligation. Whether or not an option
expires unexercised, the writer retains the amount of the premium. This
amount, of course, may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option
period. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. If a put option is exercised,
the writer must fulfill the obligation to purchase the underlying security at
the exercise price which will usually exceed the then market value of the
underlying security.
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The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of
the purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who
is the holder of an option may liquidate its position by effecting a "closing
sale transaction." This is accomplished by selling an option of the same
series as the option previously purchased. There is no guarantee that either
a closing purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit the Portfolio to write another call option on the underlying
security with either a different exercise price or expiration date or both,
in the case of a written put option, will permit the Portfolio to write
another put option to the extent that the exercise price thereof is secured
by depositing liquid assets. Also, effecting a closing transaction will
permit the cash or proceeds from the concurrent sale of any securities
subject to the option to be used for other Portfolio investments. If the
Portfolio desires to sell a particular security from its portfolio on which
it has written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
A Portfolio will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Portfolio will realize
a loss from a closing transaction if the price of the transaction is more than
the premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the
Portfolio.
An options position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market
does not exist, it might be possible to effect a closing transaction in
particular options with the result that the Portfolio would have to exercise
the options in order to realize any profit. If the Portfolio is unable to
effect a closing purchase transaction in a secondary market, it will not be
able to sell the underlying security until the option expires or it delivers
the underlying security upon exercise. Reasons for the absence of a liquid
secondary market include the following: (1) there may be insufficient
trading interest in certain options, (2) restrictions may be imposed by an
exchange on opening transactions or closing transactions, or both, (3)
trading halts, suspensions or other restrictions may be imposed with respect
to particular classes or series of options or underlying securities, (4)
unusual or unforeseen circumstances may interrupt normal operation on an
exchange, (5) the facilities of an exchange or OCC may not at all times be
adequate to handle current trading volume, or (6) one or more exchange could,
for economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that
class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by OCC as a result of trades on
that exchange would continue to be exercisable in accordance with their terms.
The Portfolios may purchase put options to hedge against a decline in
the value of their portfolios. By using put options in this way, the
Portfolios will reduce any profit they might otherwise have realized in the
underlying security by the amount of the premium paid for the put option and
by transaction costs.
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The Portfolios may purchase call options to hedge against an increase in
the price of securities that the Portfolios anticipate purchasing in the
future. The premium paid for the call option plus any transaction costs will
reduce the benefit, if any, realized by a Portfolio upon exercise of the
option, and, unless the price of the underlying security rises sufficiently,
the option may expire worthless.
Options may also be traded OTC ("OTC Options"). In an OTC trading
environment, many of the protections afforded to exchange participants will
not be available. For example, there are no daily price fluctuation limits,
and adverse market movements could therefore continue to an unlimited extent
over a period of time. The Portfolios may purchase or write OTC Options
deemed creditworthy by the Adviser. OTC Options are illiquid and it may not
be possible for the Portfolios to dispose of such options they have purchased
or terminate their obligations under an option they have written at a time
when the Adviser and portfolio manager believe it would be advantageous to do
so. Accordingly, OTC Options are subject to the Portfolios' limitation that
a maximum of 15% of its net assets be invested in illiquid securities. In
the event of the bankruptcy of the writer of an OTC Option, the Portfolios
could experience a loss of all or part of the value of the option.
For a discussion regarding the special risks of foreign currency
options, see "Risks Associated with Foreign Currency Transactions," in this
SAI.
PORTFOLIO TURNOVER
The portfolio turnover rate for a year is the lesser of the value of the
purchases or sales for the year divided by the average monthly market value of
the Portfolio for the year, excluding U.S. Government securities and securities
with maturities of one year or less. The portfolio turnover rate for a year is
calculated by dividing the lesser of sales or the average monthly value of the
Portfolio's portfolio purchases of portfolio securities during that year by
securities, excluding money market instruments. The rate of portfolio turnover
will not be a limiting factor when the Portfolio deems it appropriate to
purchase or sell securities for the Portfolio. However, the U.S. federal tax
requirement that the Portfolio derive less than 30% of its gross income from the
sale or disposition of securities held less than three months may limit the
Portfolio's ability to dispose of its securities. See "Taxes."
PRECIOUS METALS FORWARD AND FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Gold Portfolio may enter into futures contacts on precious metals
("precious metals futures") as a hedge against changes in the prices of
precious metals held or intended to be acquired by the Portfolio, but not for
speculation or for achieving leverage. The Portfolio's hedging activities
may include purchases of futures contracts as an offset against the effect of
anticipated increases in the price of a precious metal which the Portfolio
intends to acquire ("anticipatory hedge") or sales of futures contracts as an
offset against the effect of anticipated declines in the price of precious
metal which the Portfolio owns ("hedge against an existing position").
The Portfolio will enter into precious metals forward contracts which are
similar to precious metals futures contracts, in that they provide for the
purchase or sale of precious metals at an agreed price with delivery to take
place at an agreed future time. However, unlike futures contracts, forward
contracts are negotiated contracts which are primarily used in the dealer
market. Unlike the futures contract market, which is regulated by the CFTC and
by the regulations of the commodity exchanges, the forward contract market is
unregulated. The Portfolio will use forward contracts for the same hedging
purposes as those applicable to futures contracts, as described above. When the
Portfolio enters into a forward contract it will establish with the custodian a
segregated account consisting of cash, liquid assets or bullion equal to the
market value of the forward contract purchased.
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Precious metals futures and forward contract prices can be volatile and are
influenced principally by changes in spot market prices, which in turn are
affected by a variety of political and economic factors. In addition,
expectations of changing market conditions may at times influence the prices of
such futures and forward contracts, and changes in the cost of holding physical
precious metals, including storage, insurance and interest expense, will also
affect the relationship between spot and futures or forward prices. While the
correlation between changes in prices of futures and forward contracts and
prices of the precious metals being hedged by such contracts has historically
been very strong, the correlation may at times be imperfect and even a well
conceived hedge may be unsuccessful to some degree because of market behavior or
unexpected precious metals price trends. To the extent that interest rates move
in a direction opposite to that anticipated, the Portfolio may realize a loss on
a futures transaction not offset by an increase in the value of portfolio
securities. Moreover there is a possibility of a lack of a liquid secondary
market for closing out a futures position or futures option. The success of any
hedging technique depends upon the Adviser's and Sub-Adviser's accuracy in
predicting the direction of a market. If these predictions are incorrect, the
Portfolio may realize a loss.
The Portfolio may also purchase (buy) and write (sell) covered call or put
options on precious metals futures contracts. Such options would be purchased
solely for hedging purposes similar to those applicable to the purchase and sale
of futures contracts. Call options might be purchased to hedge against an
increase in the price of precious metals the Portfolio intends to acquire, and
put options may be purchased to hedge against a decline in the price of precious
metals owned by the Portfolio. As is the case with futures contracts, options
on precious metals futures may facilitate the Portfolio's acquisition of
precious metals or permit the Portfolio to defer disposition of precious metals
for tax or other purposes. The Portfolio may not purchase options on precious
metals and precious metals futures contracts if the premiums paid for all such
options, together with margin deposits on precious metals future contracts,
would exceed 5% of the Portfolio's total assets at the time the option is
purchased.
One of the risks which may arise in employing futures contracts to protect
against the price volatility of the Portfolio's assets is that the price of
precious metals subject to futures contracts (and thereby the futures contracts
prices) may correlate imperfectly with the prices of such assets. A correlation
may also be distorted by the fact that the futures market is dominated by short-
term traders seeking to profit from the difference between a contract or
security price objective and their cost of borrowed funds. Such distortions are
generally minor and would diminish as the contract approached maturity.
SECURITIES LENDING
Each Portfolio may lend its investment securities to qualified
institutional investors who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to
deliver securities or completing arbitrage operations. By lending its
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 during the term of the
loan would be for the account of the Portfolio. Each Portfolio may lend its
investment securities to qualified brokers, dealers, domestic and foreign
banks or other financial institutions, so long as the terms, structure and
the aggregate amount of such loans are not inconsistent with the 1940 Act, or
the Rules and Regulations or interpretations of the Commission thereunder,
which currently require that (a) the borrower pledge and maintain with the
portfolio collateral consisting of cash, an irrevocable letter of credit
issued by a domestic U.S. bank, or securities issued or guaranteed by the
United States Government having a value at all times not less than 100% of
the value of the securities loaned, (b) the borrower add to such collateral
whenever the price of the securities
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loaned rises (i.e., the borrower "marks to the market" on a daily basis), (c)
the loan be made subject to termination by the Portfolio at any time, and (d)
the Portfolio receive reasonable interest on the loan (which may include the
Portfolio investing any cash collateral in interest bearing short-term
investments), any distributions on the loaned securities and any increase in
their market value. There may be risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of
the securities fail financially. However, loans will only be made to
borrowers deemed by the Adviser or Sub-Adviser to be of good standing and
when, in the judgment of the Adviser or Sub-Adviser, the consideration which
can be earned currently from such securities loans justifies the attendant
risk. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions
with respect to the lending of securities, subject to review by the Board of
Directors of the Fund.
At the present time, the staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Board of Directors. In addition, voting
rights may pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
SHORT SALES
The Emerging Markets Debt, Latin American and Aggressive Equity
Portfolios may from time to time sell securities short without limitation but
consistent with applicable legal requirements, although at present the
Portfolios do not intend to sell securities short. A short sale is a
transaction in which the Portfolio would sell securities it owns or has the
right to acquire at no added cost (i.e., "against the box") or does not own
(but has borrowed) in anticipation of a decline in the market price of the
securities. When the Portfolio makes a short sale of borrowed securities,
the proceeds it receives from the sale will be held on behalf of a broker
until the Portfolio replaces the borrowed securities. To deliver the
securities to the buyer, the Portfolio will need to arrange through a broker
to borrow the securities and, in so doing, the Portfolio will become
obligated to replace the securities borrowed at their market price at the
time of replacement, whatever that price may be. The Portfolio may have to
pay a premium to borrow the securities and must pay any dividends or interest
payable on the securities until they are replaced.
The Portfolio's obligation to replace the securities borrowed in
connection with a short sale will be secured by collateral deposited with the
broker that consists of cash or liquid securities. In addition, if the short
sale is not "against the box," the Portfolio will place in a segregated
account with its custodian, or designated sub-custodian, an amount of cash or
liquid securities equal to the difference, if any, between the market
value of the securities sold short and any cash or liquid securities deposited
as collateral with the broker in connection with the short sale. Until it
replaces the borrowed securities, the Portfolio will maintain the segregated
account daily at a level so that the amount deposited in the account plus the
amount deposited with the broker will equal the current market
value of the securities sold short.
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Short sales by the Portfolio involve certain risks and special
considerations. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases can equal only the total amount
invested.
U.S. GOVERNMENT SECURITIES
The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the U.S. Government, and by various
instrumentalities which have been established or sponsored by the U.S.
Government.
U.S. Treasury securities are backed by the "full faith and credit" of
the United States. Securities issued or guaranteed by Federal agencies and
U.S. Government sponsored instrumentalities may or may not be backed by the
full faith and credit of the United States. In the case of securities not
backed by the full faith and credit of the United States, the investor must
look principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim
against the United States itself in the event the agency or instrumentality
does not meet its commitment. Agencies which are backed by the full faith and
credit of the United States include the Export-Import Bank, Farmers Home
Administration, Federal Financing Bank, and others. Certain agencies and
instrumentalities, such as the GNMA, are, in effect, backed by the full faith
and credit of the United States through provisions in their charters that
they may make "indefinite and unlimited" drawings on the Treasury, if needed
to service debt. Debt from certain other agencies and instrumentalities,
including the Federal Home Loan Bank and FNMA, are not guaranteed by the
United States, but those institutions are protected by the discretionary
authority for the U.S. Treasury to purchase certain amounts of their
securities to assist the institution in meeting its debt obligations.
However, the U.S. Treasury has no lawful obligation to assume the financial
liabilities of these agencies or others. Finally, other agencies and
instrumentalities, such as the Farm Credit System and the FHLMC, are
federally chartered institutions under Government supervision, but their debt
securities are backed only by the creditworthiness of those institutions, not
the U.S. Government.
Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and the Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency
organized under Federal charter with Government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Federal Home Loan
Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal Immediate
Credit Banks, and the FNMA.
TAXES
The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectuses. No attempt is made to present a detailed
explanation of the federal, state or local tax treatment of the Fund or its
shareholders, and the discussion here and in the Fund's Prospectuses is not
intended as a substitute for careful tax planning.
The following discussion of federal income tax consequences is based on
the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations issued thereunder as in effect on the date of this Statement of
Additional Information. New legislation, as well as administrative changes
or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
Each Portfolio within the Fund is generally treated as a separate
corporation for federal income tax purposes, and thus the provisions of the Code
generally will be applied to each Portfolio separately, rather than to the Fund
as a whole.
GENERAL REGULATED INVESTMENT COMPANY QUALIFICATIONS
Each Portfolio intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, each Portfolio must, among other things, (a) derive at least 90% of
its gross income each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures and forward contracts; (b) derive
less than 30% of its gross income each taxable year from the sale or other
disposition of the following items if held less than three months (A) stock or
securities, (B) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies), and (C) foreign currencies
(or options, futures, or forward contracts on foreign currencies) that are not
directly related to the Portfolio's principal business of investing in stocks or
securities (or options or futures with respect to stock or securities) (the
"short-short test"); and (c) diversify its holdings so that, at the end of each
fiscal quarter of the Portfolio's taxable year, (i) at least 50% of the market
value of the Portfolio's total assets is represented by cash and cash items,
United States Government securities, securities of other RICs, and other
securities, with such other securities limited, in respect to any one issuer, to
an amount not greater than 5% of the value of the Portfolio's total assets or
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets is invested in the securities (other than
United States Government securities or securities of other RICs) of any one
issuer or two or more issuers which the Portfolio controls and which are engaged
in the same, similar, or related trades or business. For purposes of the 90% of
gross income requirement described above, foreign currency gains which are not
directly related to a Portfolio's principal business of investing in stock or
securities (or options or futures with respect to stock or securities) may be
excluded from income that qualifies under the 90% requirement.
In addition to the requirements described above, in order to qualify as
a RIC, a Portfolio must distribute at least 90% of its net investment income
(which generally includes dividends, taxable interest, and the excess of net
short-term capital gains over net long-term capital losses less operating
expenses) and at least 90% of its net tax-exempt interest income, for each
tax year, if any, to its shareholders. If a Portfolio meets all of the RIC
requirements, it will not be subject to federal income tax on any of its net
investment income or capital gains that it distributes to shareholders.
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If a Portfolio fails to qualify as a RIC for any year, all of its income
will be subject to tax at corporate rates, and its distributions (including
capital gains distributions) will be taxable as ordinary income dividends to its
shareholders to the extent of the Portfolio's current and accumulated earnings
and profits, and will be eligible for the corporate dividends received deduction
for corporate shareholders.
GENERAL TAX TREATMENT OF QUALIFYING RICs AND SHAREHOLDERS
Each Portfolio will decide whether to distribute or to retain all or part
of any net capital gains (the excess of net long-term capital gains over net
short-term capital losses) in any year for reinvestment. If any such gains are
retained, the Portfolio will pay federal income tax thereon, and, if the
Portfolio makes an election, the shareholders will include such undistributed
gains in their income, will increase their basis in Portfolio shares by 65% of
the amount included in their income and will be able to claim their share of the
tax paid by the Portfolio as a refundable credit.
A gain or loss realized by a shareholder on the sale, exchange or
redemption of shares of a Portfolio held as a capital asset will be capital
gain or loss, and such gain or loss will be long-term if the holding period
for the shares exceeds one year, and otherwise will be short-term. Any loss
realized on a sale, exchange or redemption of shares of a Portfolio will be
disallowed to the extent the shares disposed of are replaced within the
61-day period beginning 30 days before and ending 30 days after the shares
are disposed of. Any loss realized by a shareholder on the disposition of
shares held 6 months or less is treated as a long-term capital loss to the
extent of any distributions of net long-term capital gains received by the
shareholder with respect to such shares or any inclusion of undistributed
capital gain with respect to such shares.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Each Portfolio will generally be subject to a nondeductible 4% federal
excise tax to the extent it fails to distribute by the end of any calendar year
at least 98% of its ordinary income for that year and 98% of its capital gain
net income (the excess of short- and long-term capital gains over short- and
long-term capital losses) for the one-year period ending on October 31 of that
year, plus certain other amounts.
Each Portfolio is required by federal law to withhold 31% of reportable
payments (which may include dividends, capital gains distributions, and
redemptions) paid to shareholders who have not certified on the Account
Registration Form or on a separate form supplied by the Portfolio, that the
Social Security or Taxpayer Identification Number provided is correct and that
the shareholder is exempt from backup withholding or is not currently subject to
backup withholding.
A Section 1256 position held by a Fund will generally be marked-to-market
(i.e. treated as if it were sold for fair market value) on the last business
day of a Fund's fiscal year, and all gain or loss associated with fiscal year
transactions and mark-to-market positions at fiscal year end (except certain
currency gain or loss covered by Section 988 of the Code) will generally be
treated as 60% long-term capital gain or loss and 40% short-term capital gain
or loss. The effect of Section 1256 mark-to-market rules may be to accelerate
income or to convert what otherwise would have been long-term capital gains
into short-term capital gains or short-term capital losses into long-term
capital losses within a Fund. The acceleration of income on Section 1256
positions may require a Fund to accrue taxable income without the
corresponding receipt of cash. In order to generate cash to satisfy the
distribution requirements of the Code, a Fund may be required to dispose of
portfolio securities that they otherwise would have continued to hold or to
use cash flows from other sources such as the sale of Fund shares. In these
ways, any or all of these rules may affect the amount, character and timing
of income earned and in turn distributed to shareholders by a Fund.
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As discussed above, in order for each Portfolio to continue to qualify for
federal income tax treatment as a RIC, at least 90% of its gross income for a
taxable year must be derived from certain qualifying income, including
dividends, interest, income derived from loans of securities, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
related income, including gains from options, futures and forward contracts,
derived with respect to its business of investing in stock, securities or
currencies. Any net gain realized from the closing out of futures contracts
will therefore generally be qualifying income for purposes of the 90%
requirement. Qualification as a RIC also requires that less than 30% of a
Portfolio's gross income be derived from the sale or other disposition of stock,
securities, options, futures or forward contracts (including certain foreign
currencies not directly related to the Fund's business of investing in stock or
securities) held less than three months. In order to avoid realizing excessive
gains on futures contracts held less than three months, the Portfolio may be
required to defer the closing out of futures contracts beyond the time when it
would otherwise be advantageous to do so.
Short sales engaged in by a Portfolio may reduce the holding property held
by a Portfolio which is substantially identical to the property sold short.
This rule may make it more difficult for the Portfolio to satisfy the short-
short test. This rule may also have the effect of converting capital gains
recognized by the Portfolio from long-term to short-term as well as converting
capital losses recognized by the Portfolio from short-term to long-term.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS. In general,
gains from foreign currencies and from foreign currency options, foreign
currency futures and forward foreign exchange contracts relating to
investments in stock, securities or foreign currencies are currently
considered to be qualifying income for purposes of determining whether the
Fund qualifies as a regulated investment company. It is currently unclear,
however, who will be treated as the issuer of certain foreign currency
instruments or how foreign currency options, futures, or forward foreign
currency contracts will be valued for purposes of the regulated investment
company diversification requirements applicable to the Fund. The Fund may
request a private letter ruling from the Internal Revenue Service on some or
all of these issues.
Under Code Section 988, special rules are provided for certain
transactions in a foreign currency other than the taxpayer's functional
currency (i.e., unless certain special rules apply, currencies other than the
U.S. dollar). In general, foreign currency gains or losses from forward
contracts, from futures contracts that are not "regulated futures contracts",
and from unlisted options will be treated as ordinary income or loss under
Code Section 988. Also, certain foreign exchange gains or losses derived with
respect to foreign fixed-income securities are also subject to Section 988
treatment. In general, therefore, Code Section 988 gains or losses will
increase or decrease the amount of the Fund's investment company taxable
income available to be distributed to shareholders as ordinary income, rather
than increasing or decreasing the amount of the Fund's net capital gain.
If the Fund invests in an entity which is classified as a "passive
foreign investment company" ("PFIC") for U.S. tax purposes, the application
of certain technical tax provisions applying to such companies could result
in the imposition of federal income tax with respect to such investments at
the Fund level which could not be eliminated by distributions to
shareholders. The U.S. Treasury issued proposed regulation section 1.1291-8
which establishes a mark-to-market regime which allows investment companies
investing in PFIC's to avoid most, if not all, of the difficulties posed by
the PFIC rules. In any event, it is not anticipated that any taxes on the
Fund with respect to investments in PFIC's would be significant.
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A Fund's investment in options, swaps and related transactions, futures
contracts and forward contracts, options on futures contracts and stock
indices and certain other securities, including transactions involving actual
or deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. For example, over-the-counter options on debt
securities and equity options, including options on stock and on narrow-based
stock indexes, will be subject to tax under Section 1234 of the Code,
generally producing a long-term or short-term capital gain or loss upon
exercise, lapse or closing out of the option or sale of the underlying stock
or security. By contrast, a Fund's treatment of certain other options,
futures and forward contracts entered into by a Fund is generally governed by
Section 1256 of the Code. These "Section 1256" positions generally include
listed options on debt securities, options on broad-based stock indexes,
options on securities indexes, options on futures contracts, regulated
futures contracts and certain foreign currency contracts and options thereon.
When a Fund holds options or contracts which substantially diminish
their risk of loss with respect to other positions (as might occur in some
hedging transactions), this combination of positions could be treated as a
"straddle" for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of
short-term capital losses into long-term capital losses. Certain tax
elections exist for mixed straddles i.e., straddles comprised of at least one
Section 1256 position and at least one non-Section 1256 position which may
reduce or eliminate the operation of these straddle rules.
SPECIAL TAX CONSIDERATIONS RELATING TO
MUNICIPAL BOND AND
MUNICIPAL MONEY MARKET PORTFOLIOS
Each of the Municipal Bond Portfolio and the Municipal Money Market
Portfolio will qualify to pay "exempt interest dividends" to its shareholders
provided that, at the close of each quarter of its taxable year at least 50% of
the value of its total assets consists of obligations the interest on which is
exempt from federal income tax. Current federal tax law limits the types and
volume of bonds qualifying for federal income tax exemption of interest, which
may have an effect on the ability of these Portfolios to purchase sufficient
amounts of tax-exempt securities to satisfy this requirement. Any loss on the
sale or exchange of shares of the Municipal Bond Portfolio or the Municipal
Money Market Portfolio held for six months or less will be disallowed to the
extent of any exempt-interest dividends received by the selling shareholder with
respect to such shares.
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As noted in the Prospectus for the Municipal Bond Portfolio and the
Municipal Money Market Portfolio, exempt-interest dividends are excludable from
a shareholder's gross income for regular Federal income tax purposes. Exempt-
interest dividends may nevertheless be subject to the alternative minimum tax
(the "Alternative Minimum Tax") imposed by Section 55 of the Code or the
environmental tax (the "Environmental Tax") imposed by Section 59A of the Code.
The Alternative Minimum Tax is imposed at the rate of up to 28% in the case of
non-corporate taxpayers and at the rate of 20% in the case of corporate
taxpayers, to the extent it exceeds the taxpayer's regular tax liability. The
Environmental Tax is imposed at the rate of 0.12% and applies only to corporate
taxpayers. The Alternative Minimum Tax and the Environmental Tax may be
affected by the receipt of exempt-interest dividends in two circumstances.
First, exempt-interest dividends derived from certain "private activity bonds"
issued after August 7, 1986, will generally be an item of tax preference and
therefore potentially subject to the Alternative Minimum Tax and the
Environmental Tax. The Portfolios intend, when possible, to avoid investing in
private activity bonds. Second, in the case of exempt-interest dividends
received by corporate shareholders, all exempt-interest dividends, regardless of
when the bonds from which they are derived were issued or whether they are
derived from private activity bonds, will be included in the corporation's
"adjusted current earnings," as defined in Section 56(g) of the Code, in
calculating the corporation's alternative minimum taxable income for purposes of
determining the Alternative Minimum Tax and the Environmental Tax.
The percentage of income that constitutes "exempt-interest dividends" will
be determined for each year for the Municipal Bond Portfolio and the Municipal
Money Market Portfolio and will be applied uniformly to all dividends declared
with respect to the Portfolios during that year. This percentage may differ
from the actual percentage for any particular day.
Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of the Municipal Bond Portfolio or the Municipal Money Market
Portfolio will not be deductible for federal income tax purposes. The deduction
otherwise allowable to property and casualty insurance companies for "losses
incurred" will be reduced by an amount equal to a portion of exempt-interest
dividends received or accrued during any taxable year. Foreign corporations
engaged in a trade or business in the United States will be subject to a "branch
profits tax" on their "dividend equivalent amount" for the taxable year, which
will include exempt-interest dividends. Certain Subchapter S corporations may
also be subject to taxes on their "passive investment income," which could
include exempt-interest dividends. Up to 85% of the Social Security benefits or
railroad retirement benefits received by an individual during any taxable year
will be included in the gross income of such individual if the individual's
"modified adjusted gross income" (which includes exempt-interest dividends) plus
one-half of the Social Security benefits or railroad retirement benefits
received by such individual during that taxable year exceeds the base amount
described in Section 86 of the Code.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial development bonds or
private activity bonds should consult their tax advisors before purchasing
shares of the Municipal Bond Portfolio or the Municipal Money Market Portfolio.
"Substantial user" is defined generally for these purposes as including a "non-
exempt person" who regularly uses in trade or business a part of a facility
financed from the proceeds of such bonds.
Issuers of bonds purchased by the Municipal Bond Portfolio (or the
beneficiary of such bonds) may have made certain representations or covenants in
connection with the issuance of such bonds to satisfy certain requirements of
the Code that must be satisfied subsequent to the issuance of such bonds.
Investors should be aware that exempt-interest dividends derived from such bonds
may become subject to federal income taxation retroactively to the date thereof
if such representations are determined to have been inaccurate or if the issuer
of such bonds (or the beneficiary of such bonds) fails to comply with such
covenants.
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SPECIAL TAX CONSIDERATIONS RELATING TO FOREIGN INVESTMENTS
Gains or losses attributable to foreign currency contracts, or to
fluctuations in exchange rates that occur between the time a Portfolio accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Portfolio actually collects
such receivables or pays such liabilities are treated as ordinary income or
ordinary loss to the Portfolio. Similarly, gains or losses on disposition of
debt securities denominated in a foreign currency attributable to fluctuations
in the value of the foreign currency between the date of acquisition of the
security and the date of disposition also are treated as ordinary gain or loss
to the Portfolio. These gains or losses increase or decrease the amount of a
Portfolio's net investment income available to be distributed to its
shareholders as ordinary income.
It is expected that each Portfolio will be subject to foreign withholding
taxes with respect to its dividend and interest income from foreign countries,
and a Portfolio may be subject to foreign income taxes with respect to other
income. So long as more than 50% in value of a Portfolio's total assets at the
close of the taxable year consists of stock or securities of foreign
corporations, the Portfolio may elect to treat certain foreign income taxes
imposed on it for United States federal income tax purposes as paid directly by
its shareholders. A Portfolio will make such an election only if it deems it to
be in the best interest of its shareholders and will notify shareholders in
writing each year if it makes an election and of the amount of foreign income
taxes, if any, to be treated as paid by the shareholders. If a Portfolio makes
the election, shareholders will be required to include in income their
proportionate shares of the amount of foreign income taxes treated as imposed on
the Portfolio and will be entitled to claim either a credit (subject to the
limitations discussed below) or, if they itemize deductions, a deduction, for
their shares of the foreign income taxes in computing their federal income tax
liability.
Shareholders who choose to utilize a credit (rather than a deduction) for
foreign taxes will be subject to a number of complex limitations regarding the
availability and utilization of the credit. Because of these limitations,
shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the foreign income taxes paid by a Portfolio.
Shareholders are urged to consult their tax advisors regarding the application
of these rules to their particular circumstances.
TAXES AND FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, a foreign trust or estate, a foreign corporation, or a foreign
partnership ("Foreign Shareholder") depends on whether the income from the
Portfolio is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Portfolio is not effectively connected with a U.S.
trade or business carried on by a Foreign Shareholder, distributions of net
investment income plus the excess of net short-term capital gains over net
long-term capital losses will be subject to U.S. withholding tax at the rate of
30% (or such lower treaty rate as may be applicable) upon the gross amount of
the dividend. Furthermore, Foreign Shareholders will generally be exempt from
U.S. federal income tax on gains realized on the sale of shares of the
Portfolio, distributions of net long-term capital gains, and amounts retained by
the Fund which are designated as undistributed capital gains.
If the income from the Portfolio is effectively connected with a U.S. trade
or business carried on by a Foreign Shareholder, then distributions from the
Portfolio and any gains realized upon the sale of shares of the Portfolio, will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
and residents or domestic corporations.
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The Portfolio may be required to withhold U.S. federal income tax on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless the Foreign Shareholder complies with Internal
Revenue Service certification requirements.
The tax consequences to a Foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described here.
Furthermore, Foreign Shareholders are strongly urged to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in a Portfolio, including the potential application of the provisions
of the Foreign Investment in Real Estate Property Tax Act of 1980, as amended.
PURCHASE OF SHARES
The purchase price of the Class A shares of each Portfolio of the Fund,
except the Money Market and Municipal Money Market Portfolios, and the Class
B shares of each Multiclass Portfolio of the Fund is the net asset value next
determined after the order is received. The International Small Cap
Portfolio may impose a 1% transaction fee on share purchases. For each
Portfolio of the Fund other then the Money Market or Municipal Money Market
Portfolios, an order received prior to the regular close of the New York
Stock Exchange (the "NYSE") will be executed at the price computed on the
date of receipt; and an order received after the regular close of the NYSE
will be executed at the price computed on the next day the NYSE is open as
long as the Fund's transfer agent receives payment by check or in Federal
Funds prior to the regular close of the NYSE on such day. Shares of the
Money Market and Municipal Money Market Portfolios may be purchased at the
net asset value per share at the price next determined after Federal Funds
are available to such Portfolios. Shares of the Fund may be purchased on any
day the NYSE is open. The NYSE will be closed on the following days: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
Each Portfolio reserves the right in its sole discretion (i) to suspend
the offering of its shares, (ii) to reject purchase orders when in the
judgment of management such rejection is in the best interest of the Fund,
and (iii) to reduce or waive the minimum for initial and subsequent
investments for certain fiduciary accounts such as employee benefit plans or
under circumstances where certain economies can be achieved in sales of a
Portfolio's shares. The International Equity Portfolio is currently limiting
investments in the Portfolio to: (i) reinvested dividends and distributions
by existing shareholders of the Portfolio; (ii) additional investments by
existing shareholders of the Portfolio; (iii) investments by certain
employees of Morgan Stanley; and (iv) investors who were in the process of
becoming shareholders of the Portfolio at the time the Portfolio limited
further investments.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the NYSE is closed, or trading on the NYSE is
restricted as determined by the Commission, (ii) during any period when an
emergency exists as defined by the rules of the Commission as a result of which
it is not reasonably practicable for a Portfolio to dispose of securities owned
by it, or fairly to determine the value of its assets, and (iii) for such other
periods as the Commission may permit.
No charge is made by any Portfolio for redemptions except for the 1%
transaction fee that may be assessed upon redemption of the International
Small Cap Portfolio. Any redemption may be more or less than the
shareholder's cost depending on the market value of the securities held by
the Portfolio.
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To protect your account and the Fund from fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Fund to
verify the identity of the person who has authorized a redemption from your
account. Signature guarantees are required in connection with: (1) all
redemptions, regardless of the amount involved, when the proceeds are to be paid
to someone other than the registered owner(s) and/or registered address; and
(2) share transfer requests.
A guarantor must be a bank, a trust company, a member firm of a domestic
stock exchange, or a foreign branch of any of the foregoing. Notaries public
are not acceptable guarantors.
The signature guarantees must appear either: (1) on the written request
for redemption; (2) on a separate instrument for assignment ("stock power")
which should specify the total number of shares to be redeemed; or (3) on all
stock certificates tendered for redemption and, if shares held by the Fund are
also being redeemed, on the letter or stock power.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
Shares of each Portfolio of the Fund may be exchanged for shares of any
other available Portfolio (other than the International Equity Portfolio, which
is closed to new investors). In exchanging for shares of a Portfolio with more
than one class, the class of shares a shareholder receives in exchange will be
determined in the same manner as any other purchase of shares and will not be
based on the class of shares surrendered for the exchange. Consequently, the
same minimum initial investment and minimum account size for determining the
class of shares received in the exchange will apply.
Any such exchange will be based on the respective net asset values of
the shares involved. There is no sales commission or sales charge of any
kind. Before making an exchange, a shareholder should consider the
investment objectives of the Portfolio to be purchased.
Exchange requests may be made either by mail or telephone. Exchange
requests by mail should be sent to Morgan Stanley Institutional Fund, Inc., P.O.
Box 2798, Boston, Massachusetts 02208-2798. Telephone exchanges will be accepted
only if the certificates for the shares to be exchanged are held by the Fund for
the account of the shareholder and the registration of the two accounts will be
identical. Requests for exchanges received prior to 10:00 a.m. (Eastern Time)
for the Municipal Money Market Portfolio, 11:00 a.m. (Eastern Time) for the
Money Market Portfolio, and 4:00 p.m. (Eastern Time) for the remaining
Portfolios will be processed as of the close of business on the same day.
Requests received after these times will be processed on the next business day.
Exchanges may be subject to limitations as to amounts or frequency, and to other
restrictions established by the Board of Directors to assure that such exchanges
do not disadvantage the Fund and its shareholders.
For federal income tax purposes an exchange between Portfolios is a taxable
event for shareholders subject to tax, and, accordingly, a gain or loss may be
realized. The exchange privilege may be modified or terminated by the Fund at
any time upon 60-days notice to shareholders.
TRANSFER OF SHARES
Shareholders may transfer shares of the Fund's Portfolios to another person
by making a written request to the Fund. The request should clearly identify
the account and number of shares to be transferred, and include the signature of
all registered owners and all stock certificates, if any, which are subject to
the transfer. The signature on the letter of request, the stock certificate or
any stock power must be guaranteed in the same manner as described under
"Redemption of Shares". As in the case of redemptions, the written request must
be received in good order before any transfer can be made. Transferring shares
may affect the eligibility of an account for a given class of the Portfolio's
shares and may result in involuntary conversion or redemption of such shares.
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INVESTMENT LIMITATIONS
Each current Portfolio has adopted the following restrictions which are
fundamental policies and may not be changed without the approval of the lesser
of: (1) at least 67% of the voting securities of the Portfolio present at a
meeting if the holders of more than 50% of the outstanding voting securities of
the Portfolio are present or represented by proxy, or (2) more than 50% of the
outstanding voting securities of the Portfolio. Each Portfolio of the Fund will
not:
(1) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent the
Portfolio from purchasing or selling options or futures contracts or from
investing in securities or other instruments backed by physical commodities),
and except that the Gold Portfolio may invest in gold bullion in accordance with
its investment objectives and policies;
(2) purchase or sell real estate, although it may purchase and sell
securities of companies that deal in real estate and may purchase and sell
securities that are secured by interests in real estate;
(3) lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or repurchase agreements;
(4) except with respect to the Global Fixed Income, Emerging Markets,
Emerging Markets Debt, China Growth, Latin American, MicroCap, Aggressive
Equity, U.S. Real Estate Portfolios (i) purchase more than 10% of any class of
the outstanding voting securities of any issuer and (ii) purchase securities of
an issuer (except obligations of the U.S. Government and its agencies and
instrumentalities) if as a result, with respect to 75% of its total assets, more
than 5% of the Portfolio's total assets, at market value, would be invested in
the securities of such issuer;
(5) issue senior securities and will not borrow, except from banks and as
a temporary measure for extraordinary or emergency purposes and then, in no
event, in excess of 33 1/3% of its total assets (including the amount borrowed)
less liabilities (other than borrowings), except that each of the Emerging
Markets Debt and Latin American Portfolios may borrow from banks and other
entities in amount not in excess of 33 1/3% of its total assets (including the
amount borrowed) less liabilities in accordance with its investment objectives
and policies;
(6) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933 Act in
the disposition of restricted securities;
(7) acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value of the Portfolio's
total assets would be invested in securities of companies within such
industry; provided, however, that there shall be no limitation on the
purchase of obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, or (in the case of the Money Market Portfolio
or the Municipal Money Market Portfolio) instruments issued by U.S. Banks,
except that (i) the Latin American Portfolio may invest more than 25% of its
total assets in companies involved in the telecommunications industry or
financial services industry, (ii) the Gold Portfolio may invest more than 25%
of its total assets in securities of companies in the group of industries
involved in gold-related or precious-metals-related activities, as described
in the prospectus, and may invest more than 25% of its total assets in one or
more of the industries, such as mining, that are part of such group of
industries, as described in the prospectus, and (iii) the U.S. Real Estate
Portfolio may invest more than 25% of its total assets in the U.S. real
estate industry, respectively, as provided in their respective Prospectuses;
and
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(8) write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
In addition, each current Portfolio of the Fund has adopted non-fundamental
investment limitations as stated below and in their respective Prospectuses.
Such limitations may be changed without shareholder approval. Each current
Portfolio of the Fund will not:
(1) purchase on margin or sell short, except (i) that the Emerging
Markets Debt, Latin American and Aggressive Equity Portfolios may from time
to time sell securities short without limitation but consistent with
applicable legal requirements as stated in its Prospectus, (ii) that each of
the Active Country Allocation, Balanced, Value Equity, Small Cap Value
Equity, Latin American, U.S. Real Estate, International Magnum, Emerging
Markets, Emerging Markets Debt, Equity Growth, Gold, China
Growth and Aggressive Equity Portfolios may enter into option transactions to
the extent that not more than 5% of the Portfolio's total assets are required
as deposits to secure obligations under options and not more than 20% of its
total assets are invested in options, futures contracts and options on
futures contracts at any time, and (iii) as specified above in Fundamental
Restriction No. (1);
(2) purchase or retain securities of an issuer if those Officers and
Directors of the Fund or its investment adviser owning more than 1/2 of 1% of
such securities together own more than 5% of such securities;
(3) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 10% of its total assets at fair market value;
(4) invest for the purpose of exercising control over management of any
company;
(5) invest its assets in securities of any investment company, except
as permitted by the 1940 Act or the rules, regulations, interpretations or
orders of the SEC and its staff thereunder;
(6) except for the U.S. Real Estate Portfolio, invest in real estate
limited partnership interests, and the U.S. Real Estate Portfolio may not invest
in such interests that are not publicly traded;
(7) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the respective Prospectuses) that are publicly distributed, and
(ii) by lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent with the 1940
Act or the Rules and Regulations or interpretations of the Commission
thereunder;
(8) purchase puts, calls, straddles, spreads and any combination
thereof if for any reason thereof the value of its aggregate investment in
such classes of securities will exceed 5% of their respective total assets,
except that: (i) each of the Active Country Allocation, Equity Growth, Gold,
China Growth and Aggressive Equity Portfolios may enter into option
transactions to the extent that not more than 5% of the Portfolio's total
assets are required as deposits to secure obligations under options and not
more than 20% of its total assets are invested in options, futures contracts
and options on futures contracts at any time; and (ii) the Fixed Income and
Global Fixed Income Portfolios are not subject to this limitation number (8);
(9) borrow money, except from banks for extraordinary or emergency
purposes, and then only in amounts up to 10% of the value of the Portfolio's
total assets, taken at cost at the time of borrowing, or purchase securities
while borrowings exceed 5% of its total assets, except that the Latin American
and Emerging Markets Debt Portfolios may borrow in accordance with Fundamental
Restriction No. (5) above;
(10) invest in fixed time deposits with a duration of over seven
calendar days or invest in fixed time deposits with a duration of from two
business days to seven calendar days if more than 10% of the Portfolio's
total assets would be invested in these deposits.
The Balanced, Fixed Income and Value Equity Portfolios will only issue
shares for securities or assets other than cash in a bona fide reorganization,
statutory merger, or in other acquisitions of portfolio securities (except for
municipal debt securities issued by state political subdivisions or their
agencies or instrumentalities) which (i) meet their respective investment
objectives; and (ii) are acquired for investment and not for resale.
34
<PAGE>
Each of the Global Fixed Income, Emerging Markets, Emerging Markets Debt,
China Growth, Latin American, Aggressive Equity and U.S. Real Estate Portfolios
will diversify its holdings so that, at the close of each quarter of its taxable
year, (i) at least 50% of the market value of the Portfolio's total assets is
represented by cash (including cash items and receivables), U.S. Government
securities, and other securities, with such other securities limited, in respect
of any one issuer, for purposes of this calculation to an amount not greater
than 5% of the value of the Portfolio's total assets and 10% of the outstanding
voting securities of such issuer; and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities).
With respect to Fundamental Restriction No. (7), the Fund will determine
industry concentration in accordance with the classifications of industries
based on the Industry Numbers from the Standard Industrial Classification
Manual as prepared by the Office of Management and Budget, except that, with
respect to the Money Market and Municipal Money Market Portfolios, (i)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; and (ii) asset-backed
securities will be classified according to the underlying assets securing
such securities.
In accordance with Fundamental Restriction No. (7), the Latin American
Portfolio will only invest more than 25% of its total assets in companies
involved in the telecommunications industry or financial services industry if
the Board of Directors determines that the Latin American markets are
dominated by securities of issuers in such industries and that, in light of
the anticipated return, investment quality, availability and liquidity of the
issuers in such industries, the Portfolio's ability to achieve its investment
objective would, in light of the investment policies and limitations, be
materially adversely affected if the Portfolio was not able to invest greater
than 25% of its total assets in such industries.
The percentage limitations contained in these restrictions apply at the
time of purchase of securities. Future Portfolios of the Fund may adopt
different limitations.
DETERMINING MATURITIES OF CERTAIN INSTRUMENTS
Generally, the maturity of a portfolio instrument shall be deemed to be
the period remaining until the date noted on the face of the instrument as
the date on which the principal amount must be paid, or in the case of an
instrument called for redemption, the date on which the redemption payment
must be made. However, instruments having variable or floating interest rates
or demand features may be deemed to have remaining maturities as follows:
(1) a Government Obligation with a variable rate of interest readjusted no
less frequently than annually may be deemed to have a maturity equal to the
period remaining until the next readjustment of the interest rate; (b) an
instrument with a variable rate of interest, the principal amount of which is
scheduled on the face of the instrument to be paid in one year or less, may
be deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate; (c) an instrument with a variable rate of
interest that is subject to a demand feature may be deemed to have a maturity
equal to the longer of the period remaining until the next readjustment of
the interest rate or the period remaining until the principal amount can be
recovered through demand; (d) an instrument with a floating rate of interest
that is subject to a demand feature may be deemed to have a maturity equal to
the period remaining until the principal amount can be recovered through
demand; and (e) a repurchase agreement may be deemed to have a maturity equal
to the period remaining until the date on which the repurchase of the
underlying securities is scheduled to occur, or where no date is specified,
but the agreement is subject to demand, the notice period applicable to a
demand for the repurchase of the securities.
MANAGEMENT OF THE FUND
OFFICERS AND DIRECTORS
The Fund's officers, under the supervision of the Board of Directors,
manage the day-to-day operations of the Fund. The Directors set broad
policies for the Fund and choose its officers. Two Directors and all of the
officers of the Fund are directors, officers or employees of the Fund's
adviser, distributor or administrative services provider. Directors and
officers of the Fund are also directors and officers of some or all of the
other investment companies managed, administered, advised or distributed by
MSAM or its affiliates. The other Directors have no affiliation with
the Fund's adviser, distributor or administrative services provider. A list
of the Directors and officers of the Fund and a brief statement of their
present positions and principal occupations during the past five years is set
forth below:
35
<PAGE>
Name, Address Position Principal Occupation During
and Date of Birth with Fund Past Five Years
- ------------------- --------- ---------------------------
Barton M. Biggs* Chairman and Chairman and Director of Morgan
1221 Avenue of the Director Stanley Asset Management Inc. and
Americas Morgan Stanley Asset Management
New York, NY 10020 Limited; Managing Director of Morgan
11/26/32 Stanley & Co. Incorporated; Director
of Morgan Stanley Group Inc.; Member
of International Advisory Counsel of
the Thailand Fund; Director of Rand
McNally Company; Member of the Yale
Development Board; Chairman and
Director of 16 U.S. registered
investment companies managed by
Morgan Stanley Asset Management
Inc.
Warren J. Olsen* Director and Principal of Morgan Stanley & Co.
1221 Avenue of the President Incorporated and of Morgan Stanley
Americas Asset Management Inc.; President and
New York, NY 10020 Director of 16 U.S. registered
12/21/56 investment companies managed by
Morgan Stanley Asset Management
Inc.
John D. Barrett, II Director Chairman and Director of Barrett
521 Fifth Avenue Associates, Inc. (investment
New York, NY 10135 counseling); Director of the Ashforth
8/21/35 Company (real estate); Director of
the Morgan Stanley Fund, Inc., PCS
Cash Fund, Inc. and Morgan Stanley
Universal Funds, Inc.
36
<PAGE>
Name, Address Position Principal Occupation During
and Date of Birth with Fund Past Five Years
- ------------------- --------- ---------------------------
Gerard E. Jones Director Partner in Richards & O'Neil LLP (law
43 Arch Street firm); Director of the Morgan Stanley
Greenwich, CT 06830 Fund, Inc., PCS Cash Fund, Inc. and
1/23/37 Morgan Stanley Universal Funds, Inc.
Andrew McNally IV Director Chairman and Chief Executive Officer
8255 North Central of Rand McNally (publication);
Park Avenue Director of Allendale Insurance Co.,
Skokie, IL 60076 Mercury Finance (consumer finance);
11/11/39 Zenith Electronics, Hubbell, Inc.
(industrial electronics); Director of
the Morgan Stanley Fund, Inc., PCS
Cash Fund, Inc. and Morgan Stanley
Universal Funds, Inc.
Samuel T. Reeves Director Chairman of the Board and CEO,
8211 North Pinacle L.L.C. (investment firm);
Fresno Street Director, Pacific Gas and Electric
Fresno, CA 93720 and PG&E Enterprises (utilities);
7/28/34 Director of the Morgan Stanley Fund,
Inc., PCS Cash Fund, Inc. and Morgan
Stanley Universal Funds, Inc.
Fergus Reid Director Chairman and Chief Executive Officer
85 Charles Colman Blvd of LumeLite Corporation (injection
Pawling, NY 12564 molding firm); Trustee and Director
8/12/32 of Vista Mutual Fund Group; Director
of the Morgan Stanley Fund, Inc.,
PCS Cash Fund, Inc. and Morgan
Stanley Universal Funds, Inc.
Frederick O. Robertshaw Director Of Counsel, Copple, Chamberlin
2800 North Central Avenue Boehm, P.C.; Formerly of Counsel,
Phoenix, AZ 85004 Bryan, Cave LLP; (law firms);
1/24/34 Director of the Morgan Stanley Fund,
Inc., PCS Cash Fund, Inc. and
Morgan Stanley Universal Funds, Inc.
37
<PAGE>
Name, Address Position Principal Occupation During
and Date of Birth with Fund Past Five Years
- ------------------- --------- ---------------------------
James W. Grisham* Vice President Principal of Morgan Stanley & Co.
1221 Avenue of the Incorporated and of Morgan Stanley
Americas Asset Management Inc.; Vice President
New York, NY 10020 of 16 U.S. registered investment
10/24/41 companies managed by Morgan Stanley
Asset Management Inc.
Michael F. Klein* Vice President Principal of Morgan Stanley Asset
1221 Avenue of the Management Inc; Officer of various
Americas investment companies managed by
New York, NY 10020 Morgan Stanley Asset Management Inc.
12/12/58 Previously practiced law with the New
York law firm of Rogers & Wells.
Harold J. Schaaff, Jr.* Vice President Principal of Morgan Stanley & Co.
1221 Avenue of the Incorporated and of Morgan Stanley
Americas Asset Management Inc.;
New York, NY 10020 General Counsel and Secretary of
6/10/60 Morgan Stanley Asset Management Inc.;
Vice President of 16 U.S. registered
investment companies managed by
Morgan Stanley Asset Management Inc.
38
<PAGE>
Name, Address Position Principal Occupation During
and Date of Birth with Fund Past Five Years
- ------------------- --------- ---------------------------
Joseph P. Stadler* Vice President Vice President of Morgan Stanley &
1221 Avenue of the Co. Incorporated and Morgan Stanley
Americas Asset Management Inc.; Previously
New York, NY 10020 with Price Waterhouse LLP
6/7/54 (accounting); Vice President of
16 U.S. registered investment
companies managed by Morgan Stanley
Asset Management Inc.
Valerie Y. Lewis* Secretary Vice President of Morgan Stanley &
1221 Avenue of the Co. Incorporated and Morgan Stanley
Americas Asset Management Inc.; Previously
New York, NY 10020 with Citicorp (banking); Secretary of
3/26/56 16 U.S. registered investment
companies managed by Morgan Stanley
Asset Management Inc.
Karl O. Hartmann Assistant Senior Vice President, Secretary and
73 Tremont Street Secretary General Counsel of Chase Global Funds
Boston, MA 02108-3913 Services Company; Previously, Leland,
3/7/55 O'Brien, Rubinstein Associates, Inc.
(investments).
39
<PAGE>
Name, Address Position Principal Occupation During
and Date of Birth with Fund Past Five Years
- ------------------- --------- ---------------------------
James R. Rooney Treasurer Vice President, Director of Fund
73 Tremont Street Administration and Compliance
Boston, MA 02108-3913 Services, Chase Global Funds
10/21/58 Services Company; Director of Fund
Administration; Officer of various
investment companies managed by
Morgan Stanley Asset Management Inc.;
Previously with Scudder, Stevens &
Clark, Inc. (investments) and Ernst &
Young LLP (accounting); Treasurer of
16 U.S. registered investment
companies managed by Morgan Stanley
Asset Management Inc.
Joanna Haigney Assistant Manager of Fund Administration and
73 Tremont Street Treasurer Compliance Services, Chase Global
Boston, MA 02108-3913 Funds Services Company; Previously
10/10/66 with Coopers & Lybrand LLP; Assistant
Treasurer of 16 U.S. registered
investment companies managed by
Morgan Stanley Asset Management Inc.
- --------------
* "Interested Person" within the meaning of the 1940 Act.
40
<PAGE>
REMUNERATION OF DIRECTORS AND OFFICERS
Effective June 28, 1995, the Open-end Fund Complex will pay each of
the nine Directors who is not an "interested person" an annual aggregate fee
of $55,000, plus out-of-pocket expenses. The Open-end Fund Complex will pay
each of the members of the Fund's Audit Committee, which consists of the
Fund's Directors who are not "interested persons," an additional annual
aggregate fee of $10,000 for serving on such a committee. The allocation of
such fees will be among the three funds in the Open-end Fund Complex in
direct proportion to their respective average net assets. For the fiscal
year December 31, 1996, the Fund paid approximately $389,000 in Directors'
fees and expenses. Directors who are also officers or affiliated persons
receive no remuneration for their services as Directors. The Fund's officers
and employees are paid by the Adviser or its agents. As of April 7,
1997, to Fund management's knowledge, the Directors and officers of the Fund,
as a group, owned more than 1% of the outstanding common stock of the
following Portfolios of the Fund: 2.0% Asian Equity Portfolio - Class A shares;
2.2% Emerging Markets Portfolio - Class B shares; 2.6% Latin American Portfolio
- - Class A shares and 2.9% Technology Portfolio - Class A shares. The following
table shows aggregate compensation paid to each of the Fund's Directors by the
Fund and the Fund Complex, respectively, in the fiscal year ended December 31,
1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
NAME OF AGGREGATE PENSION OR ESTIMATED TOTAL
PERSON, COMPENSATION RETIREMENT ANNUAL COMPENSATION
POSITION FROM BENEFITS ACCRUED BENEFITS FROM REGISTRANT
REGISTRANT AS PART OF FUND UPON AND FUND COMPLEX
EXPENSES RETIREMENT PAID TO DIRECTORS
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Barton M. Biggs, N/A N/A N/A N/A
Director and Chairman
of the Board
Warren J. Olsen, N/A N/A N/A N/A
Director and President
John D. Barrett, II 59,485 N/A N/A 68,777
Director
Gerard E. Jones, 59,485 N/A N/A 75,877
Director
Andrew McNally, IV 55,023 N/A N/A 63,195
Director
Samuel T. Reeves, 53,287 N/A N/A 61,331
Director
Fergus Reid, 67,434 N/A N/A 77,220
Director
Frederick O. Robertshaw, 50,834 N/A N/A 58,777
Director
Frederick B. Whittemore,* N/A N/A N/A N/A
Director
</TABLE>
___________
* As of March 14, 1997, Mr. Whittemore resigned from the Board of Directors.
41
<PAGE>
INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS
Morgan Stanley Asset Management Inc. ("MSAM" or the "Adviser") is a
wholly-owned subsidiary of Morgan Stanley Group Inc. The principal offices
of Morgan Stanley Group Inc. are located at 1221 Avenue of the Americas, New
York, NY 10020. As compensation for advisory services for the fiscal years
ended December 31, 1994, December 31, 1995 and December 31, 1996, the Adviser
earned fees of approximately $34,338,000, $40,534,000 and $55,465,000,
respectively, and from such fees voluntarily waived fees of $2,640,000,
$3,526,000 and $4,340,000, respectively. For the fiscal years ended
December 31, 1994, December 31, 1995 and December 31, 1996, the Fund paid
brokerage commissions of approximately $7,287,293, $10,317,515 and
$17,014,335, respectively. For the fiscal years ended December 31, 1994,
December 31, 1995 and December 31, 1996, the Fund paid in the aggregate
$796,000, $377,000 and $826,686, respectively, as brokerage commissions to
Morgan Stanley & Co. Incorporated, an affiliated broker-dealer, which
represented 11%, 4%, and 5% of the total amount of brokerage commissions
paid in each respective period. For the fiscal years ended December 31,
1994, December 31, 1995 and December 31, 1996, the Fund paid administrative
fees to MSAM of approximately $4,458,000, $5,238,000 and $7,298,531,
respectively.
The Sub-Adviser, Sun Valley Gold Company, with principal offices at
620 Sun Valley Road, Sun Valley, Idaho, serves as the investment sub-adviser
of the Gold Portfolio, pursuant to a sub-advisory agreement among the Fund,
the Adviser and the Sub-Adviser (the "Sub-Advisory Agreement"). The Adviser
and the Sub-Adviser have entered into an indemnification agreement under
which, generally, the Sub-Adviser has agreed to indemnify the Adviser and the
Fund for claims or losses in connection with any failure by the Sub-Adviser
to comply with its obligations under the Sub-Advisory Agreement or related
agreements or any act or omission that amounts to negligence, misfeasance or
bad faith, and the Adviser has agreed to indemnify the Sub-Adviser for claims
or losses in connection with any failure by the Adviser to comply with its
obligations under the Sub-Advisory Agreement or related agreements. As
compensation for sub-advisory services for the fiscal years ended December
31, 1994, December 31, 1995 and December 31, 1996, the Sub-Adviser earned
fees of approximately $76,000, $73,000 and $110,000, respectively, and
from such fees voluntarily waived fees of $36,000, $37,000 and $52,000,
respectively. For the fiscal years ended December 31, 1994, December 31,
1995 and December 31, 1996, the Fund paid $8,000, $450 and $0,
respectively, as brokerage commissions to Sun Valley.
Pursuant to the MSAM Administration Agreement between the Adviser and
the Fund, the Adviser provides Administrative Services. For its services under
the Administration Agreement, the Fund pays the Adviser a monthly fee which on
an annual basis equals 0.15 of 1% of the average daily net assets of each
Portfolio.
Under the Agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase Global Funds Services Company ("CGFSC," a corporate affiliate
of Chase) provides certain administrative services to the Fund. CGFSC provides
operational and administrative services to investment companies with
approximately $69 billion in assets and having approximately 215,930
shareholder accounts as of December 31, 1996. CGFSC's
business address is 73 Tremont Street, Boston, Massachusetts 02108-3913.
42
<PAGE>
DISTRIBUTION OF FUND SHARES
Morgan Stanley & Co. Incorporated (the "Distributor"), a wholly-owned
subsidiary of Morgan Stanley Group Inc., serves as the Distributor of the
Fund's shares pursuant to a Distribution Agreement for the Fund and a Plan of
Distribution for the Class B shares of the Portfolios (except the Money
Market, Municipal Money Market and International Small Cap Portfolios which
do not have Class B shares) pursuant to Rule 12b-1 under the 1940 Act (each,
a "Plan" and collectively, the "Plans"). Under each Plan the Distributor is
entitled to receive from these Portfolios a distribution fee, which is
accrued daily and paid quarterly, at an annual rate of up to 0.25% of the
average daily net assets of the Class B shares of these Portfolios. The
Distributor expects to allocate most of its fee to its investment
representative and investment dealers, banks or financial service firms that
provide distribution services ("Participating Dealer"). The actual amount of
such compensation is agreed upon by the Fund's Board of Directors and by the
Distributor. The Distributor may, in its discretion, voluntarily waive from
time to time all or any portion of its distribution fee and the Distributor
is free to make additional payments out of its own assets to promote the sale
of Fund shares.
The Plans obligate the Portfolios to accrue and pay to the Distributor
the fee agreed to under its Distribution Agreement. The Plans do not obligate
the Portfolios to reimburse the Distributor for the actual expenses the
Distributor may incur in fulfilling its obligations under the Plans. Thus,
under each Plan, even if the Distributor's actual expenses exceed the fee
payable to it thereunder at any given time, the Portfolios will not be obligated
to pay more than that fee. If the Distributor's actual expenses are less than
the fee it receives, the Distributor will retain the full amount of the fee. The
Plans for the Class B shares were most recently approved by the Fund's Board of
Directors, including those directors who are not "interested persons" of the
Fund as that term is defined in the 1940 Act and who have no direct or indirect
financial interest in the operation of a Plan or in any agreements related
thereto, on February 13, 1997.
The Class B shares commenced operations on January 2, 1996. Therefore,
no Rule 12b-1 fees were paid to the Distributor for the fiscal year ended
December 31, 1995. The Mortgage-Backed Securities, China Growth and MicroCap
Portfolios were not in operation in the fiscal year ended December 31, 1996.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under
Rule 17j-1 of the 1940 Act which incorporates the Code of Ethics of the Adviser
(together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Adviser and, as described below,
impose additional, more onerous, restrictions on the Fund's investment
personnel.
The Codes require that all employees of the Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to the
proposed investment. The substantive restrictions applicable to all employees
of the Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security that at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Adviser. Furthermore, the Codes provide for trading "blackout periods" that
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security.
43
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The names and addresses of the holders of 5% or more of the outstanding
shares of any class of the Fund as of April 7, 1997 and the percentage of
outstanding shares of such classes owned beneficially or of record by such
shareholders as of such date are, to Fund management's knowledge, as follows:
ACTIVE COUNTRY ALLOCATION PORTFOLIO: City of New York Deferred Compensation
Plan, 40 Rector Street, 3rd Floor, New York, NY 10006, owned 26% of such
Portfolio's total outstanding Class A shares.
The Trustees of Columbia University in the City of New York, 475 Riverside
Drive, Suite 401, New York, NY 10115, owned 15% of such Portfolio's total
outstanding Class A shares.
Oglebay Norton Company, 1100 Superior Avenue, Cleveland, OH 44114-2598, owned
11% of such Portfolio's total outstanding Class A shares.
Boatmen's Trust Co. Pension Plan, P.O. Bos 14737, St. Louis, MO 63178-4737
owned 7% of such Portfolio's total outstanding Class A shares.
The Flinn Foundation, Northern Trust Co., Master Trust Dept., 7th Floor, P.O.
Box 92984, Chicago, IL 60675, owned 6% of such Portfolio's total outstanding
Class A shares.
Sahara Enterprises, Inc., 3 First National Plaza, Suite 2000, Chicago, IL 60602-
4260, owned 7% of such Portfolio's total outstanding Class A shares.
The Chase Manhattan Bank, N.A., Trustee Chubb Capital Accumulation Plan, 770
Broadway, New York, NY 10003, owned 7% of such Portfolio's total outstanding
Class A shares.
Fredric W. & Stephanie C. Harman, 21 Hillbrook, Portola Valley, CA 94028,
owned 54% of such Portfolio's total outstanding Class B shares.
David M. & Sharon M. Platter, 9 Palmer Lane, Riverside, CT 06878, owned 46% of
such Portfolio's total outstanding Class B shares.
AGGRESSIVE EQUITY PORTFOLIO: Ministers and Missionaries Benefit Board of the
American Baptist Churches, Attn: Morgan Stanley Asset Management, 1221 Avenue
of the Americas, New York, NY 10020, owned 11% of such Portfolio's total
outstanding Class A shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O.
Box 92956, Chicago, IL 60675-2956, owned 9% of such Portfolio's total
outstanding Class A shares.
Valassis Enterprises - Equity C/O Franklin Enterprises, 520 Lake Cook Road,
Suite 380, Deerfield, IL 60015, owned 6% of such Portfolio's total
outstanding Class A shares.
Kinghugh S.A., C/O Morgan Stanley Asset Management, 1221 Avenue of the Americas,
New York, NY 10020, owned 6% of such Portfolio's total outstanding Class A
shares.
Bank Morgan Stanley AG, Bahnogstrasse 92, Zurich CH-8023, Switzerland owned
6% of such Portfolio's total outstanding Class A shares.
44
<PAGE>
ASIAN EQUITY PORTFOLIO: Association De Bienfsaissance Et De Retraite Des
Pollciers De La Communaute Urbaine De Montreal, 480 Gilford Street, Montreal,
Quebec H2J1N3, owned 9% of such Portfolio's total outstanding Class A shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O.
Box 92956, Chicago, IL 60675-2956, owned 6% of such Portfolio's total
outstanding Class A shares.
James L. & Sarah M. Barksdale, Trustees of Jim & Sally Barksdale, 800
Woodlands Parkway, Suite 118, Ridgeland, MS 39157-5216 owned 6% of such
Portfolio's total outstanding Class B shares.
BALANCED PORTFOLIO: Kinney Printing Co-Employees, 4801 So. Lawndale, Chicago,
IL 60632-3018, owned 16% of such Portfolio's total outstanding Class A shares.
H. Conrad & Sarah Meyer, One Woodland Avenue, Bronxville, NY 10708, owned 12%
of such Portfolio's total outstanding Class A shares.
Joan M. Hunt Trust, 8627 Madison Drive, Niles, IL 60648, owned 8% of such
Portfolio's total outstanding Class A shares.
Guarantee & Trust Company, IRA Rollover, One Woodland Avenue, Bronxville, NY
10708, owned 7% of such Portfolio's total outstanding Class A shares.
William Guthrie, IRA Rollover, 435 Sheridan Road, Winnetka, IL 60093-2626,
owned 32% of such Portfolio's total outstanding Class B shares.
Ramakrishna Kothalanka M.D., Profit Sharing Plan, MSTC Custodian, 126 Bentley
Avenue, Jersey City, NJ 07304-1702, owned 16% of such Portfolio's total
outstanding Class B shares.
Sam G. Pitroda Custodian for Rajal Pitroda, 1480 Goldenbell Court, Downers
Grove, IL 60515-1301, owned 8% of such Portfolio's total outstanding Class B
shares.
Sam G. Pitroda Custodian for Salil Pitroda, 1480 Goldenbell Court, Downers
Grove, IL 60515-1301, owned 8% of such Portfolio's total outstanding Class B
shares.
Phyllis M. Mott IRA, MSTC Custodian, 120 West State Street, Suite 400, Rockford,
IL 61101, owned 8% of such Portfolio's total outstanding Class B shares.
EMERGING GROWTH PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 47% of such
Portfolio's total outstanding Class A shares.
Allendale Mutual Insurance Co., P.O. Box 7500, Johnston, RI 02919-0750, owned
17% of such Portfolio's total outstanding Class A shares.
NOAM/A/EC, C/O Philip Winters, Morgan Stanley Asset Management, 1221 6th Avenue,
New York, NY 10020, owned 8% of such Portfolio's total outstanding Class A
shares.
South Trust Estate & Trust Company of Georgia, Trustee U/A Southern Engineering
Company Retirement Plan, P.O. Box 1001, Atlanta, GA 30301, owned 7% of such
Portfolio's total outstanding Class A shares.
HVA Limited Partnership, C/O H L Van Arnem, 1301 W. Newport Center Drive,
Deerfield Beach, FL 33442-7734, owned 11% of such Portfolio's total outstanding
Class B shares.
Anne W. Rohrbach, c/o Gleacher Avenue, 660 Madison Avenue, 19th Floor, New
York, NY 10021, owned 11% of such Portfolio's total outstanding Class B shares
Lawrence M. Howell, Howell Capital, One Maritime Plaza, Suite 1700, San
Francisco, CA 94101, owned 7% of such Portfolio's total outstanding Class B
shares.
Julian Eisner, 871 Oak Lane, North Woodmere, NY 11581, owned 7% of such
Portfolio's total outstanding Class B shares.
Conrad & Sarah Meyer, One Woodland Avenue, Bronxville, NY 10708, owned 6% of
such Portfolio's total outstanding Class B shares.
Bruce S. Ives, 163 Gallows Hill Road, West Redding, CT 06896, owned 6% of
such Portfolio's total outstanding Class B shares.
William B. O'Connor, 18 Montfort Road, Port Washington, NY 11050, owned 6% of
such Portfolio's total outstanding Class B shares.
James F. & Marlene Connors, 205 E. Joppa Road, Towson, MD 21286, owned 5% of
such Portfolio's total outstanding Class B shares.
EMERGING MARKETS DEBT PORTFOLIO: Northwestern University, 633 Clark Street,
Evanston, IL 60208-1122, owned 20% of such Portfolio's total outstanding Class A
shares.
Valassis Enterprises - Equity, C/O Franklin Enterprises, 520 Lake Cook Road,
Deerfield, IL 60015, owned 6% of such Portfolio's total outstanding Class A
shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O. Box
92956, Chicago, IL 60675-2956, owned 6% of such Portfolio's total outstanding
Class A shares.
Swarthmore College, 500 College Avenue, Swarthmore, PA 19081-1110, owned 7% of
such Portfolio's total outstanding Class A shares.
Morgan Stanley & Co. Pension Fund, C/O Northern Trust Co., 770 Broadway,
New York, NY 10003, owned 7% of such Portfolio's total outstanding
Class A shares.
Michael J. Fuchs, 9 West 57th Street, New York, NY 10019, owned 11% of such
Portfolio's total outstanding Class B shares.
Alice H. & Paul D. Bartlett, 4800 Main Street, Kansas City, MO 64112, owned
11% of such Portfolio's total outstanding Class B shares.
Daniel E. Winters, 1319 Mirror Terrace, NW, Winter Haven, FL 33881, owned 8% of
such Portfolio's total outstanding Class B shares.
Bruce A. Drummond, 1847 Onaway SE, Grand Rapids, MI 49506, owned 6% of such
Portfolio's total outstanding Class B shares.
Eleanor S. Herkert Trustee of the Eleanor S. Herkert Trust, 2000 Diana Drive,
Lakeview West, Hallandale, FL 33009, owned 6% of such Portfolio's total
outstanding Class B shares.
David Brooks Gendron, 2 Montpelier Place, London SW7 1HJ England, UK, owned
6% of such Portfolio's total outstanding Class B shares.
Paul D. Bartlett, Jr,. 4800 Main Street, Suite 600, Kansas City, MO 64112,
owned 5% of such Portfolio's total outstanding Class B shares.
EMERGING MARKETS PORTFOLIO: Ministers & Missionaries Benefit Board of the
American Baptist Churches, 475 Riverside Drive, New York, NY 10115, owned 7% of
such Portfolio's total outstanding Class A shares.
Ewing Marion Kauffman Foundation, 4900 Oak Street, Kansas City, MO 64112, owned
7% of such Portfolio's total outstanding Class A shares.
EQUITY GROWTH PORTFOLIO: Fidelity Management Trust Company as Trustee for
GTE Master Savings Trust, 82 Devonshire Street, Boston, MA 02109, owned 25%
of such Portfolio's total outstanding Class A shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O.
Box 92956, Chicago, IL 60675, owned 17% of such Portfolio's total outstanding
Class A shares.
St. Raymonds Cemetery Reserve Fund, P.O. Box 92800, Rochester, NY 14692, owned
5% of such Portfolio's total outstanding Class A shares.
Fidelity Investments Institutional Operations Company, Agent for Certain
Employee Benefit Plans, 100 Magellan Way, Covington, KY 41015, owned 8% of such
Portfolio's total outstanding Class A shares.
Philip E. Asquith, 31 Lakeside Drive, Ramsey, NJ 07446, owned 5% of such
Portfolio's total outstanding Class B shares.
45
<PAGE>
EUROPEAN EQUITY PORTFOLIO: Marc Andreessen Trustees, FBO Marc Andreessen,
16615 Lark Avenue, Los Gatos, CA 95030, owned 12% of such Portfolio's total
outstanding Class B shares.
Wayne Gretzky Trustee of the Gretzky Trust of 1989, 9100 Wilshire Boulevard,
Beverly Hills, CA 90210, owned 6% of such Portfolio's total outstanding
Class B shares.
Paul M. and Shirley F. Mathews, 25 West 706 Jerome Avenue, Wheaton, IL 60187,
owned 6% of such Portfolio's total outstanding Class B shares.
William & Brenda Castonguay, 9101 Hometown Drive, Raleigh, NC 27615, owned 5%
of such Portfolio's total outstanding Class B shares.
FIXED INCOME PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 29% of such
Portfolio's total outstanding Class A shares.
Brooks School, C/O Mr. Frank Marino, North Andover, MA 01845, owned 7% of such
Portfolio's total outstanding Class A shares.
Trust for Descendents of David R. Jaffe, C/O David Jaffe, 45 Hemlock Ridge,
Weston, CT 06883, owned 8% of such Portfolio's total outstanding Class B
shares.
Laverne M. Brownsey Trust UA, 135 S. LaSalle Street, Chicago, IL 60603, owned
7% of such Portfolio's total outstanding Class B shares.
First United Methodist Church of Chicago - Endowment Fund, 77 West Washington,
Chicago, IL 60602, owned 7% of such Portfolio's total outstanding Class
B shares.
Cascino Investment Co., 820 Burgess Hill, Naperville, IL 60565, owned 16% of
such Portfolio's total outstanding Class B shares.
Marvin J. Schneider, MSTC Custodian, 12331 Ladue Road, St. Louis, MO 63141,
owned 8% of such Portfolio's total outstanding Class B shares.
Joan M. Hunt, MSTC Custodian, 8627 Madison Drive, Niles, IL 60648, owned 7%
of such portfolio's total outstanding Class B shares.
Michael S. Virgil, FBO Mary Ann Young Brownsey Trust, 135 S. LaSalle Street,
Chicago, IL 60603, owned 7% of such Portfolio's total outstanding Class B
shares.
Joan O. Benjamin, 10 Saint Lukes Place, New York, NY 10014, owned 7% of such
Portfolio's total outstanding Class B shares.
John K. Howe, MSTC Custodian, 7274 East Las Palmaritas Drive, Scottsdale, AZ
85258, owned 7% of such Portfolio's total outstanding Class B shares.
GLOBAL EQUITY PORTFOLIO: Robert College of Istanbul Turkey C/O Morgan Stanley
Asset Management, 25 Cabot Square, London, England E144QA, owned 47% of such
Portfolio's total outstanding Class A shares.
JM Kaplan Fund, Inc., 880 Third Avenue, 3rd floor, New York, NY 10022, owned
13% of such Portfolio's total outstanding Class A shares.
46
<PAGE>
Kaplan, Choate Value Partners, L.P., 880 Third Avenue, New York, NY 10022-4730,
owned 9% of such Portfolio's total outstanding Class A shares.
Gooss & Company, C/O Chase Manhattan Bank, 1211 6th Avenue, New York, NY 10036,
owned 7% of such Portfolio's total outstanding Class A shares.
Divtex and Company FBO, Pritchard Hubble and Herr C/O Texas Commerce Bank, P.O.
Box 2558, Houston, TX 77252, owned 7% of such Portfolio's total outstanding
Class A shares.
Bank of Mississippi, P.O. Box 1605, Jackson, MS 39215, owned 13% of such
Portfolio's total outstanding Class B shares.
Fidelity Investments Institutional Operations as Agent for Certain Employee
Benefit Plans, 100 Magellan Way, Covington, KY 41015, owned 13% of such
Portfolio's total outstanding Class B shares.
Edward J. Prostic, 2225 Stratford Road, Mission Hills, KS 66208, owned 9% of
such Portfolio's total outstanding Class B shares.
V. Marc Droppert IRA, MSTC Custodian, 13106 184th NE, Redmond, WA 98052, owned
8% of such Portfolio's total outstanding Class B shares.
North American Trust Company, FBO Heller/Robert S. Venning, P.O. Box 84419, San
Diego, CA 92138, owned 7% of such Portfolio's total outstanding Class B
shares.
Leslie E. Tiffany IRA, MSTC, 14312 173rd Place NE, Redmond, WA 98052, owned 6%
of such Portfolio's total outstanding Class B shares.
GLOBAL FIXED INCOME PORTFOLIO: Farm Credit Bank Retirement Plan, Columbia
District American Industries Trust Company Trustee, 5700 NW Central Drive, 4th
Floor, Houston, TX 77092, owned 19% of such Portfolio's total outstanding Class
A shares.
Northern Trust Company as Custodian FBO The Lund Foundation, P.O. Box 92956,
Chicago, IL 60675, owned 15% of such Portfolio's total outstanding Class A
shares.
The Northern Trust Co. FBO Christel Dehaan Trust, P.O. Box 92956, Chicago, IL
60675-2956, owned 6% of such Portfolio's total outstanding Class A shares.
Lakeview Holdings Ltd., Coutts & Co. (Bahamas) Ltd., P.O. Box N7788, West Bay
St., Nassau Bahamas owned 5% of such Portfolio's total outstanding Class A
shares.
David Brooks Gendron, 2 Montpelier Place, London SW7 1HJ, England, UK, owned 34%
of such Portfolio's total outstanding Class B shares.
Joan M. Hunt, MSTC Custodian, 8627 Madison Drive, Niles, IL 60648, owned 17%
of such Portfolio's total outstanding Class B shares.
Laverne M. Brownsey Trust UA, 135 S. LaSalle Street, Chicago, IL 60603, owned
16% of such Portfolio's total outstanding Class B shares.
George & Claudine Boutros, 11007 Branbrook, Houston, TX 77042, owned 7% of
such Portfolio's total outstanding Class B shares.
George N. and Susan P. Fugelsang, 17 Calhoun Drive, Greenwich, CT 06831, owned
10% of such Portfolio's total outstanding Class B shares.
Paul E. & H. Anthony Hellmers, 4 Colonial Lane, Larchmont, NY 10538, owned 7%
of such Portfolio's total outstanding Class B shares.
Anthony F. & Colette H. Rowland, C/O Cambrian Management, 1114 Avenue of the
Americas, New York, NY 10036, owned 6% of such Portfolio's total outstanding
Class B shares.
GOLD PORTFOLIO: William H. Ellis Trustee, Living Trust, Attn: Julie J. Laux,
2519 N. Bosworth, Chicago, IL 60614, owned 6% of such Portfolio's total
outstanding Class A shares.
47
<PAGE>
Marshall & Ilsley Trust Company, C/F John Morey, 1000 N. Water Street,
Milwaukee, WI 53202, owned 26% of such Portfolio's total outstanding
Class B shares.
Barlett and Company, Profit Sharing Plan and Trust, 4800 Main Street, Kansas
City, MO 64112, owned 20% of such Portfolio's total outstanding Class B shares.
Chicago Methodist Episcopal Church Aid Society, C/O Gordon Worley, 4401 Gulf
Shore Boulevard North, Monaco Beach Club, Naples, FL 33940, owned 18% of such
Portfolio's total outstanding Class B shares.
Steven C. Olson, 505 Knollwood Road, Ridgewood, NJ 07450, owned 16% of such
Portfolio's total outstanding Class B shares.
Priscilla & John Privat, Community Property, 8852 N.E. 24th Street, Bellevue,
WA 98004, owned 6% of such Portfolio's total outstanding Class B shares.
HIGH YIELD PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley Profit
Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 21% of such
Portfolio's total outstanding Class A shares.
Valassis Enterprises - Equity, c/o Franklin Enterprises, 520 Lake Cook Road,
Suite 380, Deerfield, IL 60015, owned 12% of such Portfolio's total outstanding
Class A shares.
Adeliade L. Hinckley, C/O Jim Bell, Morgan Stanley/IIS Department, 1251 Avenue
of the Americas, New York, NY 10020, owned 7% of such Portfolio's total
outstanding Class B shares.
INTERNATIONAL EQUITY PORTFOLID: Ramakrishna Kothalanka M.D., IRA Rollover, MSTC
Custodian, 126 Bentley Avenue, Jersey City, NJ 07304, owned 5% of such
Portfolio's total outstanding Class B shares.
Fleet Bank, Trustee for Third Presbyterian Church, P.O. Box 92800, Rochester,
NY 14692, owned 17% of such Portfolio's total outstanding Class B shares.
INTERNATIONAL MAGNUM PORTFOLIO: Bankers Trust Trustee, Harris Corporation
Retirement Plan & Harris Corporation Union Retirement Plan, 1025 W. Nasa
Boulevard, Melbourne, FL 32919, owned 47% of such Portfolio's total outstanding
Class A shares.
48
<PAGE>
Southwest Guaranty Trust Co., 2121 Sage Road, Suite 150, Houston, TX 77056,
owned 6% of such Portfolio's total outstanding Class A shares.
Fidelity Investments Institutional Operations Company, Agent for Certain
Employee Benefit Plans, 100 Magellan Way, Covington, KY 41015, owned 83%
of such Portfolio's total outstanding Class B shares.
INTERNATIONAL SMALL CAP PORTFOLIO: The Short Brothers Pension Fund, P.O. Box
241, Airport Road, Belfast, N. Ireland, owned 11% of such Portfolio's total
outstanding Class A shares.
Trustees of Boston College Attn: Paul Haran Associate Treasurer, St. Thomas
More Hall 310, Chestnut Hill, MA 02167, owned 7% of such Portfolio's total
outstanding Class A shares.
General Mills, Inc. Master Trust: Pooled International Fund, One General Mills
Blvd., Minneapolis, MN 55426, owned 7% of such Portfolio's total outstanding
Class A shares.
JAPANESE EQUITY PORTFOLIO: United Carolina Bank Trust Operations, P.O. Box
632, Whiteville, NC 28472, owned 23% of such Portfolio's total outstanding
Class B shares.
Barlett and Company, Profit Sharing Plan and Trust, 4800 Main Street, Kansas
City, MO 64112, owned 14% of such Portfolio's total outstanding Class B shares.
Paul M. & Shirley F. Mathews, 25 W. 706 Jerome Avenue, Wheaton, IL 60187,
owned 7% of such Portfolio's total outstanding Class B shares.
William & Brenda Castonguay, 9101 Hometown Drive, Raleigh, NC 27615, owned
7% of such Portfolio's total outstanding Class B shares.
Wayne Gretzky Trustee of the Gretzky Trust of 1989, 9100 Wilshire Boulevard,
Beverly Hills, CA 90210, owned 6% of such Portfolio's total outstanding
Class B shares.
Douglas E. Ebert, Trustee and Successor in Trust, 326 Vailwood Court,
Bloomfield Hills, MI 48302, owned 6% of such Portfolio's total outstanding
Class B shares.
LATIN AMERICAN PORTFOLIO: Investors Bank & Trust Co., Financial Product
Services, P.O. Box 1537, Boston, MA 02205, owned 10% of such Portfolio's total
outstanding Class A shares.
MUNICIPAL BOND PORTFOLIO: Daniel F. and Maria J. McDonald, 8550 Old
Dominion Drive, McLean, VA 22102, owned 11% of such Portfolio's total
outstanding Class A shares.
Donna Karan, C/O Stephan Weiss, The Donna Karan Company, 550 Seventh Avenue,
New York, NY 10018, owned 6% of such Portfolio's total outstanding
Class A shares.
Frank R. Mori, 935 Park Avenue, New York, NY 10028, owned 8% of such
Portfolio's total outstanding Class A shares.
Cushman Trust, C/O Cambrian Services, 1114 Avenue of the Americas, Suite 2702,
New York, NY 10036, owned 6% of such Portfolio's total outstanding Class A
shares.
Arnold E. and Jill I. Bellowe Trustees, 915 Park Lane, Montecito, CA 93108-
1421, owned 6% of such Portfolio's total outstanding Class A shares.
Sevenson Environmental Services, P.O. Box 396, 2749 Lockport Road, Niagra Falls,
NY 14305, owned 6% of such Portfolio's total outstanding Class A shares.
49
<PAGE>
SMALL CAP VALUE EQUITY PORTFOLIO: Valassis Enterprises - Equity, C/O Franklin
Enterprises, 520 Lake Cook Road, Deerfield, IL 60015, owned 8% of such
Portfolio's total outstanding Class A shares.
McMahan Furniture Company, Attn: Richard A. McMahan, P.O. Box 8000, Carlsbad, CA
92018, owned 7% of such Portfolio's total outstanding Class A shares.
William H. Ellis Trustee, William Ellis Living Trust, 2519 N. Bosworth,
Chicago, IL 60614, owned 5% of such Portfolio's total outstanding
Class A shares.
Barlett and Company, Profit Sharing Plan and Trust, 4800 Main Street, Kansas
City, MO 64112, owned 31% of such Portfolio's total outstanding Class B
shares.
David Brooks Gendron, 2 Montpelier Place, London SW7 1HJ England, UK,
owned 14% of such Portfolio's total outstanding Class B shares.
Robert R. Bennett IRA Rollover, MSTC Custodian, 18853 N. 88th Drive, Peoria,
AZ 85382, owned 10% of such Portfolio's total outstanding Class B shares.
Ramakrishna Kothalanka M.D., IRA Rollover, MSTC Custodian, 126 Bentley Avenue,
Jersey City, NJ 07304, owned 9% of such Portfolio's total outstanding
Class B shares.
Kinney Printing Co-Employees, Attn: Dolores M. Miklos, 4801 South Lawndale,
Chicago, IL 60632-3018, owned 9% of such Portfolio's total outstanding Class B
shares.
Frank E. Hunt Trust, 8627 Madison Drive, Niles, IL 60648, owned 5% of such
Portfolio's total outstanding Class B shares.
TECHNOLOGY PORTFOLIO: Goolock Associates, C/O Oppenheimer & Co. Inc., 200
Liberty Street, New York, NY 10281, owned 21% of such Portfolio's total
outstanding Class A shares.
Misty Investment Limited, N7776, Nassau, Bahamas, owned 10% of such
Portfolio's total outstanding Class A shares.
Peter Karmanos Jr., 4740 Dow Ridge, Orchard Lake, MI 48324, owned 10% of
such Portfolio's total outstanding Class A shares.
Robert F. Bernard, C/O Whittman-Hart, 311 S. Wacker Drive, Chicago, IL 60606,
owned 8% of such Portfolio's total outstanding Class A shares.
John Montelione, 619 Tremont Street, Sarasota, FL 34242, owned 6% of such
Portfolio's total outstanding Class A shares.
Trefoil Inc., 179 St. Paul Avenue, Brantford Ontario, Canada N3T4G5,
owned 5% of such Portfolio's total outstanding Class A shares.
William J. Connolly, 63 Blackhawk Club Court, Danville, CA 94506, owned 5%
of such Portfolio's total outstanding Class A shares.
Brian E. Bellows, 6133 Pasadena Point Boulevard, Gulfport, FL 33707,
owned 18% of such Portfolio's total outstanding Class B shares.
Robert J. Weinstein M.D., & Lois Weinstein, 875 N. Michigan Avenue, Chicago, IL
60611, owned 8% of such Portfolio's total outstanding Class B shares.
Paul Krieger, 23 Fairview Avenue, Great Neck, NY 11023, owned 7% of such
Portfolio's total outstanding Class B shares.
U.S. REAL ESTATE PORTFOLIO: European Patent Organization Pension Reserve Fund,
Erhardt Strasse 27, Munich, 80331 Germany, owned 7% of such Portfolio's total
outstanding Class A shares.
Morgan Stanley & Co. Pension Fund, C/O Northern Trust Company Cust, 770
Broadway, New York, NY 10003, owned 8% of such Portfolio's total outstanding
Class A shares.
Northwestern University, Attn: Investment Department, 633 Clark Street,
Evanston, IL 60208, owned 10% of such Portfolio's total outstanding Class A
shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O.
Box 92956, Chicago, IL 60675, owned 6% of such Portfolio's total outstanding
Class A shares.
Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA 94104,
owned 5% of such Portfolio's total outstanding Class A Shares.
Kansas Children's Service League, P.O. Box 517, Wichita, KS 67201, owned 5%
of such Portfolio's total outstanding Class B shares.
VALUE EQUITY PORTFOLIO: McMahan Furniture Company, Attn: Richard A. McMahan,
P.O. Box 8000, Carlsbad, CA 92018, owned 8% of such Portfolio's total
outstanding Class A shares.
Alice H. & Paul D. Bartlett, Trustees, 4800 Main Street, Kansas City, MO 64112,
owned 19% of such Portfolio's total outstanding Class B shares.
Paul D. Bartlett Jr., 4800 Main Street, Kansas City, MO 64112, owned 13% of
such Portfolio's total outstanding Class B shares.
Cascino Investment Co., 820 Burgess Hill, Naperville, IL 60565, onwed 11% of
such Portfolio's total outstanding Class B shares.
David Brooks Gendron, 2 Montpelier Place, London SW7 1HJ England, UK, owned
8% of such Portfolio's total outstanding Class B shares.
Delaware Charter Guarantee & Trust Company, C/F Nelaura O. Lewis, IRA Rollover,
78 Cedar Cliff Road, Riverside, CT 06878, owned 6% of such Portfolio's total
outstanding Class B shares.
First United Methodist Church of Chicago - Endowment Fund, 77 West Washington,
Chicago, IL 60602, owned 6% of such Portfolio's total outstanding Class B
shares.
George N. and Susan P. Fugelsang, 17 Calhoun Drive, Greenwich, CT 06831,
owned 6% of such Portfolio's total outstanding Class B shares.
Laverne M. Brownsey Trust, 135 S. LaSalle St., Chicago, IL 60603 owned 5% of
such Portfolio's total outstanding Class B shares.
50
<PAGE>
NET ASSET VALUE FOR MONEY MARKET PORTFOLIOS
The Money Market Portfolio and the Municipal Money Market Portfolio seek
to maintain a stable net asset value per share of $1.00. These Portfolios use
the amortized cost method of valuing their securities, which does not take into
account unrealized gains or losses. The use of amortized cost and the
maintenance of each Portfolio's per share net asset value at $1.00 is based on
the Portfolio's election to operate under the provisions of Rule 2a-7 under the
1940 Act. As a condition of operating under that Rule, each of the Money Market
Portfolios must maintain a dollar-weighted average portfolio maturity of 90 days
or less, purchase only instruments having remaining maturities of 397 days or
less, and invest only in securities which are of "eligible quality" as
determined in accordance with regulations of the Commission.
The Rule also requires that the Directors, as a particular
responsibility within the overall duty of care owed to shareholders,
establish procedures reasonably designed, taking into account current market
conditions and each Portfolio's investment objectives, to stabilize the net
asset value per share as computed for the purposes of sales and redemptions
at $1.00. These procedures include periodic review, as the Directors deem
appropriate and at such intervals as are reasonable in light of current
market conditions, of the relationship between the amortized cost value per
share and a net asset value per share based upon available indications of
market value. In such review, investments for which market quotations are
readily available are valued at the most recent bid price or quoted yield
available for such securities or for securities of comparable maturity,
quality and type as obtained from one or more of the major market makers for
the securities to be valued. Other investments and assets are valued at fair
value, as determined in good faith by the Directors.
In the event of a deviation of over 1/2 of 1% between a Portfolio's net
asset value based upon available market quotations or market equivalents and
$1.00 per share based on amortized cost, the Directors will promptly consider
what action, if any, should be taken. The Directors will also take such action
as they deem appropriate to eliminate or to reduce to the extent reasonably
practicable any material dilution or other unfair results which might arise from
differences between the two. Such action may include redemption in kind,
selling instruments prior to maturity to realize capital gains or losses or to
shorten the average maturity, withholding dividends, paying distributions from
capital or capital gains or utilizing a net asset value per share as determined
by using available market quotations.
There are various methods of valuing the assets and of paying dividends
and distributions from a money market fund. Each of the Money Market and
Municipal Money Market Portfolios values its assets at amortized cost while also
monitoring the available market bid price, or yield equivalents. Since
dividends from net investment income will be declared daily and paid monthly,
the net asset value per share of each Portfolio will ordinarily remain at $1.00,
but each Portfolio's daily dividends will vary in amount. Net realized gains,
if any, will normally be declared and paid monthly.
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to
illustrate the Portfolios' past performance.
Performance quotations by investment companies are subject to rules
adopted by the Commission, which require the use of standardized performance
quotations. In the case of total return, non-standardized performance
quotations may be furnished by the Fund but must be accompanied by certain
standardized performance information computed as required by the Commission.
Current yield and average annual compounded total return quotations used by the
Fund are based on the standardized methods of computing performance mandated by
the Commission. An explanation of those and other methods used by the Fund to
compute or express performance follows.
51
<PAGE>
TOTAL RETURN
From time to time each Portfolio, except the Money Market and Municipal
Money Market Portfolios, may advertise total return for each class of shares of
the Portfolio. Total return figures are based on historical earnings and are
not intended to indicate future performance. The average annual total return is
determined by finding the average annual compounded rates of return over 1-, 5-,
and 10-year periods (or over the life of the Portfolio) that would equate an
initial hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes that all dividends and distributions are reinvested when
paid. The quotation assumes the amount was completely redeemed at the end of
each 1-, 5-, and 10-year period (or over the life of the Portfolio) and the
deduction of all applicable Fund expenses on an annual basis.
The average annual compounded rates of return (unless otherwise noted)
for the Fund's Portfolios for the one year and five year periods ended
December 31, 1996 and for the period from inception through December 31, 1996
are as follows:
Inception One Average Annual Average Annual
Name of Portfolio Date Year Five Year Since Inception
- ----------------- --------- ------ -------------- ---------------
Active Country Allocation
Class A . . . . . . . . . . 1/17/92 9.71% N/A 8.71%
Class B . . . . . . . . . . 1/02/96 9.22% N/A N/A
Aggressive Equity
Class A . . . . . . . . . . 3/08/95 40.90% N/A 45.98%
Class B . . . . . . . . . . 1/02/96 39.72% N/A N/A
Asian Equity
Class A . . . . . . . . . . 7/01/91 3.49% 19.35% 18.28%
Class B . . . . . . . . . . 1/02/96 2.92% N/A N/A
Balanced
Class A . . . . . . . . . . 2/20/90 10.93% 10.15% 10.39%
Class B . . . . . . . . . . 1/02/96 10.24% N/A N/A
Emerging Growth
Class A . . . . . . . . . . 11/01/89 3.72% 4.10% 11.96%
Class B . . . . . . . . . . 1/02/96 3.58% N/A N/A
Emerging Markets
Class A . . . . . . . . . . 9/25/92 12.19% N/A 12.93%
Class B . . . . . . . . . . 1/02/96 11.04% N/A N/A
Emerging Markets Debt
Class A . . . . . . . . . . 2/01/94 50.52% N/A 18.94%
Class B . . . . . . . . . . 1/02/96 48.52% N/A N/A
Equity Growth
Class A . . . . . . . . . . 4/02/91 30.97% 16.99% 17.06%
Class B . . . . . . . . . . 1/02/96 29.92% N/A N/A
European Equity
Class A . . . . . . . . . . 4/02/93 22.29% N/A 19.62%
Class B . . . . . . . . . . 1/02/96 20.76% N/A N/A
Fixed Income
Class A . . . . . . . . . . 5/15/91 4.61% 7.00% 8.35%
Class B . . . . . . . . . . 1/02/96 4.35% N/A N/A
Global Equity
Class A . . . . . . . . . . 7/15/92 22.83% N/A 19.22%
Class B . . . . . . . . . . 1/02/96 22.04% N/A N/A
Global Fixed Income
Class A . . . . . . . . . . 5/01/91 6.44% 7.17% 8.50%
Class B . . . . . . . . . . 1/02/96 6.12% N/A N/A
52
<PAGE>
Inception One Average Annual Average Annual
Name of Portfolio Date Year Five Year Since Inception
- ----------------- --------- ------ -------------- ---------------
Gold
Class A . . . . . . . . . . 2/01/94 16.94% N/A 6.80%
Class B . . . . . . . . . . 1/02/96 13.21% N/A N/A
High Yield
Class A . . . . . . . . . . 9/28/92 15.01% N/A 12.91%
Class B . . . . . . . . . . 1/02/96 14.37% N/A N/A
International Equity
Class A . . . . . . . . . . 8/04/89 19.64% 16.41% 11.96%
Class B . . . . . . . . . . 1/02/96 18.58% N/A N/A
International Magnum
Class A . . . . . . . . . . 3/15/96 8.25%* N/A N/A
Class B . . . . . . . . . . 3/15/96 7.90%* N/A N/A
International Small Cap
Class A . . . . . . . . . . 12/15/92 16.82% N/A 16.42%
Japanese Equity
Class A . . . . . . . . . . 4/25/94 -1.40% N/A -2.51%
Class B . . . . . . . . . . 1/02/96 -1.67% N/A N/A
Latin American
Class A . . . . . . . . . . 1/18/95 48.77% N/A 16.98%
Class B . . . . . . . . . . 1/02/96 42.44% N/A N/A
Municipal Bond
Class A . . . . . . . . . . 1/18/95 3.67% N/A 6.36%
Class B . . . . . . . . . . 1/02/96 3.55% N/A N/A
Small Cap Value Equity
Class A . . . . . . . . . . 12/17/92 22.99% N/A 14.32%
Class B . . . . . . . . . . 1/02/96 22.33% N/A N/A
U.S. Real Estate
Class A . . . . . . . . . . 2/24/95 39.56% N/A 32.73%
Class B . . . . . . . . . . 1/02/96 38.23% N/A N/A
Value Equity
Class A . . . . . . . . . . 1/31/90 19.73% 14.92% 12.95%
Class B . . . . . . . . . . 1/02/96 18.57% N/A N/A
* Cumulative (unannualized) total return since inception of the Portfolio.
These figures were calculated according to the following formula:
P(1 + T)to the nth power = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of hypothetical $1,000 payment made at
the beginning of the 1-, 5-, or 10-year periods at the end of
the 1-, 5-, or 10-year periods (or fractional portion thereof).
CALCULATION OF YIELD FOR NON-MONEY MARKET PORTFOLIOS
From time to time certain of the Fund's Portfolios may advertise yield.
Current yield reflects the income per share earned by a Portfolio's
investments.
Current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per share
on the last day of the period and annualizing the result. Expenses accrued for
the period include any fees charged to all shareholders during the base period.
53
<PAGE>
The respective current yields for certain of the Fund's Portfolios for the
30-day period ended December 31, 1996 were as follows:
PORTFOLIO NAME CLASS A SHARES CLASS B SHARES
-------------- -------------- --------------
Emerging Markets Debt . . . . . . . 10.46% 10.16%
Fixed Income. . . . . . . . . . . . 6.39% 6.27%
Global Fixed Income . . . . . . . . 4.91% 4.76%
High Yield. . . . . . . . . . . . . 9.31% 9.05%
Municipal Bond. . . . . . . . . . . 4.35% 4.11%
These figures were obtained using the following formula:
Yield = 2[( a - b + 1 )to the 6th power - 1]
------
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive income distributions
d = the maximum offering price per share on the last day of the
period.
CALCULATION OF YIELD FOR MONEY MARKET PORTFOLIOS
The current yield of the Money Market and Municipal Money Market
Portfolios is calculated daily on a base period return for a hypothetical
account having a beginning balance of one share for a particular period of
time (generally 7 days). The return is determined by dividing the net change
(exclusive of any capital changes in such account) by its average net asset
value for the period, and then multiplying it by 365/7 to determine the
annualized current yield. The calculation of net change reflects the value
of additional shares purchased with the dividends by the Portfolio, including
dividends on both the original share and on such additional shares. The
yields of the Money Market and Municipal Money Market Portfolios for the
7-day period ended December 31, 1996 were 4.99% and 3.38%, respectively. An
effective yield, which reflects the effects of compounding and represents an
annualization of the current yield with all dividends reinvested, may also be
calculated for each Portfolio by dividing the base period return by 7, adding
1 to the quotient, raising the sum to the 365th power, and subtracting 1 from
the result. The effective yields of the Money Market and Municipal Money
Market Portfolios for the 7-day period ended December 31, 1996 were 5.11% and
3.43%, respectively.
The yield of a Portfolio will fluctuate. The annualization of a week's
dividend is not a representation by the Portfolio as to what an investment in
the Portfolio will actually yield in the future. Actual yields will depend on
such variables as investment quality, average maturity, the type of instruments
the Portfolio invests in, changes in interest rates on instruments, changes in
the expenses of the Fund and other factors. Yields are one basis investors may
use to analyze the Portfolios of the Fund, and other investment vehicles;
however, yields of other investment vehicles may not be comparable because of
the factors set forth in the preceding sentence, differences in the time periods
compared, and differences in the methods used in valuing portfolio instruments,
computing net asset value and calculating yield.
54
<PAGE>
TAXABLE EQUIVALENT YIELD FOR THE MUNICIPAL BOND AND MUNICIPAL MONEY MARKET
PORTFOLIO
It is easy to calculate your own taxable equivalent yield if you know
your tax bracket. The formula is:
Tax Free Yield
--------------------
1 - Your Tax Bracket = Your Taxable Equivalent Yield
For example, if you are in the 28% tax bracket and can earn a tax-free
yield of 7.5%, the taxable equivalent yield would be 10.42%.
The table below indicates the advantages of investments in Municipal
Bonds for certain investors. Tax-exempt rates of interest payable on a
Municipal Bond (shown at the top of each column) are equivalent to the taxable
yields set forth opposite the respective income tax levels, based on income tax
rates effective for the tax year 1996 under the Internal Revenue Code. There
can, of course, be no guarantee that the Municipal Bond Portfolio or Municipal
Money Market Portfolio will achieve a specific yield. Also, it is possible that
some portion of the Portfolio's dividends may be subject to Federal income
taxes. A substantial portion, if not all, of such dividends may be subject to
state and local taxes.
TAXABLE EQUIVALENT YIELD TABLE
<TABLE>
<CAPTION>
Sample Level of Taxable Equivalent Rates
Taxable Income Based on Tax-Exempt Yield of:
-------------- -----------------------------
Federal
Income
Joint Single Tax
Return Return Bracket 3% 4% 5% 6% 7% 8% 9% 10% 11%
- ------ ------ ------- -- -- -- -- -- -- -- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-39,000 $0-23,350 15.0% 3.5% 4.7% 5.9% 7.1% 8.2% 9.4% 10.6% 11.8% 12.9%
39,000-94,250 23,350-56,550 28.0 4.2 5.6 6.9 8.3 9.7 11.1 12.5 13.9 15.3
94,250-143,600 56,550-117,950 31.0 4.3 5.8 7.2 8.7 10.1 11.6 13.0 14.5 15.9
143,600-256,500 117,950-256,500 36.0 4.7 6.3 7.8 9.4 10.9 12.5 14.1 15.6 17.2
over 256,500 over 256,500 39.6 5.0 6.6 8.3 9.9 11.6 13.2 14.9 16.6 18.2
</TABLE>
- -------
* Net amount subject to 1996 Federal Income Tax after deductions and
exemptions, not indexed for 1996 income tax rates.
The taxable equivalent yields for the Municipal Money Market and Municipal Bond
Portfolios for the seven days ended December 31, 1996 assuming a Federal income
tax rate of 39.6% (maximum rate), were 5.60% and 6.44%, respectively. The
taxable equivalent effective yields for the Municipal Money Market and Municipal
Bond Portfolios for the seven days ended December 31, 1996, assuming the same
tax rate, were 5.68% and 6.57%, respectively.
55
<PAGE>
COMPARISONS
To help investors better evaluate how an investment in a Portfolio of
Morgan Stanley Institutional Fund, Inc. might satisfy their investment
objective, advertisements regarding the Fund may discuss various measures of
Fund performance as reported by various financial publications.
Advertisements may also compare performance (as calculated above) to
performance as reported by other investments, indices and averages. The
following publications may be used:
(a) CDA Mutual Fund Report, published by CDA Investment Technologies,
Inc. -- analyzes price, current yield, risk, total return and
average rate of return (average annual compounded growth rate)
over specified time periods for the mutual fund industry.
(b) Financial publications: Business Week, Changing Times, Financial
World, Forbes, Fortune, Money, Barron's, Consumer's Digest,
Financial Times, Global Investor, Investor's Daily, Lipper
Analytical Services, Inc., Morningstar, Inc., New York Times,
Personal Investor, Wall Street Journal and Weisenberger
Investment Companies Service -- publications that rate fund
performance over specified time periods.
(c) Historical data supplied by the research departments of First
Boston Corporation, the J.P. Morgan companies, Salomon Brothers,
Merrill Lynch, Pierce, Fenner & Smith, Lehman Brothers and
Bloomberg L.P.
(d) Lipper -- Mutual Fund Performance Analysis and Lipper -- Fixed
Income Fund Performance Analysis -- measures total return and
average current yield for the mutual fund industry. Ranks
individual mutual fund performance over specified time periods,
assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
(e) Mutual Fund Source Book, published by Morningstar, Inc. --
analyzes price, yield, risk and total return for equity funds.
(f) Savings and Loan Historical Interest Rates -- as published in the
U.S. Savings & Loan League Fact Book.
(g) Stocks, Bonds, Bills and Inflation, published by Hobson
Associates -- historical measure of yield, price and total return
for common and small company stock, long-term government bonds,
U.S. Treasury bills and inflation.
The following indices and averages may also be used:
(a) Composite Indices -- 70% Standard & Poor's 500 Stock Index and
30% NASDAQ Industrial Index; 35% Standard & Poor's 500 Stock
Index and 65% Salomon Brothers High Grade Bond Index; and 65%
Standard & Poor's 500 Stock Index and 35% Salomon Brothers High
Grade Bond Index.
(b) Consumer Price Index (or cost of Living Index), published by the
U.S. Bureau of Labor Statistics -- a statistical measure of
change, over time, in the price of goods and services in major
expenditure groups.
(c) Donoghue's Money Fund Average -- an average of all major money
market fund yields, published weekly for 7 and 30-day yields.
56
<PAGE>
(d) Dow Jones Composite Average or its component averages -- an
unmanaged index composed of 30 blue-chip industrial corporation
stocks (Dow Jones Industrial Average), 15 utilities company
stocks and 20 transportation stocks. Comparisons of performance
assume reinvestment of dividends.
(e) EMBI+ -- Expanding on the EMBI, which includes only Bradys, the
EMBI+ includes a broader group of Brady Bonds, loans, Eurobonds
and the U.S. Dollar local markets instruments. A more
comprehensive benchmark than the EMBI, the EMBI+ covers 49
instruments from 14 countries. At $96 billion, its market cap is
nearly 50% higher than the EMBI's. The EMBI+ is not, however,
intended to replace the EMBI but rather to complement it. The
EMBI continues to represent the most liquid, most easily traded
segment of the market, including more of the assets that
investors typically hold in their portfolios. Both of these
indices are published daily.
(f) First Boston High Yield Index -- generally includes over 180
issues with an average maturity range of seven to ten years with
a minimum capitalization of $100 million. All issues are
individually trader-priced monthly.
(g) First Boston Upper/Middle Tier High Yield Index -- an unmanaged
index of bonds rated B to BBB.
(h) Goldman Sachs 100 Convertible Bond Index -- currently includes 67
bonds and 33 preferred. The original list of names was generated
by screening for convertible issues of 100 million or greater in
market capitalization. The index is priced monthly.
(i) IFC Global Total Return Composite Index -- an unmanaged index of
common stocks and includes 18 developing countries in Latin
America, East and South Asia, Europe, the Middle East and Africa
(net of dividends reinvested).
(j) Indata Balanced-Median Index -- an unmanaged index and includes
an asset allocation of 2.5% cash, 38.2% bonds and 59.3% equity
based on $52.6 billion in assets among 579 portfolios for the year
ended December 31, 1996 (assumes dividends reinvested).
(k) Indata Equity-Median Stock Index -- an unmanaged index which
includes an average asset allocation of 7.4% cash and 92.6% equity
based on $464.9 billion in assets among 1,277 portfolios for the
year ended December 31, 1996.
(l) J.P. Morgan Emerging Markets Bond Index -- a market-weighted
index composed of all Brady bonds outstanding and includes
Argentina, Brazil, Bulgaria, Mexico, Nigeria, the Philippines,
Poland and Venezuela.
(m) J.P. Morgan Emerging Markets Bond Index Plus -- expanding on
the J.P. Morgan Emerging Markets Bond Index, which only trades
Brady Bonds, this index reflects total returns for external
debt instruments which have been traded in emerging markets.
Brady Bonds are included amoung such instruments, as well as
Eurobonds, loans and U.S. dollar denominated local market
instruments. Countries included in the index are Argentina,
Brazil, Bulgaria, Ecuador, Mexico, Morocco, Nigeria, Panama,
Peru, the Phillipines, Poland, Russia, South Africa and
Venezuela.
(n) J.P. Morgan Traded Global Bond Index -- an unmanaged index of
securities and includes Australia, Belgium, Canada, Denmark,
France, Germany, Italy, Japan, The Netherlands, Spain, Sweden,
United Kingdom and the United States.
(o) Lehman Brothers Aggregate Bond Index -- an unmanaged index made
up of the Government/Corporate Index, the Mortgage Backed
Securities Index and the Asset-Backed Securities Index.
(p) Lehman Brothers LONG-TERM Treasury Bond -- composed of all bonds
covered by the Lehman Brothers Treasury Bond Index with
maturities of 10 years or greater.
57
<PAGE>
(q) The Lehman 7 Year Municipal Bond Index -- an unmanaged index
which consists of investment grade bonds with maturities between
6-8 years rated BAA or better. All bonds have been taken from
deals done within the last 5 years, with assets of $50 million or
larger.
(r) Lipper Capital Appreciation Index -- a composite of mutual funds
managed for maximum capital gains.
(s) Morgan Stanley Capital International Combined Far East Free
ex-Japan Index -- a market-capitalization weighted index
comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore, Taiwan and Thailand. Korea is included
in the MSCI Combined Far East Free ex-Japan Index at 20% of its
market capitalization.
(t) Morgan Stanley Capital International EAFE Index -- an arithmetic,
market value-weighted average of the performance of over 900
securities on the stock exchanges of countries in Europe,
Australia and the Far East.
(u) Morgan Stanley Capital International Emerging Markets Global
Latin America Index -- an unmanaged, arithmetic market value
weighted average of the performance of over 196 securities on the
stock exchanges of Argentina, Brazil, Chile, Colombia, Mexico,
Peru and Venezuela (Assumes reinvestment of dividends).
(v) Morgan Stanley Capital International Europe Index -- an unmanaged
index of common stocks and includes 14 countries throughout
Europe.
(w) Morgan Stanley Capital International Japan Index -- an unmanaged
index of common stocks.
(x) Morgan Stanley Capital International Latin America Index -- a
broad-based market capitalization-weighted composite index
covering at least 60% of markets in Mexico, Argentina, Brazil,
Chile, Colombia, Peru and Venezuela (assumes dividends
reinvested).
(y) Morgan Stanley Capital International World Index -- an
arithmetic, market value-weighted average of the performance of
over 1,470 securities listed on the stock exchanges of countries
in Europe, Australia, the Far East, Canada and the United States.
(z) NASDAQ Composite Index -- an unmanaged index of common stocks.
(aa) NASDAQ Industrial Index -- a capitalization-weighted index
composed of more than 3,000 domestic stocks taken from the
following industry sectors: agriculture, mining, construction,
manufacturing, electronic components, services and public
administration enterprises. It is a value-weighted index
calculated on price change only and does not include income.
(bb) National Association of Real Estate Investment Trusts ("NAREIT")
Index -- an unmanaged market weighted index of tax qualified
REITs (excluding healthcare REITs) listed on the New York Stock
Exchange, American Stock Exchange and the NASDAQ National Market
System including dividends.
(cc) The New York Stock Exchange composite or component indices --
unmanaged indices of all industrial, utilities, transportation
and finance company stocks listed on the New York Stock Exchange.
58
<PAGE>
(dd) Philadelphia Gold and Silver Index -- an unmanaged index
comprised of seven leading companies involved in the mining of
gold and silver.
(ee) Russell 2000 Growth Index -- comprised of those Russell 2000
Securities with an above-average growth orientation. Here,
securities tend to exhibit higher price-to-book and
price-earnings ratios, lower dividend yields and higher
forecasted growth than the Value universe.
(ff) Russell 2500 Index -- comprised of the bottom 500 stocks in the
Russell 1000 Index which represents the universe of stocks from
which most active money managers typically select; and all the
stocks in the Russell 2000 Index. The largest security in the
index has a market capitalization of approximately 1.3 billion.
(gg) Salomon Brothers GNMA Index -- includes pools of mortgages
originated by private lenders and guaranteed by the mortgage
pools of the Government National Association.
(hh) Salomon Brothers High Grade Corporate Bond Index -- consists of
publicly issued, non-convertible corporate bonds rated AA or AAA.
It a is value-weighted, total return index, including
approximately 800 issues with maturities of 12 years or greater.
(ii) Salomon Brothers Broad Investment Grade Bond -- a market-weighted
index that contains approximately 4700 individually priced
investment grade corporate bonds rated BBB or better, U.S.
Treasury/agency issues and mortgage pass-through securities.
(jj) Standard & Poor's 500 Stock Index or its component indices --
unmanaged index composed of 400 industrial stocks, 40 financial
stocks, 40 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
(kk) Standard & Poor's Small Cap 600 Index -- a capitalization-
weighted index of 600 domestic stocks having market
capitalizations which reside within the 50th and the 83rd
percentiles of the market capitalization of the entire stock
market, chosen for certain liquidity characteristics and for
industry representation.
(ll) Wilshire 5000 Equity Index or its component indices -- represents
the return on the market value of all common equity securities
for which daily pricing is available. Comparisons of performance
assume reinvestment of dividends.
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in the Fund's
Portfolios, that the averages are generally unmanaged, and that the items
included in the calculations of such averages may not be identical to the
formula used by the Fund to calculate its futures. In addition, there can be no
assurance that the Fund will continue this performance as compared to such other
averages.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund's Articles of Incorporation, as amended and restated, permit
the Directors to issue 35 billion shares of common stock, par value $.001 per
share, from an unlimited number of classes ("Portfolios") of shares.
Currently the Fund consists of shares of twenty-nine Portfolios (the China
Growth, Mortgage-Backed Securities and MicroCap Portfolios are not currently
offering shares).
59
<PAGE>
The shares of each Portfolio of the Fund are fully paid and
nonassessable, and have no preference as to conversion, exchange, dividends,
retirement or other features. The shares of each Portfolio of the Fund have
no pre-emptive rights. The shares of the Fund have non-cumulative voting
rights, which means that the holders of more than 50% of the shares voting
for the election of Directors can elect 100% of the Directors if they choose
to do so. A shareholder is entitled to one vote for each full share held
(and a fractional vote for each fractional share held), then standing in his
name on the books of the Fund.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund's policy is to distribute substantially all of each Portfolio's
net investment income, if any. The Fund may also distribute any net realized
capital gains in the amount and at the times that will avoid both income
(including taxable gains) taxes on it and the imposition of the federal excise
tax on income and capital gains (see discussion under "Taxes" in this Statement
of Additional Information). However, the Fund may also choose to retain net
realized capital gains and pay taxes on such gains. The amounts of any income
dividends or capital gains distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares
of a Portfolio by an investor may have the effect of reducing the per share net
asset value of that Portfolio by the per share amount of the dividend or
distribution. Furthermore, such dividends or distributions, although in effect
a return of capital, are subject to income taxes for shareholders subject to tax
as set forth herein and in the applicable Prospectus.
As set forth in the Prospectuses, unless the shareholder elects
otherwise in writing, all dividends and capital gains distributions for a class
of shares are automatically received in additional shares of such class of that
Portfolio of the Fund at net asset value (as of the business day following the
record date). This automatic reinvestment of dividends and distributions will
remain in effect until the Fund is notified by the shareholder in writing at
least three days prior to the record date that either the Income Option (income
dividends in cash and capital gains distributions in additional shares at net
asset value) or the Cash Option (both income dividends and capital gains
distributions in cash) has been elected.
CUSTODY ARRANGEMENTS
Chase is the Fund's custodian for domestic and certain foreign assets.
Chase is not affiliated with Morgan Stanley & Co. Incorporated.
Morgan Stanley Trust Company, Brooklyn, NY, acts as the Fund's
custodian for foreign assets held outside the United States and
employs subcustodians who were approved by the Directors of the Fund in
accordance with Rule 17f-5 adopted by the Commission under the 1940 Act.
Morgan Stanley Trust Company is an affiliate of Morgan Stanley & Co.
Incorporated. In the selection of foreign subcustodians, the Directors
consider a number of factors, including, but not limited to, the reliability
and financial stability of the institution, the ability of the institution to
provide efficiently the custodial services required for the Fund, and the
reputation of the institution in the particular country or region.
60
<PAGE>
DESCRIPTION OF RATINGS
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
EXCERPTS FROM MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") DESCRIPTION
OF BOND RATINGS: Aaa - Bonds which are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by
an exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa -Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities. Moody's applies numerical modifiers 1, 2 and 3 in the Aa
and A rating categories. The modifier 1 indicates that the security ranks at
a higher end of the rating category, modifier 2 indicates a mid-range rating
and the modifier 3 indicates that the issue ranks at the lower end of the
rating category. A - Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future. Baa - Bonds which are
rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. Ba - Bonds which are rated Ba are
judged to have speculative elements; their future cannot be considered as
well assured. Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds in this
class. B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small. Caa - Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with respect to
principal or interest. Ca - Bonds which are rated Ca represent obligations
which are speculative in a high degree. Such issues are often in default or
have other marked shortcomings. C - Bonds which are rated C are the lowest
rated class of bonds, and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
EXCERPTS FROM STANDARD & POOR'S RATINGS GROUP ("S&P") DESCRIPTION OF BOND
RATINGS: AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation and indicate an extremely strong capacity to pay
principal and interest. AA - Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only to a
small degree. A - Bonds rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories. BBB - Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher rated
categories. BB, B, CCC, CC - Debt rated BB, B, CCC and CC is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. C - The rating C is reserved for income bonds
on which no interest is being paid. D - Debt rated D is in default, and payment
of interest and/or repayment of principal is in arrears.
61
<PAGE>
DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES: Moody's
ratings for state and municipal notes and other short-term obligations are
designated Moody's Investment Grade ("MIG"). Symbols used are as follows:
MIG-1 -- best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established broad-based access to the market
for refinancing, or both; MIG-2 -- high quality with margins of protection ample
although not so large as in the preceding group; MIG-3 - favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades.
DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING: Prime-1 ("P1")
- -- Judged to be of the best quality. Their short-term debt obligations carry
the smallest degree of investment risk.
EXCERPT FROM S&P'S RATING OF MUNICIPAL NOTE ISSUES: S-1+ -- very strong
capacity to pay principal and interest; SP-2 -- strong capacity to pay principal
and interest.
DESCRIPTION OF S&P'S HIGHEST COMMERCIAL PAPER RATINGS: A-1+ -- this
designation indicates the degree of safety regarding timely payment is
overwhelming. A-1 -- this designation indicates the degree of safety regarding
timely payment is very strong.
62
<PAGE>
FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal year ended December 31, 1996,
including notes thereto and the report of Price Waterhouse LLP are herein
incorporated by reference from the Fund's Annual report. A copy of the Fund's
Annual Report to Shareholders must accompany the delivery of this Statement of
Additional Information.
63
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company with diversified and nondiversified series
("Portfolios"). The Fund currently consists of twenty-nine Portfolios offering
a broad range of investment choices. The Fund is designed to provide clients
with attractive alternatives for meeting their investment needs. Shares of each
Portfolio are offered with no sales charge, exchange or (with the exception of
the International Small Cap Portfolio) redemption fee. The Class A shares and
Class B shares currently offered by the Portfolios have different minimum
investment requirements and fund expenses. This Statement of Additional
Information addresses information of the Fund applicable to Class A shares and
Class B shares of the Technology Portfolio (the "Portfolio"), one of the twenty-
nine portfolios.
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the prospectus of the Portfolio (the "Prospectus"). To
obtain the Prospectus or the prospectus and/or Statement of Additional
Information relating to any of the other Portfolios, please call the Morgan
Stanley Institutional Fund, Inc. Services Group at 1-800-548-7786.
TABLE OF CONTENTS
Page
Investment Objective and Policies. . . . . . . . . . . . . . . . . . . . . . 2
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
General Regulated Investment Company Qualification . . . . . . . . . . . . . 8
General Tax Treatment of Qualifying RICs and Shareholders. . . . . . . . . . 9
Special Tax Considerations Relating to Foreign Investments . . . . . . . . .10
Taxes and Foreign Shareholders . . . . . . . . . . . . . . . . . . . . . . .10
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Investment Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Determining Maturities of Certain Instruments. . . . . . . . . . . . . . . .14
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . . .26
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Description of Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1997.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the Portfolio's investment objective and
policies set forth in the Prospectus:
THE EQUITY-LINKED SECURITIES
The Portfolio may invest in equity-linked securities, including, among
others, PERCS, ELKS or LYONs, which are securities that are convertible into
or the value of which is based upon the value of, equity securities upon
certain terms and conditions. The amount received by an investor at maturity
of such securities is not fixed but is based on the price of the underlying
common stock. It is impossible to predict whether the price of the underlying
common stock will rise or fall. Trading prices of the underlying common stock
will be influenced by the issuer's operational results, by complex,
interrelated political, economic, financial, or other factors affecting the
capital markets, the stock exchanges on which the underlying common stock
is traded and the market segment of which the issuer is a part. In addition,
it is not possible to predict how equity-linked securities will trade in the
secondary market, which is fairly developed and liquid. The market for such
securities may be shallow, however, and high volume trades may be possible
only with discounting. In addition to the foregoing risks, the return on such
securities depends on the creditworthiness of the issuer of the securities,
which may be the issuer of the underlying securities or a third party
investment banker or other lender. The creditworthiness of such third party
issuer of equity-linked securities may, and often does, exceed the
creditworthiness of the issuer of the underlying securities. The advantage of
using equity-linked securities over traditional equity and debt securities is
that the former are income producing vehicles that may provide a higher
income than the dividend income on the underlying equity securities while
allowing some participation in the capital appreciation of the underlying
equity securities. Another advantage of using equity-linked securities is
that they may be used for hedging to reduce the risk of investing in the
generally more volatile underlying equity securities.
The following are three examples of equity-linked securities. The
Portfolio may invest in the securities described below or other similar
equity-linked securities.
PERCS. Preferred Equity Redemption Cumulative Stock ("PERCS")
technically is preferred stock with some characteristics of common stock.
PERCS are mandatorily convertible into common stock after a period of time,
usually three years, during which the investors' capital gains are capped,
usually at 30%. Commonly, PERCS may be redeemed by the issuer at any time or
if the issuer's common stock is trading at a specified price level or better.
The redemption price starts at the beginning of the PERCS duration period at
a price that is above the cap by the amount of the extra dividends the PERCS
holder is entitled to receive relative to the common stock over the duration
of the PERCS and declines to the cap price shortly before maturity of the
PERCS. In exchange for having the cap on capital gains and giving the issuer
the option to redeem the PERCS at any time or at the specified common stock
price level, the Portfolio may be compensated with a substantially higher
dividend yield than that on the underlying common stock. Investors, such as
the Portfolio, that seek current income find PERCS attractive because PERCS
provide a higher dividend income than that paid with respect to a company's
common stock.
ELKS. Equity-Linked Securities ("ELKS") differ from ordinary debt
securities, in that the principal amount received at maturity is not fixed
but is based on the price of the issuer's common stock. ELKS are debt
securities commonly issued in fully registered form for a term of three years
under an indenture trust. At maturity, the holder of ELKS will be entitled to
receive a principal amount equal to the lesser of a cap amount, commonly in
the range of 30% to 55% greater than the current price of the issuer's common
stock, or the average closing price per share of the issuer's common stock,
subject to adjustment as a result of certain dilution events, for the 10
trading days immediately prior to maturity. Unlike PERCS, ELKS are commonly
not subject to redemption prior to maturity. ELKS usually bear interest
during the three-year term at a substantially higher rate than the dividend
yield on the underlying common stock. In exchange for having the cap on the
return that might have been received as capital gains on the underlying
common stock, the Portfolio may be compensated with the higher yield,
contingent on how well the underlying common stock does. Investors, such as
the Portfolio, that seek current income, find ELKS attractive because ELKS
provide a higher dividend income than that paid with respect to a company's
common stock.
LYONS. Liquid Yield Option Notes ("LYONs") differ from ordinary debt
securities, in that the amount received prior to maturity is not fixed but is
based on the price of the issuer's common stock. LYONs are zero-coupon
notes that sell at a large discount from face value. For an investment in
LYONs, the Portfolio will not receive any interest payments until the notes
mature, typically in 15 to 20 years, when the notes are redeemed at face, or
par, value. The yield on LYONs, typically, is lower-than-market rate for debt
securities of the same maturity, due in part to the fact that the LYONs are
convertible into common stock of the issuer at any time at the option of the
holder of the LYONs. Commonly, the LYONs are redeemable by the issuer at any
time after an initial period or if the issuer's common stock is trading at a
specified price level or better or, at the option of the holder, upon certain
fixed dates. The redemption price typically is the purchase price of the
LYONs plus accrued original issue discount to the date of redemption, which
amounts to the lower-than-market yield. The Portfolio will receive
only the lower-than-market yield unless the underlying common stock
increases in value at a substantial rate. LYONs are attractive to investors
like the Portfolio when it appears that they will increase in value due to
the rise in value of the underlying common stock.
FOREIGN CURRENCY TRANSACTIONS
To the extent the Portfolio invests in securities denominated in foreign
currencies, the assets of the Portfolio may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange
control regulations, and the Portfolio may incur costs in connection with
conversions between various currencies. The Portfolio will conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. A
foreign currency forward contract involves an obligation to purchase or sell
a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks)
and their customers. A forward contract generally has no deposit
requirement, and no commissions are charged at any stage for such trades.
The Portfolio may enter into foreign currency forward contracts in
several circumstances. When the Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when the
Portfolio anticipates the receipt in a foreign currency of dividends or
interest payments on a security which it holds, the Portfolio may desire to
"lock-in" the U.S. dollar price of the security or the U.S. dollar equivalent
of such dividend or interest payment, as the case may be. By entering into a
forward contract for a fixed amount of dollars, for the purchase or sale of
the amount of foreign currency involved in the underlying transactions, the
Portfolio will be able to protect itself against a possible loss resulting
from an adverse change in the relationship between the U.S. dollar and the
subject foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment
is declared, and the date on which such payments are made or received.
Additionally, when the Portfolio anticipates that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract for a fixed amount of dollars,
to sell the amount of foreign currency approximating the value of some or all
of the Portfolio's securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date on which the
forward contract is entered into and the date it matures. The projection of
short-term currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain.
The Portfolio does not intend to enter into such forward contracts to protect
the value of portfolio securities on a continuous basis. The Portfolio will
not enter into such forward contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate the
Portfolio to deliver an amount of foreign currency in excess of the value of
its securities or other assets denominated in that currency.
Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the long-term investment decisions made with
regard to overall diversification strategies. However, the management of the
Fund believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of the performance
of the Portfolio will thereby be served. Except under circumstances where a
segregated account is not required under the 1940 Act or the rules adopted
thereunder, the Fund's Custodian will place cash, U.S. or liquid securities
into a segregated account of the Portfolio in an amount equal to the value
of its total assets committed to the consummation of forward currency
exchange contracts. If the value of the securities placed in the
segregated account declines, additional cash or securities will be placed in
the account on a daily basis so that the value of the account will be equal to
the amount of the Portfolio's commitments with respect to such contracts.
The Portfolio generally will not enter into a forward contract with a term
of greater than one year. At the maturity of a forward contract, the Portfolio
may either sell the portfolio security and make delivery of the foreign
currency, or it may retain the security and terminate its contractual obligation
to deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly,
it may be necessary for the Portfolio to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that the Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
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If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices.
Should forward prices decline during the period between the Portfolio entering
into a forward contract for the sale of a foreign currency and the date it
enters into an offsetting contract for the purchase of the foreign currency, the
Portfolio will realize a gain to the extent that the price of the currency it
has agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, the Portfolio would suffer a loss to the extent
that the price of the currency it has agreed to purchase exceeds the price of
the currency it has agreed to sell.
The Portfolio is not required to enter into such transactions with regard
to its foreign currency-denominated securities. It also should be realized that
this method of protecting the value of portfolio securities against a decline in
the value of a currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange which one can
achieve at some future point in time. Additionally, although such contracts
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result should the value of such currency increase. For a discussion of the
special risks associated with foreign currency transactions, see "Risks
Associated with Foreign Currency Transactions," below in this SAI.
RISKS ASSOCIATED WITH FOREIGN CURRENCY TRANSACTIONS
Transactions in foreign currency forward contracts, foreign currency
futures contracts and options thereon, and options on foreign currencies, are
subject to the risk of governmental actions affecting trading in or the
prices of currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on the value of
positions held by the Portfolio permitted to engage in such hedging
transactions. In addition, the value of such positions could be adversely
affected by a number of other complex political and economic factors
applicable to the countries issuing the underlying currencies.
Furthermore, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying forward contracts, futures contracts and options. As a
result, the available information on which the Portfolio's trading systems will
be based may not be as complete as the comparable data on which the Portfolio
makes investment and trading decisions in connection with securities and other
transactions. Moreover, because the foreign currency market is a global,
twenty-four hour market, events could occur on that market which will not be
reflected in the forward, futures or options markets until the following day,
thereby preventing the Portfolio from responding to such events in a timely
manner.
Settlement of OTC forward contracts or the exercise of foreign currency
options generally must occur within the country issuing the underlying
currency, which in turn requires parties to such contracts to accept or make
delivery of such currencies in conformity with any United States or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike currency futures contracts and exchange-traded options, OTC
options on foreign currencies and foreign currency forward contracts are not
traded on contract markets or national securities exchanges regulated by the
CFTC or the Commission, respectively. In an OTC trading environment, many of
the protections associated with transactions on exchanges will not be
available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over
a period of time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this entire amount
could be lost. Moreover, an option writer could lose amounts substantially
in excess of its initial investment due to the margin and collateral
requirements associated with such option positions. Similarly, there is no
limit on the amount of potential losses on forward contracts to which the
Portfolio is a party.
In addition, OTC transactions can only be entered into with a financial
institution willing to take the opposite side, as principal, of the
Portfolio's position unless the institution acts as broker and is able to
find another counterparty willing to enter into the transaction with the
Portfolio. Where no such counterparty is available, it will not be possible
to enter into a desired transaction. There also may be no liquid secondary
market in the trading of OTC contracts, and the Portfolio may be unable to
close out options purchased or written, or forward contracts entered into,
until their exercise, expiration or maturity. This in turn could limit the
Portfolio's ability to realize profits or to reduce losses on open positions
and could result in greater losses.
Furthermore, OTC transactions are not backed by the guarantee of an
exchange's clearing corporation. The Portfolio will therefore be subject to
the risk of default by, or the bankruptcy of, the financial institution
serving as its counterparty. One or more of such institutions also may
decide to discontinue its role as market-maker in a particular currency,
thereby restricting the Portfolio's ability to enter into desired hedging
transactions. The Portfolio will enter into OTC transactions only with
parties whose creditworthiness has been reviewed and found satisfactory by
the Adviser.
OTC options on foreign currencies are within the exclusive regulatory
jurisdiction of the CFTC. The CFTC currently permits the trading of such
options, but only subject to a number of conditions regarding the commercial
purpose of the purchaser of such options.
Options on foreign currencies traded on a national securities exchange
are within the jurisdiction of the Commission, as are other securities traded
on such exchanges. As a result, many of the protections provided to traders
on organized exchanges will be available with respect to such transactions.
In particular, all foreign currency options positions entered into on a
national securities exchange are cleared and guaranteed by the Options
Clearing Corporation ("OCC"), thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the OTC market,
potentially permitting the Portfolio to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of adverse
market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effect of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures for
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on exercise.
FOREIGN INVESTMENTS
The Portfolio may invest, in securities of foreign issuers. Investors
should recognize that investing in such foreign securities involves certain
special considerations which are not typically associated with investing in U.S.
issuers. For a description of the effect on the Portfolio of currency exchange
rate fluctuation, see "Investment Objective and Policies -- Forward Foreign
Currency Exchange Contracts" above. As foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards and
may have policies that are not comparable to those of domestic issuers, there
may be less information available about certain foreign companies than about
domestic issuers. Securities of some foreign issuers are generally less liquid
and more volatile than securities of comparable domestic issuers. There is
generally less government supervision and regulation of stock exchanges, brokers
and listed issuers than in the U.S. In addition, with respect to certain
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect U.S. investments in those countries. Foreign securities not listed
on a recognized domestic or foreign exchange are regarded as not readily
marketable and therefore such investments will be limited to 15% of the
Portfolio's net asset value at the time of purchase.
Although the Portfolio will endeavor to achieve the most favorable
execution costs in their portfolio transactions, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges.
Certain foreign governments levy withholding or other taxes on dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. It is not expected that
the Portfolio or its shareholders would be able to claim a credit for U.S. tax
purposes with respect to any such foreign taxes. However, these foreign
withholding taxes may not have a significant impact on the Portfolio, because
the Portfolio's investment objective is to seek long-term capital appreciation
and any dividend or interest income should be considered incidental.
FUTURES CONTRACTS
The Portfolio may enter into futures contracts and options on futures
contracts for the purpose of remaining fully invested and reducing transactions
costs and may also enter into futures contracts for hedging purposes. The
Portfolio will not enter into futures contracts or options thereon for
speculative purposes. Futures contracts provide for the future sale by one
party and purchase by another party of a specified amount of a specific security
at a specified future time and at a specified price. Futures contracts, which
are standardized as to maturity date and underlying financial instrument, are
traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"), a U.S. government agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold" or "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
Futures contracts on securities indices or other indices do not require the
physical delivery of securities, but merely provide for profits and losses
resulting from changes in the market value of a contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures position is simply closed out. Changes in the
market value of a particular futures contract reflect changes in the level of
the index on which the futures contract is based.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold for prices that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of an
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Portfolio
expects to earn interest income on its margin deposits. With respect to each
long position in a futures contract or option thereon, the underlying commodity
value of such contract will always be covered by cash and cash equivalents set
aside plus accrued profits held at the futures commission merchant.
The Portfolio may purchase and write call and put options on futures
contracts which are traded on a U.S. Exchange and enter into closing
transactions with respect to such options to terminate an existing position. An
option on a futures contract gives the purchaser the right (in return for the
premium paid) to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the accumulated balance in the writer's futures margin
account, which represents the amount by which
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the market price of the futures contract at the time of exercise exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The Portfolio will purchase and write options on futures contracts for
identical purposes to those set forth above for the purchase of a futures
contract (purchase of a call option or sale of a put option) and the sale of a
futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in futures contracts.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the underlying securities with futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from market
fluctuations. The Portfolio intends to use futures contracts only for hedging
purposes.
Regulations of the CFTC applicable to the Portfolio require that all
futures transactions constitute bona fide hedging transactions except that the
Portfolio may engage in futures transactions that do not constitute bona fide
hedging to the extent that not more than 5% of the liquidation value of the
Portfolio's total assets are required as margin deposits or premiums for such
transactions. The Portfolio will only sell futures contracts to protect
securities owned against declines in price or purchase contracts to protect
against an increase in the price of securities intended for purchase. As
evidence of this hedging interest, the Portfolio expects that approximately 75%
of their futures contracts will be "completed"; that is, equivalent amounts of
related securities will have been purchased or are being purchased by the
Portfolio upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While the Portfolio will incur commission expenses in both opening and closing
out futures positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. The Portfolio will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of its total assets. In addition, the Portfolio will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under futures contracts and options on futures contracts and, under
options, futures contracts and options on futures contracts would exceed 20% of
its total assets.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contracts at any specific time. Thus, it may
not be possible to close a futures position. In the event of adverse price
movements, the Portfolio would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if the Portfolio
has insufficient cash, it may have to sell portfolio securities to meet its
daily margin requirement at a time when it may be disadvantageous to do so. In
addition, the Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the Portfolio's ability
to effectively hedge.
The Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if, at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
Portfolio engages in futures strategies only for hedging purposes, the Adviser
does not believe that the Portfolio is subject to the risks of loss frequently
associated with futures transactions. The Portfolio would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying security or currency and sold it after the decline.
Utilization of futures transactions by the Portfolio does involve the risk
of imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities or currencies being
hedged. It is also possible that
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the Portfolio could both lose money on futures contracts and also experience a
decline in value of its portfolio securities. There is also the risk of loss by
the Portfolio of margin deposits in the event of bankruptcy of a broker with
whom the Portfolio has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses. For a discussion of the special risks associated
with foreign currency transactions, see "Risks Associated with Foreign Currency
Transactions" in this SAI.
MORTGAGE-BACKED SECURITIES
Mortgage-Backed Securities are securities that, directly or indirectly,
represent a participation in, or are secured by and payable from, mortgage
loans on real property. Mortgage-backed securities include collateralized
mortgage obligations, pass-through securities issued or guaranteed by
agencies or instrumentalities of the U.S. government or by private sector
entities.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are debt obligations or multiclass pass-through certificates issued by
agencies or instrumentalities of the U.S. government or by private originators
or investors in mortgage loans. They are backed by Mortgage Pass-Through
Securities (discussed below) or whole loans (all such assets, the "Mortgage
Assets") and are evidenced by a series of bonds or certificates issued in
multiple classes or "tranches." The principal and interest on the underlying
Mortgage Assets may be allocated among the several classes of a series of CMOs
in many ways.
CMOs may be issued by agencies or instrumentalities of the U.S. government,
or by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs that are issued by private
sector entities and are backed by assets lacking a guarantee of an entity having
the credit status of a governmental agency or instrumentality are generally
structured with one or more types of credit enhancement as described below. An
issuer of CMOs may elect to be treated, for federal income tax purposes, as a
Real Estate Mortgage Investment Conduit (a "REMIC"). An issuer of CMOs issued
after 1991 must elect to be treated as a REMIC or it will be taxable as a
corporation under rules regarding taxable mortgage pools.
In a CMO, a series of bonds or certificates are issued in multiple
classes. Each tranche may be issued with a specific fixed or floating coupon
rate and has a stated maturity or final scheduled distribution date.
Principal prepayments on the underlying Mortgage Assets may cause the CMOs to
be retired substantially earlier than their stated maturities or final
scheduled distribution dates. Interest is paid or accrues on CMOs on a
monthly, quarterly or semi-annual basis. The principal of and interest on
the Mortgage Assets may be allocated among the several classes of a CMO in
many ways. The general goal in allocating cash flows on Mortgage Assets to
the various classes of a CMO is to create certain tranches on which the
expected cash flows have a higher degree of predictability than the
underlying Mortgage Assets. As a general matter, the more predictable the
cash flow is on a particular CMO tranche, the lower the anticipated yield
will be on that tranche at the time of issuance relative to prevailing market
yields on Assets. As part of the process of creating more predictable cash
flows on certain tranches of a CMO, one or more tranches generally must be
created that absorb most of the changes in the cash flows on the underlying
Mortgage Assets. The yields on these tranches are generally higher than
prevailing market yields on Mortgage-Backed Securities with similar average
lives. Because of the uncertainty of the cash flows on these tranches, the
market prices of and yields on these tranches are more volatile.
Included within the category of CMOs are PAC Bonds. PAC Bonds are a type
of CMO tranche or series designed to provide relatively predictable payments of
principal provided that, among other things, the actual prepayment experience on
the underlying mortgage loans falls within a predefined range. If the actual
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the predefined range or if deviations from other assumptions occur,
principal payments on the PAC Bond may be earlier or later than predicted. The
magnitude of the predefined range varies from one PAC Bond to another; a
narrower range increases the risk that prepayments on the PAC Bond will be
greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risks of prepayment than are other types of
mortgage-backed securities.
MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities in
which the Mortgage-Backed Securities Portfolio may invest include
pass-through securities issued or guaranteed by agencies or instrumentalities
of the U.S. government or by private sector entities. Mortgage pass-through
securities issued or guaranteed by private sector originators of or investors
in mortgage loans and are structured similarly to governmental pass-through
securities. Because private pass-throughs typically lack a guarantee by an
entity having the credit status of a governmental agency or instrumentality,
they are generally structured with one or more types of credit enhancement
described below. Federal National Mortgage Association ("FNMA" or "Fannie
Mae") and Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac")
obligations are not backed by the full faith and credit of the U.S.
government as Government National Mortgage Association ("GNMA" or "Ginnie
Mae") certificates are, but FNMA and FHLMC securities are supported by the
instrumentalities' right to borrow from the U.S. Treasury. Each of GNMA,
GNMA and FHLMC guarantees timely distributions of interest to certificate
holders.
Each of GNMA and FNMA also guarantees timely distributions of scheduled
principal. FHLMC has in the past guaranteed only the ultimate collection of
principal of the underlying mortgage loan; however, FHLMC now issues Mortgage-
Backed Securities (FHLMC Gold Pcs) which also guarantee timely payment of
monthly principal reductions. REFCORP obligations are backed, as to principal
payments, by zero coupon U.S. Treasury bonds, and as to interest payment,
ultimately by the U.S. Treasury. Obligations issued by such U.S. governmental
agencies and instrumentalities are described more fully below.
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934, as amended (the "Housing Act"),
authorizes Ginnie Mae to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of mortgage
loans insured by the Federal Housing Administration under the Housing Act, or
Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the
Department of Veterans Affairs under the Servicemen's Readjustment Act of 1944,
as amended ("VA Loans"), or by pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the United States
government is pledged to the payment of all amounts that may be required to be
paid under any guaranty. In order to meet its obligations under such guaranty,
Ginnie Mae is authorized to borrow from the U.S. Treasury with no
limitations as to amount.
Each Ginnie Mae Certificate will represent a pro rata interest in one or
more of the following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multi-family residential
properties under construction; (vi) mortgage loans on completed multi-family
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodical changes in interest rates or in
other payment terms of the mortgage loans; and (ix) mortgage-backed serial
notes. All of these mortgage loans will be FHA Loans or VA Loans and, except as
otherwise specified above, will be fully-amortizing loans secured by first liens
on one- to four-family housing units.
FANNIE MAE CERTIFICATES. Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. The obligations of Fannie Mae are not backed
by the full faith and credit of the U.S. government.
Each Fannie Mae Certificate will represent a pro rata interest in one or
more pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate and adjustable mortgage loans secured by
multi-family projects.
FREDDIE MAC CERTIFICATES. Freddie Mac is a corporate instrumentality of
the United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations
solely of Freddie Mac and are not backed by the full faith and credit of the
U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac.
The mortgage loans underlying the Freddie Mac Certificates will consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity of
between ten and thirty years, substantially all of which are secured by first
liens on one- to four-family residential properties or multi-family projects.
Each mortgage loan must meet the applicable standards set forth in the FHLMC
Act. A Freddie Mac Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
CREDIT ENHANCEMENT. Mortgage-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties. To
lessen the effect of failure by obligors on underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two categories: (i) liquidity protection and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection generally refers to the provision of advances, typically by
the entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties (referred
to herein as "third party credit support), through various means of structuring
the transaction or through a combination of such approaches. The Mortgage-
Backed Securities Portfolio will not pay any additional fees for such credit
support, although the existence of credit support may increase the price the
Portfolio pays for a security.
The ratings of mortgage-backed securities for which third-party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency and loss
experience on the underlying pool of assets is better than expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with defaults on the underlying assets being borne first
by the holders of the most subordinated class), creation of "reserve funds"
(where cash or investments, sometimes funded from a portion of the payments on
the underlying assets, are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each security is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such a security.
MUNICIPAL BONDS
Municipal Bonds generally include debt obligations issued by states and
their political subdivisions, and duly constituted authorities and corporations,
to obtain funds to construct, repair or improve various public facilities such
as airports, bridges, highways, hospitals, housing, schools, streets and water
and sewer works. Municipal Bonds may also be issued to refinance outstanding
obligations as well as to obtain funds for general operating expenses and for
loans to other public institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special tax" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other tax, but not
from general tax revenues. The Municipal Bond Portfolio and the Municipal Money
Market Portfolio may also invest in tax-exempt industrial development bonds,
short-term municipal obligations, project notes, demand notes and tax-exempt
commercial paper in accordance with the Portfolio's investment objectives and
policies.
Industrial revenue bonds (i.e., private activity bonds) in most cases are
revenue bonds and generally do not have the pledge of the credit of the issuer.
The payment of the principal and interest on such industrial revenue bonds is
dependent solely on the ability of the user of the facilities financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. Short-term
municipal obligations issued by states, cities, municipalities or municipal
agencies include Tax Anticipation Notes, Revenue Anticipation Notes, Bond
Anticipation Notes, Construction Loan Notes and Short-Term Discount Notes.
Project Notes are instruments guaranteed by the Department of Housing and Urban
Development but issued by a state or local housing agency. While the issuing
agency has the primary obligation on such Project notes, they are also secured
by the full faith and credit of the United States.
Note obligations with demand or put options may have a stated maturity
in excess of one year, but allow any holder to demand payment of principal
plus accrued interest upon a specified number of days notice. Frequently,
such obligations are secured by letters of credit or other credit support
arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to repay in its discretion the
outstanding principal of the notes plus accrued interest upon a specific
number of days notice to the bondholders. The interest rate on a demand note
may be based upon a known lending rate, such as a bank's prime rate, and may
be adjusted when such rate changes, or the interest rate on a demand note may
be a market rate that is adjusted at specified intervals. The demand notes
in which the Municipal Money Market Portfolio will invest are payable on not
more than one year's notice.
The yields of Municipal Bonds depend on, among other things, general money
market conditions, conditions in the Municipal Bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's and S&P represent their opinions of the quality
of the Municipal Bonds. It should be emphasized that such ratings are general
and are not absolute standards of quality. Consequently, Municipal Bonds with
the same maturity, coupon and rating may have different yields, while Municipal
Bonds of the same maturity and coupon, but with different ratings, may have the
same yield. It will be the responsibility of the Adviser to appraise
independently the fundamental quality of the bonds held by the Municipal Bond
Portfolio and the Municipal Money Market Portfolio.
Municipal Bonds are sometimes purchased on a "when issued" basis meaning
the buyer has committed to purchasing certain specified securities at an
agreed-upon price when they are issued. The period between commitment date and
issuance date can be a month or more. It is possible that the securities will
never be issued and the commitment canceled.
From time to time proposals have been introduced before Congress to
restrict or eliminate the Federal income tax exemption for interest on Municipal
Bonds. Similar proposals may be introduced in the future. If any such proposal
were enacted, it might restrict or eliminate the ability of either the Municipal
Bond Portfolio or the Municipal Money Market Portfolio to achieve its investment
objective. In that event, the Fund's Directors and officers would reevaluate
its investment objective and policies and consider recommending to its
shareholders changes in such objective and policies.
Similarly, from time to time proposals have been introduced before State
and local legislatures to restrict or eliminate the State and local income tax
exemption (to the extent such an exemption applies, which may not apply in all
cases) for interest on Municipal Bonds. Similar proposals may be introduced in
the future. If any such proposal were enacted, it might restrict or eliminate
the ability of either of the Municipal Bond Portfolio or the Municipal Money
Market Portfolio to achieve its investment objective. In that event, the Fund's
Directors and officers would reevaluate the Portfolio's investment objective and
policies and consider recommending to its shareholders changes in such objective
and policies.
OPTIONS TRANSACTIONS
GENERAL INFORMATION. As stated in the Prospectus, the Portfolio may purchase
and sell options on equity securities. Additional information with respect to
option transactions is set forth below. Call and put options on portfolio
securities are listed on various U.S. and foreign securities exchanges ("listed
options") and are written in over-the-counter transactions ("OTC Options").
Listed options are issued or guaranteed by the exchange on which they
trade or by a clearing corporation, such as Options Clearing Corporation
("OCC") in the United States. Ownership of a listed call option gives the
fund the right to buy from the clearing corporation or exchange, the
underlying security covered by the option at the state exercise price (the
price per unit of the underlying security or currency) by filing an exercise
notice prior to the expiration date of the option. The writer (seller) of
the option would then have the obligation to sell to the clearing corporation
or exchange, the underlying security or currency at that exercise price prior
to the expiration date of the option, regardless of the current market price.
Ownership of a listed put option would give the Portfolio the right to sell
the underlying security or currency to the clearing corporation or exchange
at the state exercise price. Upon notice of exercise of the put option, the
writer of the option would have the obligation to purchase the underlying
security from the clearing corporation or exchange at the exercise price.
OTC options are purchased from or sold (written) to dealers of financial
institutions which have entered into direct agreements with the Portfolio. With
OTC options, such variables as expiration date, exercise price and premium will
be agreed upon between the Portfolio and the transactions dealer, without the
intermediation of a third party such as a clearing corporation or exchange. If
the transacting dealer fails to make or take delivery of the securities
underlying an option it has written, in accordance with the terms of that
option, the Portfolio would lose the premium paid for the option as well as any
anticipated benefit of the transaction.
COVERED CALL WRITING. The Portfolio may write (i.e., sell) covered call options
on portfolio securities. By doing so, the Portfolio would become obligated
during the terms of the option to deliver the securities underlying the option
should the option holder choose to exercise the option before the option's
termination date. In return for the call it has written, the Portfolio will
receive from the purchaser (or option holder) a premium which is the price of
the option, less a commission charged by a broker. The Portfolio will keep the
premium regardless of whether the option is exercised. A call option is
"covered" if the Portfolio owns the security underlying the option it has
written or has an absolute or immediate right to acquire the security by holding
a call option on such security, or maintains a sufficient amount of cash, cash
equivalents or liquid securities to purchase the underlying security. When the
Portfolio writes covered call options, it augments its income by the premiums
received and is thereby hedged to the extent of that amount against a decline in
the price of the underlying securities and the premiums received will offset a
portion of the potential loss incurred by the Portfolio if the securities
underlying the options are ultimately sold by the Portfolio at a loss. However,
during the option period, the Portfolio has, in return for the premium on the
option, given up the opportunity for capital appreciation above the exercise
price should the market price of the underlying security increase, but has
retained the risk of loss should the price of the underlying security decline.
The size of premiums will fluctuate with varying market conditions.
COVERED PUT WRITING. The Portfolio may write covered put options on portfolio
securities. By doing so, the Portfolio incurs an obligation to buy the security
underlying the option from the purchaser of the put at the option's exercise
price at any time during the option period, at the purchaser's election (certain
listed and OTC options written by the Portfolio will be exercisable by the
purchaser only on a specific date). Generally, a put option is "covered" if the
Portfolio maintains cash, or other liquid securities equal to the
exercise price of the option or if the Portfolio holds a put option on
the same underlying security with a similar or higher exercise price.
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The Portfolio may write put options to receive the premiums paid by
purchasers; when the Adviser wishes to purchase the security underlying the
option at a price lower than its current market price, in which case it will
write the covered put at an exercise price reflecting the lower purchase price
sought; and to close out long put option positions.
PURCHASE OF PUT AND CALL OPTIONS. The Portfolio may purchase listed or OTC put
or call options on its portfolio securities in amounts exceeding no more than 5%
of its total assets. When the Portfolio purchases a call option it acquires the
right to purchase a designated security at a designated price (the "exercise
price"), and when the Portfolio purchases a put option it acquires the right to
sell a designated security at the exercise price, in each case on or before a
specified date (the "termination date"), usually not more than nine months from
the date the option is issued.
The Portfolio may purchase call options to close out a covered call
position or to protect against an increase in the price of a security it
anticipates purchasing. The Portfolio may purchase put options on securities
which it holds in its portfolio only to protect itself against a decline in the
value of the security. If the value of the underlying security were to fall
below the exercise price of the put purchased in an amount greater than the
premium paid for the option, the Portfolio would incur no additional loss. The
Portfolio may also purchase put options to close out written put positions in a
manner similar to call option closing purchase transactions.
The amount the Portfolio pays to purchase an option is called a "premium",
and the risk assumed by the Portfolio when it purchases an option is the loss of
this premium. Because the price of an option tends to move with that of its
underlying security, if the Portfolio is to make a profit, the price of the
underlying security must change and the change must be sufficient to cover the
premium and commissions paid. A price change in the security underlying the
option does not assure a profit since prices in the options market may not
always reflect such a change.
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RISK FACTORS IN OPTIONS TRANSACTIONS. The use of options also involves
additional risks. Compared to the purchase or sale of futures contracts, the
purchase of call or put options involves less potential risk to a Portfolio
because the maximum amount of risk is the premium paid for the option. The
writing of a call option generates a premium which may partially offset a
decline in the value of a Portfolio's portfolio assets. By writing a call
option, the Portfolio becomes obligated to sell the underlying instrument, which
may have a value higher than the exercise price. Conversely, the writing of a
put option generates a premium, but the Portfolio becomes obligated to purchase
the underlying instrument, which may have a value lower than the exercise price.
Thus, the loss incurred by a Portfolio in writing options may exceed the amount
of the premium received.
The effective use of options strategies is dependent, among other things, on a
Portfolio's ability to terminate options positions at a time when the portfolio
manager deems it desirable to do so. Although a Portfolio will enter into
options positions only if the portfolio manager believes that a liquid secondary
market exists for such options, there is no assurance that the Portfolio will be
able to effect closing transactions at any particular time or at an acceptable
price.
A Portfolio's purchase or sale of put or call options will be based upon
predictions as to anticipated market trends and/or interest rate movements by
the portfolio manager, which could prove to be inaccurate. Even if the
expectations of the portfolio manager are correct, there may be an imperfect
correlation between the change in the value of the options and of the
Portfolio's portfolio securities.
The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, or purchased, in the case of a put
option; the writer may be assigned an exercise notice at any time prior to the
termination of the obligation. Whether or not an option expires unexercised,
the writer retains the amount of the premium. This amount, of course, may, in
the case of a covered call option, be offset by a decline in the market value of
the underlying security during the option period. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security. If a put option is exercised, the writer must fulfill the
obligation to purchase the underlying security at the exercise price which will
usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will permit
the Portfolio to write another call option on the underlying security with
either a different exercise price or expiration date or both, in the case of a
written put option, will permit the Portfolio to write another put option to the
extent that the exercise price thereof is secured by depositing liquid assets.
Also, effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
Portfolio investments. If the Portfolio desires to sell a particular security
from its portfolio on which it has written a call option, it will effect a
closing transaction prior to or concurrent with the sale of the security.
A Portfolio will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; the Portfolio will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely to be offset
in whole or in part by appreciation of the underlying security owned by the
Portfolio.
An options position may be closed out only where there exists a secondary market
for an option of the same series. If a secondary market does not exist, it
might not be possible to effect a closing transaction in particular options with
the result that the Portfolio would have to exercise the options in order to
realize any profit. If the Portfolio is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (1) there may be insufficient trading interest in certain options,
(2) restrictions may be imposed by an exchange on opening transactions or
closing transactions, or both, (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities, (4) unusual or unforeseen circumstances may
interrupt normal operation on an exchange, (5) the facilities of an exchange or
OCC may not at all times be adequate to handle current trading volume, or (6)
one or more exchange could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that Exchange (or in that class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by OCC as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.
The Portfolios may purchase put options to hedge against a decline in the value
of their portfolios. By using put options in this way, the Portfolios will
reduce any profit they might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
The Portfolios may purchase call options to hedge against an increase in the
price of securities that the Portfolios anticipate purchasing in the future.
The premium paid for the call option plus any transaction costs will reduce
the benefit, if any, realized by a Portfolio upon exercise of the option,
and, unless the price of the underlying security rises sufficiently, the
option may expire worthless.
Options may also be traded OTC ("OTC Options"). In an OTC trading environment,
many of the protections afforded to exchange participants will not be available.
For example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
The Portfolios may purchase or write OTC Options deemed creditworthy by the
Adviser. OTC Options are illiquid and it may not be possible for the Portfolios
to dispose of such options they have purchased or terminate their obligations
under an option they have written at a time when the Adviser and portfolio
manager believe it would be advantageous to do so. Accordingly, OTC Options are
subject to the Portfolios' limitation that a maximum of 15% of its net assets be
invested in illiquid securities. In the event of the bankruptcy of the writer
of an OTC Option, the Portfolios could experience a loss of all or part of the
value of the option.
For a discussion regarding the special risks of foreign currency options, see
"Risks Associated with Foreign Currency Transactions," in this SAI.
PORTFOLIO TURNOVER
The portfolio turnover rate for a year is the lesser of the value of the
purchases or sales for the year divided by the average monthly market value of
the Portfolio for the year, excluding U.S. Government securities and securities
with maturities of one year or less. The portfolio turnover rate for a year is
calculated by dividing the lesser of sales or the average monthly value of the
Portfolio's portfolio purchases of portfolio securities during that year by
securities, excluding money market instruments. The rate of portfolio turnover
will not be a limiting factor when the Portfolio deems it appropriate to
purchase or sell securities for the Portfolio. However, the U.S. federal tax
requirement that the Portfolio derive less than 30% of its gross income from the
sale or disposition of securities held less than three months may limit the
Portfolio's ability to dispose of its securities. See "Taxes."
SECURITIES LENDING
The Portfolio may lend its investment securities to qualified institutional
investors who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, the 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 during the term of the loan would be for
the account of the Portfolio. The Portfolio may lend its investment securities
to qualified brokers, dealers, domestic and foreign banks or other financial
institutions, so long as the terms, structure and the aggregate amount of such
loans are not inconsistent with the Investment Company Act of 1940, as amended
(the "1940 Act"), or the Rules and Regulations or interpretations of the
Securities and Exchange Commission (the "Commission") thereunder, which
currently require that (a) the borrower pledge and maintain with the Portfolio
collateral consisting of cash, an irrevocable letter of credit issued by a
domestic U.S. bank, or securities issued or guaranteed by the United States
Government having a value at all times not less than 100% of the value of the
securities loaned, (b) the borrower add to such collateral whenever the price of
the securities loaned rises (i.e., the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the Portfolio at any
time, and (d) the Portfolio receive reasonable interest on the loan (which may
include the Portfolio investing any cash collateral in interest bearing
short-term investments), any distributions on the loaned securities and any
increase in their market value. There may be risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of the
securities fail financially. However, loans will only be made to borrowers
deemed by the Advisor to be of good standing and when, in the judgment of the
Advisor, the consideration which can be earned currently from such securities
loans justifies the attendant risk. All relevant facts and circumstances,
including the creditworthiness of the broker, dealer or institution, will be
considered in making decisions with respect to the lending of securities,
subject to review by the Board of Directors of the Fund.
At the present time, the staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's
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Board of Directors. Voting rights may pass with the loaned securities, provided
that if a material event occurs affecting a security on loan, the loan must be
called and the securities voted.
SHORT SALES
The Portfolio may from time to time sell securities short without
limitation but consistent with applicable legal requirements, although at
present the Portfolio does not intend to sell securities short. A short sale
is a transaction in which the Portfolio would sell securities it owns or has
the right to acquire at no added cost (i.e., "against the box") or does not
own (but has borrowed) in anticipation of a decline in the market price of
the securities. When the Portfolio makes a short sale of borrowed
securities, the proceeds it receives from the sale will be held on behalf of
a broker until the Portfolio replaces the borrowed securities. To deliver
the securities to the buyer, the Portfolio will need to arrange through a
broker to borrow the securities and, in so doing, the Portfolio will become
obligated to replace the securities borrowed at their market price at the
time of replacement, whatever that price may be. The Portfolio may have to
pay a premium to borrow the securities and must pay any dividends or interest
payable on the securities until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash or liquid securities. In addition, if the short sale is not
"against the box," the Portfolio will place in a segregated account with its
custodian, or designated sub-custodian, an amount of cash or liquid securities
equal to the difference, if any, between the current market value of the
securities sold short and any cash or liquid securities deposited as collateral
with the broker in connection with the short sale. Until it replaces the
borrowed securities, the Portfolio will maintain the segregated account
daily at a level so that the amount deposited in the account plus the amount
deposited with the broker will equal the current market value of the securities
sold short.
Short sales by the Portfolio involve certain risks and special
considerations. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases can equal only the total amount
invested.
U.S. GOVERNMENT SECURITIES
The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the U.S. Government, and by various
instrumentalities which have been established or sponsored by the U.S.
Government.
U.S. Treasury securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by Federal agencies and U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export-Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain agencies and instrumentalities,
such as the Government National Mortgage Associates, are, in effect, backed by
the full faith and credit of the United States through provisions in their
charters that they may make "indefinite and unlimited" drawings on the Treasury,
if needed to service debt. Debt from certain other agencies and
instrumentalities, including the Federal Home Loan Bank and Federal National
Mortgage Association, are not guaranteed by the United States, but those
institutions are protected by the discretionary authority for the U.S. Treasury
to purchase certain amounts of their securities to assist the institution in
meeting its debt obligations. However, the U.S. Treasury has no lawful
obligation to assume the financial liabilities of these agencies or others.
Finally, other agencies and instrumentalities, such as the Farm Credit System
and the Federal Home Loan Mortgage Corporation, are federally chartered
institutions under Government supervision, but their debt securities are backed
only by the creditworthiness of those institutions, not the U.S. Government.
Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and the Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency organized
under Federal charter with Government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Immediate Credit
Banks, and the Federal National Mortgage Association.
TAXES
The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the federal, state or local tax treatment of the Fund or its
shareholders, and the discussion here and in the Fund's Prospectus is not
intended as a substitute for careful tax planning.
The following discussion of federal income tax consequences is based on the
Internal Revenue Code of 1986, as amended (the "Code") and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.
Each Portfolio within the Fund is generally treated as a separate
corporation for federal income tax purposes, and thus the provisions of the Code
generally will be applied to each Portfolio separately, rather than to the Fund
as a whole.
GENERAL REGULATED INVESTMENT COMPANY QUALIFICATION
The Portfolio intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, the Portfolio must, among other things, (a) derive at least 90% of
its gross income each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
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<PAGE>
securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures and forward contracts; (b) derive
less than 30% of its gross income each taxable year from the sale or other
disposition of the following items if held less than three months (A) stock or
securities, (B) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies), and (C) foreign currencies
(or options, futures, or forward contracts on foreign currencies) that are not
directly related to the Portfolio's principal business of investing in stocks or
securities (or options or futures with respect to stock or securities) (the
"short-short test"); and (c) diversify its holdings so that, at the end of each
fiscal quarter of the Portfolio's taxable year, (i) at least 50% of the market
value of the Portfolio's total assets is represented by cash and cash items,
United States Government securities, securities of other RICs, and other
securities, with such other securities limited, in respect to any one issuer, to
an amount not greater than 5% of the value of the Portfolio's total assets or
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets is invested in the securities (other than
United States Government securities or securities of other RICs) of any one
issuer or two or more issuers which the Portfolio controls and which are engaged
in the same, similar, or related trades or business. For purposes of the 90% of
gross income requirement described above, foreign currency gains which are not
directly related to the Portfolio's principal business of investing in stock or
securities (or options or futures with respect to stock or securities) may be
excluded from income that qualifies under the 90% requirement.
In addition to the requirements described above, in order to qualify as a
RIC, the Portfolio must distribute at least 90% of its net investment income
(which generally includes dividends, taxable interest, and the excess of net
short-term capital gains over net long-term capital losses less operating
expenses) and at least 90% of its net tax-exempt interest income, for each tax
year, if any, to its shareholders. If the Portfolio meets all of the RIC
requirements, it will not be subject to federal income tax on any of its net
investment income or capital gains that it distributes to shareholders.
If the Portfolio fails to qualify as a RIC for any year, all of its income
will be subject to tax at corporate rates, and its distributions (including
capital gains distributions) will be taxable as ordinary income dividends to its
shareholders to the extent of the Portfolio's current and accumulated earnings
and profits, and will be eligible for the corporate dividends received deduction
for corporate shareholders.
GENERAL TAX TREATMENT OF QUALIFYING RICs AND SHAREHOLDERS
The Portfolio will decide whether to distribute or to retain all or part of
any net capital gains (the excess of net long-term capital gains over net short-
term capital losses) in any year for reinvestment. If any such gains are
retained, the Portfolio will pay federal income tax thereon, and, if the
Portfolio makes an election, the shareholders will include such undistributed
gains in their income, will increase their basis in Portfolio shares by 65% of
the amount included in their income and will be able to claim their share of the
tax paid by the Portfolio as a refundable credit.
A gain or loss realized by a shareholder on the sale, exchange or exemption
of shares of the Portfolio held as a capital asset will be capital gain or loss,
and such gain or loss will be long-term if the holding period for the shares
exceeds one year, and otherwise will be short-term. Any loss realized on a
sale, exchange, or redemption of shares of the Portfolio will be disallowed to
the extent the shares disposed of are replaced within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed of.
Any loss realized by a shareholder on the disposition of shares held 6 months or
less is treated as a long-term capital loss to the extent of any distributions
of net long-term capital gains received by the shareholder with respect to such
shares or any inclusion of undistributed capital gain with respect to such
shares.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
The Portfolio will generally be subject to a nondeductible 4% federal
excise tax to the extent it fails to distribute by the end of any calendar year
at least 98% of its ordinary income for that year and 98% of its capital gain
net income (the excess of short- and long-term capital gains over short- and
long-term capital losses) for the one-year period ending on October 31 of that
year, plus certain other amounts.
The Portfolio is required by federal law to withhold 31% of reportable
payments (which may include dividends, capital gains distributions, and
redemptions) paid to shareholders who have not certified on the Account
Registration Form or on a separate form supplied by the Portfolio, that the
Social Security or Taxpayer Identification Number provided is correct and that
the shareholder is exempt from backup withholding or is not currently subject to
backup withholding.
For certain transactions, the Portfolio is required for federal income tax
purposes to recognize as gain or loss its net unrealized gains and losses on
forward currency and futures contracts as of the end of each taxable year, as
well as those actually realized during the year. In most cases, any such gain
or loss recognized with respect to a regulated futures contract is considered to
be 60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Realized gain or loss
attributable to a foreign currency forward contract is treated as 100% ordinary
income. Furthermore, foreign
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<PAGE>
currency futures contracts which are intended to hedge against a change in the
value of securities held by the Portfolio may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition.
As discussed above, in order for the Portfolio to continue to qualify for
federal income tax treatment as a RIC, at least 90% of its gross income for a
taxable year must be derived from certain qualifying income, including
dividends, interest, income derived from loans of securities, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
related income, including gains from options, futures and forward contracts,
derived with respect to its business of investing in stock, securities or
currencies. Any net gain realized from the closing out of futures contracts
will therefore generally be qualifying income for purposes of the 90%
requirement. Qualification as a RIC also requires that less than 30% of the
Portfolio's gross income be derived from the sale or other disposition of stock,
securities, options, futures or forward contracts (including certain foreign
currencies not directly related to the Fund's business of investing in stock or
securities) held less than three months. In order to avoid realizing excessive
gains on futures contracts held less than three months, the Portfolio may be
required to defer the closing out of futures contracts beyond the time when it
would otherwise be advantageous to do so.
Short sales engaged in by the Portfolio may reduce the holding property
held by the Portfolio which is substantially identical to the property sold
short. This rule may make it more difficult for the Portfolio to satisfy the
short-short test. This rule may also have the effect of converting capital
gains recognized by the Portfolio from long-term to short-term as well as
converting capital losses recognized by the Portfolio from short-term to long-
term.
SPECIAL TAX CONSIDERATIONS RELATING TO FOREIGN INVESTMENTS
Gains or losses attributable to foreign currency contracts, or to
fluctuations in exchange rates that occur between the time the Portfolio accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Portfolio actually collects
such receivables or pays such liabilities are treated as ordinary income or
ordinary loss to the Portfolio. Similarly, gains or losses on disposition of
debt securities denominated in a foreign currency attributable to fluctuations
in the value of the foreign currency between the date of acquisition of the
security and the date of disposition also are treated as ordinary gain or loss
to the Portfolio. These gains or losses increase or decrease the amount of the
Portfolio's net investment income available to be distributed to its
shareholders as ordinary income.
It is expected that the Portfolio will be subject to foreign withholding
taxes with respect to its dividend and interest income from foreign countries,
and the Portfolio may be subject to foreign income taxes with respect to other
income. So long as more than 50% in value of the Portfolio's total assets at
the close of the taxable year consists of stock or securities of foreign
corporations, the Portfolio may elect to treat certain foreign income taxes
imposed on it for United States federal income tax purposes as paid directly by
its shareholders. The Portfolio will make such an election only if it deems it
to be in the best interest of its shareholders and will notify shareholders in
writing each year if it makes an election and of the amount of foreign income
taxes, if any, to be treated as paid by the shareholders. If the Portfolio
makes the election, shareholders will be required to include in income their
proportionate shares of the amount of foreign income taxes treated as imposed on
the Portfolio and will be entitled to claim either a credit (subject to the
limitations discussed below) or, if they itemize deductions, a deduction, for
their shares of the foreign income taxes in computing their federal income tax
liability.
Shareholders who choose to utilize a credit (rather than a deduction) for
foreign taxes will be subject to a number of complex limitations regarding the
availability and utilization of the credit. Because of these limitations,
shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the foreign income taxes paid by the Portfolio.
Shareholders are urged to consult their tax advisors regarding the application
of these rules to their particular circumstances.
TAXES AND FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, a foreign trust or estate, a foreign corporation, or a foreign
partnership ("Foreign Shareholder") depends on whether the income from the
Portfolio is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Portfolio is not effectively connected with a U.S.
trade or business carried on by a Foreign Shareholder, distributions of net
investment income plus the excess of net short-term capital gains over net
long-term capital losses will be subject to U.S. withholding tax at the rate of
30% (or such lower treaty rate as may be applicable) upon the gross amount of
the dividend. Furthermore, Foreign Shareholders will generally be exempt from
U.S. federal income tax on gains realized on the
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<PAGE>
sale of shares of the Portfolio, distributions of net long-term capital gains,
and amounts retained by the Fund which are designated as undistributed capital
gains.
If the income from the Portfolio is effectively connected with a U.S. trade
or business carried on by a Foreign Shareholder, then distributions from the
Portfolio and any gains realized upon the sale of shares of the Portfolio, will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
and residents or domestic corporations.
The Portfolio may be required to withhold U.S. federal income tax on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless the Foreign Shareholder complies with Internal
Revenue Service certification requirements.
The tax consequences to a Foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described here.
Furthermore, Foreign Shareholders are strongly urged to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in the Portfolio, including the potential application of the
provisions of the Foreign Investment in Real Estate Property Tax Act of 1980, as
amended.
PURCHASE OF SHARES
The following supplements the Purchase of Shares section in the Prospectus.
The purchase price of shares of the Portfolio is the net asset value next
determined after the order is received. An order received prior to the regular
close of the New York Stock Exchange (the "NYSE") will be executed at the price
computed on the date of receipt; and an order received after the regular close
of the NYSE will be executed at the price computed on the next day the NYSE is
open as long as the Fund's transfer agent receives payment by check or in
Federal Funds prior to the regular close of the NYSE on such day. Shares of the
Fund may be purchased on any day the NYSE is open. The NYSE will be closed on
the following days: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day and on the
preceding Friday or subsequent Monday when one of these holidays falls on a
Saturday or Sunday, respectively.
The Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts such as employee benefit plans or under circumstances where
certain economies can be achieved in sales of the Portfolio's shares.
REDEMPTION OF SHARES
The following supplements the Redemption of Shares section in the
Prospectus.
The Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the NYSE is closed, or trading on the NYSE is
restricted as determined by the Commission, (ii) during any period when an
emergency exists as defined by the rules of the Commission as a result of which
it is not reasonably practicable for the Portfolio to dispose of securities
owned by it, or fairly to determine the value of its assets, and (iii) for such
other periods as the Commission may permit.
No charge is made by the Portfolio for redemptions. Any redemption may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.
To protect your account and the Fund from fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Fund to
verify the identity of the person who has authorized a redemption from your
account. Signature guarantees are required in connection with: (1) all
redemptions, regardless of the amount involved, when the proceeds are to be paid
to someone other than the registered owner(s) and/or registered address; and
(2) share transfer requests.
A guarantor must be a bank, a trust company, a member firm of a domestic
stock exchange, or a foreign branch of any of the foregoing. Notaries public
are not acceptable guarantors.
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The signature guarantees must appear either: (1) on the written request
for redemption; (2) on a separate instrument for assignment ("stock power")
which should specify the total number of shares to be redeemed; or (3) on all
stock certificates tendered for redemption and, if shares held by the Fund are
also being redeemed, on the letter or stock power.
SHAREHOLDER SERVICES
The following supplements the Shareholder Services section in the
Prospectus.
EXCHANGE FEATURES
Shares of the Portfolio of the Fund may be exchanged for shares of any
other available Portfolio (other than the International Equity Portfolio, which
is closed to new investors). In exchanging for shares of a Portfolio with more
than one class, the class of shares a shareholder receives in exchange will be
determined in the same manner as any other purchase of shares and will not be
based on the class of shares surrendered for the exchange. Consequently, the
same minimum initial investment and minimum account size for determining the
class of shares received in the exchange will apply.
Any such exchange will be based on the respective net asset values of the
shares involved. There is no sales commission or sales charge of any kind.
Before making an exchange, a shareholder should consider the investment
objectives of the Portfolio to be purchased.
Exchange requests may be made either by mail or telephone. Exchange
requests by mail should be sent to Morgan Stanley Institutional Fund, Inc., P.O.
Box 2798, Boston, Massachusetts 02208-2798. Telephone exchanges will be accepted
only if the certificates for the shares to be exchanged are held by the Fund for
the account of the shareholder and the registration of the two accounts will be
identical. Requests for exchanges received prior to 4:00 p.m. (Eastern Time)
will be processed as of the close of business on the same day. Requests
received after these times will be processed on the next business day.
Exchanges may be subject to limitations as to amounts or frequency, and to other
restrictions established by the Board of Directors to assure that such exchanges
do not disadvantage the Fund and its shareholders.
For federal income tax purposes an exchange between Portfolios is a taxable
event for shareholders subject to tax, and, accordingly, a gain or loss may be
realized. The exchange privilege may be modified or terminated by the Fund at
any time upon 60 days notice to shareholders.
TRANSFER OF SHARES
Shareholders may transfer shares of the Portfolio to another person by
making a written request to the Fund. The request should clearly identify the
account and number of shares to be transferred, and include the signature of all
registered owners and all stock certificates, if any, which are subject to the
transfer. The signature on the letter of request, the stock certificate or any
stock power must be guaranteed in the same manner as described under "Redemption
of Shares." As in the case of redemptions, the written request must be received
in good order before any transfer can be made. Transferring shares may affect
the eligibility of an account for a given class of the Portfolio's shares and
may result in involuntary conversion or redemption of such shares.
INVESTMENT LIMITATIONS
The Portfolio has adopted the following restrictions which are fundamental
policies and may not be changed without the approval of the lesser of: (1) at
least 67% of the voting securities of the Portfolio present at a meeting if the
holders of more than 50% of the outstanding voting securities of the Portfolio
are present or represented by proxy, or (2) more than 50% of the outstanding
voting securities of the Portfolio. The Portfolio will not:
(1) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent the
Portfolio from purchasing or selling options or futures contracts or from
investing in securities or other instruments backed by physical commodities);
(2) purchase or sell real estate, although it may purchase and sell
securities of companies that deal in real estate and may purchase and sell
securities that are secured by interests in real estate;
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<PAGE>
(3) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or repurchase agreements;
(4) issue senior securities;
(5) borrow, except the Portfolio may: borrow from banks in amounts up to
33 1/3% of its total assets (including the amount borrowed) less liabilities
in accordance with its investment objective and policies;
(6) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933 Act in
the disposition of restricted securities;
(7) acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value of the Portfolio's
total assets would be invested in securities of companies within such
industry; provided, however, that there shall be no limitation on the purchase
of securities of companies in the technology or technology related industries,
or on the purchase of obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities; and
(8) write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
With respect to fundamental limitation (7) above, the Fund will determine
industry concentration in accordance with the classifications of industries
based on the Industry Numbers from the Standard Industrial Classification Manual
as prepared by the Office of Management and Budget, except that companies in
the technology and technology related industries will be deemed part of one
industry.
The Portfolio will diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the market value of the
Portfolio's total assets is represented by cash (including cash items and
receivables), U.S. Government securities, and other securities, with such other
securities limited, in respect of any one issuer, for purposes of this
calculation to an amount not greater than 5% of the value of the Portfolio's
total assets and 10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the value of its total assets is invested in the
securities of any one issuer (other than U.S. Government securities);
In addition, the Portfolio has adopted non-fundamental investment
limitations as stated below and in the Prospectus. Such limitations may be
changed without shareholder approval. The Portfolio will not:
(1) purchase on margin or sell short, except that the Portfolio may enter
into short sales in accordance with its investment objective and policies;
(2) purchase or retain securities of an issuer if those Officers and
Directors of the Fund or its investment adviser owning more than 1/2 of 1% of
such securities together own more than 5% of such securities;
(3) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 10% of its total assets at fair market value;
(4) invest for the purpose of exercising control over management of any
company;
(5) invest its assets in securities of any investment company, except as
permitted by the 1940 Act or the rules, regulations, interpretations or orders
of the Commission and its staff thereunder;
(6) invest in real estate limited partnership interests;
(7) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the Prospectus) that are publicly distributed, and (ii) by lending
its portfolio securities to
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banks, brokers, dealers and other financial institutions so long as such loans
are not inconsistent with the 1940 Act or the Rules and Regulations or
interpretations of the Commission thereunder;
(8) purchase puts, calls, straddles, spreads and any combination thereof
if for any reason thereof the value of its aggregate investment in such classes
of securities will exceed 5% of its total assets, except that the Portfolio may
enter into option transactions to the extent that not more than 5% of the
Portfolio's total assets are required as deposits to secure obligations under
options and not more than 20% of its total assets are invested in options,
futures contracts and options on futures contracts at any time.
(9) borrow money, except from banks for extraordinary or emergency
purposes, and then only in amounts up to 10% of the value of the Portfolio's
total assets, taken at cost at the time of borrowing, or purchase securities
while borrowings exceed 5% of its total assets;
(10) invest in fixed time deposits with a duration of over seven calendar
days or invest in fixed time deposits with a duration of from two business days
to seven calendar days if more than 10% of the Portfolio's total assets would
be invested in these deposits.
The percentage limitations contained in these restrictions apply at the
time of purchase of securities.
DETERMINING MATURITIES OF CERTAIN INSTRUMENTS
Generally, the maturity of a portfolio instrument shall be deemed to be the
period remaining until the date noted on the face of the instrument as the date
on which the principal amount must be paid, or in the case of an instrument
called for redemption, the date on which the redemption payment must be made.
However, instruments having variable or floating interest rates or demand
features may be deemed to have remaining maturities as follows: (a) a
Government Obligation with a variable rate of interest readjusted no less
frequently than annually may be deemed to have a maturity equal to the period
remaining until the next readjustment of the interest rate; (b) an instrument
with a variable rate of interest, the principal amount of which is scheduled on
the face of the instrument to be paid in one year or less, may be deemed to have
a maturity equal to the period remaining until the next readjustment of the
interest rate; (c) an instrument with a variable rate of interest that is
subject to a demand feature may be deemed to have a maturity equal to the longer
of the period remaining until the next readjustment of the interest rate or the
period remaining until the principal amount can be recovered through demand;
(d) an instrument with a floating rate of interest that is subject to a demand
feature may be deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand; and (e) a repurchase agreement
may be deemed to have a maturity equal to the period remaining until the date on
which the repurchase of the underlying securities is scheduled to occur, or
where no date is specified, but the agreement is subject to demand, the notice
period applicable to a demand for the repurchase of the securities.
MANAGEMENT OF THE FUND
OFFICERS AND DIRECTORS
The Fund's officers, under the supervision of the Board of Directors,
manage the day-to-day operations of the Fund. The Directors set broad policies
for the Fund and choose its officers. Three Directors and all of the officers
of the Fund are directors, officers or employees of the Fund's adviser,
distributor or administrative services provider. Directors and officers of the
Fund are also directors and officers of some or all of the other investment
companies managed, administered, advised or distributed by Morgan Stanley Asset
Management Inc. or its affiliates. The other Directors have no affiliation with
the Fund's adviser, distributor or administrative services provider. A list of
the Directors and officers of the Fund and a brief statement of their present
positions and principal occupations during the past five years is set forth
below:
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Name, Address and Date Principal Occupation During
of Birth Postion With Fund Past Five Years
---------------------- ----------------- -----------------------------
Barton M. Biggs* Chairman and Chairman, Director and Managing
1221 Avenue of the Director Director of Morgan Stanley Asset
Americas Management Inc. and Morgan
New York, NY 10020 Stanley Asset Management Limited;
11/26/32 Managing Director of Morgan
Stanley & Co. Incorporated;
Director of Morgan Stanley Group
Inc.; Member of Investment
Advisory Counsel of the Thailand
Fund; Director of the Rand
McNally Company; Member of the
Yale Development Board; Chairman
and Director of 16 U.S.
registered investment companies
managed by Morgan Stanley Asset
Management Inc.
Warren J. Olsen* Director and Principal of Morgan Stanley &
1221 Avenue of the President Co. Incorporated and of Morgan
Americas Stanley Asset Management Inc.;
New York, NY 10020 President and Director of 16 U.S.
12/21/56 registered investment companies
managed by Morgan Stanley Asset
Management Inc.
John D. Barrett, II Director Chairman and Director of Barrett
521 Fifth Avenue Associates, Inc. (investment
New York, NY 10135 counseling); Director of the
8/21/35 Ashforth Company (real estate);
Director of the Morgan Stanley
Fund, Inc., PCS Cash Fund, Inc.
and Morgan Stanley Universal
Funds, Inc.
Gerard E. Jones Director Partner in Richards & O'Neil LLP
43 Arch Street (law firm); Director of the
Greenwich, CT 06830 Morgan Stanley Fund, Inc.,
1/23/37 PCS Cash Fund, Inc. and
Morgan Stanley Universal Funds,
Inc.
Andrew McNally IV Director Chairman and Chief Executive
8255 North Central Officer of Rand McNally
Park Avenue (publication); Director of
Skokie, IL 60076 Allendale Insurance Co., Mercury
11/11/39 Finance (consumer finance);
Zenith Electronics, Hubbell,
Inc. (industrial electronics);
Director of the Morgan Stanley
Fund, Inc., PCS Cash Fund, Inc.
and Morgan Stanley
Universal Funds, Inc.
Samuel T. Reeves Director Chairman of the Board and CEO,
8211 North Pinacle L.L.C. (investment
Fresno Street firm); Director, Pacific Gas and
Fresno, CA 93720 Electric and PG&E Enterprises
7/28/34 (utilities); Director of the
Morgan Stanley Fund, Inc.,
PCS Cash Fund, Inc. and
Morgan Stanley Universal
Funds, Inc.
Fergus Reid Director Chairman and Chief Executive
85 Charles Colman Blvd Officer of LumeLite Corporation
Pawling, NY 12564 (injection molding firm);
8/12/32 Trustee and Director of Vista
Mutual Fund Group; Director of
the Morgan Stanley Fund, Inc.
PCS Cash Fund, Inc. and
Morgan Stanley Universal
Funds, Inc.
Frederick O. Robertshaw Director Of Counsel, Copple,
2800 North Central Avenue Chamberlin & Boehm, P.C.;
Phoenix, AZ 85004 Formerly, Of Counsel, Bryan,
1/24/34 Cave; (law firms); Director of
the Morgan Stanley Fund, Inc.,
PCS Cash Fund, Inc. and
Morgan Stanley Universal
Funds, Inc.
15
<PAGE>
Name, Address and Date Principal Occupation During
of Birth Postion with Fund Past Five Years
---------------------- ----------------- -----------------------------
James W. Grisham* Vice President Principal of Morgan Stanley &
1221 Avenue of the Co., Inc. and of Morgan Stanley
Americas Asset Management Inc.; Vice
New York, NY 10020 President of 16 U.S. registered
10/24/41 investment companies managed by
Morgan Stanley Asset Management
Inc.
Michael F. Klein* Vice President Principal of Morgan Stanley
1221 Avenue of the Americas Asset Management Inc.; Officer
New York, NY 10020 of various investment
12/12/58 companies managed by Morgan
Stanley Asset Management Inc.
Previously practiced law with
the New York law
firm of Rogers & Wells.
Harold J. Schaaff, Jr.* Vice President Principal of Morgan Stanley &
1221 Avenue of the Co. and of Morgan Stanley Asset
Americas Management Inc.; General Counsel
New York, NY 10020 and Secretary of Morgan Stanley
6/10/60 Asset Management Inc.; Vice
President of 16 U.S. registered
investment companies managed by
Morgan Stanley Asset Management
Inc.
Joseph P. Stadler* Vice President Vice President of Morgan Stanley
1221 Avenue of the & Co. Inc. and Morgan Stanley
Americas Asset Management Inc.;
New York, NY 10020 Previously with Price Waterhouse
6/7/54 LLP (accounting); Vice President
of 16 U.S. registered investment
companies managed by Morgan
Stanley Asset Management Inc.
Valerie Y. Lewis* Secretary Vice President of Morgan Stanley
1221 Avenue of the & Co. Inc. and Morgan Stanely
Americas Asset Management Inc.;
New York, NY 10020 Previously with Citicorp
3/26/56 (banking); Secretary of 16 U.S.
registered investment companies
managed by Morgan Stanley Asset
Management Inc.
Karl O. Hartmann Assistant Senior Vice President, Secretary
73 Tremont Street Secretary and General Counsel of Chase
Boston, MA 02108-3913 Global Funds Services Company;
3/7/55 Previously, Leland, O'Brien,
Rubinstein Associates, Inc.
(investments).
James R. Rooney Treasurer Vice President, Director of
73 Tremont Street Fund Administration and
Boston, MA 02108-3913 Compliance Services, Chase
10/21/58 Global Funds Services Company;
Officer of various investment
companies managed by Morgan
Stanley Asset Management Inc.;
Previously with Scudder, Stevens
& Clark, Inc. (investments) and
Ernst & Young LLP (accounting);
Treasurer of 16 U.S. registered
investment companies managed by
Morgan Stanley Asset Management
Inc.
Joanna Haigney Assistant Manager of Fund Administration
73 Tremont Street Treasurer and Compliance Services,
Boston, MA 02108-3913 Chase Global Funds Services
10/10/66 Company; Previously with Coopers
& Lybrand LLP; Assistant
Treasurer of 16 U.S. registered
investment companies managed by
Morgan Stanley Asset Management
Inc.
_______
* "Interested Person" within the meaning of the 1940 Act.
16
<PAGE>
REMUNERATION OF DIRECTORS AND OFFICERS
Effective June 28, 1995, the Open-end Fund Complex will pay each of the
nine Directors who is not an "interested person" an annual aggregate fee of
$55,000, plus out-of-pocket expenses. The Open-end Fund Complex will pay
each of the members of the Fund's Audit Committee, which consists of the
Fund's Directors who are not "interested persons," an additional annual
aggregate fee of $10,000 for serving on such a committee. The allocation of
such fees will be among the three funds in the Open-end Fund Complex in
direct proportion to their respective average net assets. For the fiscal
year December 31, 1996, the Fund paid approximately $389,000 in Directors'
fees and expenses. Directors who are also officers or affiliated persons
receive no remuneration for their services as Directors. The Fund's officers
and employees are paid by the Adviser or its agents. As of April 7, 1997, to
Fund management's knowledge, the Directors and officers of the Fund, as a
group, owned more than 1% of the outstanding common stock of the following
Portfolios of the Fund: 2.0% Asian Equity Portfolio - Class A shares; 2.2%
Emerging Markets Portfolio - Class B shares; 2.6% Latin American Portfolio -
Class A shares and 2.9% Technology Portfolio - Class A Shares. The following
table shows aggregate compensation paid to each of the Fund's Directors by
the Fund and the Fund Complex, respectively, in the fiscal year ended
December 31, 1996.
17
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
- -------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
NAME OF AGGREGATE PENSION OR ESTIMATED TOTAL
PERSON, COMPENSATION RETIREMENT ANNUAL COMPENSATION
POSITION FROM BENEFITS ACCRUED BENEFITS FROM REGISTRANT
REGISTRANT AS PART OF FUND UPON AND FUND COMPLEX
EXPENSES RETIREMENT PAID TO DIRECTORS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Barton M. Biggs, $ N/A N/A N/A $ N/A
Director and Chairman
of the Board
Warren J. Olsen, N/A N/A N/A N/A
Director and President
John D. Barrett, II 59,485 N/A N/A 68,777
Director
Gerard E. Jones, 59,485 N/A N/A 75,877
Director
Andrew McNally, IV 55,023 N/A N/A 63,195
Director
Samuel T. Reeves 53,287 N/A N/A 61,331
Director
Fergus Reid 67,434 N/A N/A 77,220
Director
Frederick O. Robertshaw 50,834 N/A N/A 58,777
Director
Frederick B. Whittemore* N/A N/A N/A N/A
Director
</TABLE>
___________
* As of March 14, 1997, Mr. Whittemore resigned from the
Board of Directors.
18
<PAGE>
INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS
Morgan Stanley Asset Management Inc. ("MSAM" or the "Adviser") is a
wholly-owned subsidiary of Morgan Stanley Group Inc. The principal offices
of Morgan Stanley Group Inc. are located at 1221 Avenue of the Americas, New
York, NY 10020. As compensation for advisory services for the fiscal years
ended December 31, 1994, December 31, 1995 and December 31, 1996, the Adviser
earned fees of approximately $34,338,000, $40,534,000 and $55,465,000,
respectively, and from such fees voluntarily waived fees of $2,640,000,
$3,526,000 and $4,340,000, respectively. For the fiscal years ended December
31, 1994, December 31, 1995 and December 31, 1996, the Fund paid brokerage
commissions of approximately $7,287,293, $10,317,515 and $17,014,335,
respectively. For the fiscal years ended December 31, 1994, December 31,
1995 and December 31, 1996, the Fund paid in the aggregate $796,000, $377,000
and $826,686, respectively, as brokerage commissions to Morgan Stanley &
Co. Incorporated, an affiliated broker-dealer, which represented 11%, 4% and
5% of the total amount of brokerage commissions paid in each respective
period. For the fiscal years ended December 31, 1994, December 31, 1995 and
December 31, 1996, the Fund paid administrative fees to MSAM of approximately
$4,458,000, $5,238,000 and $7,298,531, respectively.
Pursuant to the MSAM Administration Agreement between the Adviser and the
Fund, the Adviser provides Administrative Services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15 of 1% of the average daily net assets of the Portfolio.
Under the Agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase Global Funds Services Company ("CGFSC", a corporate affiliate
of Chase) provides certain administrative services to the Fund. CGFSC provides
operational and administrative services to investment companies with
approximately $69 billion in assets and having approximately 215,930 shareholder
accounts as of December 31, 1996. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913.
DISTRIBUTION OF FUND SHARES
Morgan Stanley & Co. Incorporated (the "Distributor"), a wholly-owned
subsidiary of Morgan Stanley Group Inc., serves as the Distributor of the Fund's
shares pursuant to a Distribution Agreement for the Fund and a Plan of
Distribution for the Class B shares of the Portfolio pursuant to Rule 12b-1
under the 1940 Act (the "Plan"). Under the Plan the Distributor is entitled to
receive from the Portfolio a distribution fee, which is accrued daily and paid
quarterly, at an annual rate of up to 0.25% of the average daily net assets of
the Class B shares of the Portfolio. The Distributor expects to allocate most
of its fee to its investment representatives and investment dealers, banks or
financial service firms that provide distribution services ("Participating
Dealer"). The actual amount of such compensation is agreed upon by the Fund's
Board of Directors and by the Distributor. The Distributor may, in its
discretion, voluntarily waive from time to time all or any portion of its
distribution fee and the Distributor is free to make additional payments out of
its own assets to promote the sale of Fund shares.
The Plan obligates the Portfolio to accrue and pay to the Distributor the
fee agreed to under its Distribution Agreement. The Plan does not obligate the
Portfolio to reimburse the Distributor for the actual expenses the Distributor
may incur in fulfilling its obligations under the Plan. Thus, under the Plan,
even if the Distributor's actual expenses exceed the fee payable to it
thereunder at any given time, the Portfolio will not be obligated to pay more
than that fee. If the Distributor's actual expenses are less than the fee it
receives, the Distributor will retain the full amount of the fee. The Plan for
the Class B shares were most recently approved by the Fund's Board of Directors,
including those directors who are not "interested persons" of the Fund as that
term is defined in the 1940 Act and who have no direct or indirect financial
interest in the operation of a Plan or in any agreements related thereto, on
February 13, 1997.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act which incorporates the Code of Ethics of the Adviser
(together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Adviser and, as described below,
impose additional, more onerous, restrictions on the Fund's investment
personnel.
The Codes require that all employees of the Adviser preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Adviser include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in
19
<PAGE>
securities. In addition, no employee may purchase or sell any security that at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Adviser. Furthermore, the Codes provide for trading "blackout periods" that
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The names and addresses of the holders of 5% or more of the outstanding
shares of any class of the Fund as of April 7, 1997 and the percentage of
outstanding shares of such classes owned beneficially or of record by such
shareholders as of such date are, to Fund management's knowledge, as follows:
ACTIVE COUNTRY ALLOCATION PORTFOLIO: City of New York Deferred Compensation
Plan, 40 Rector Street, 3rd Floor, New York, NY 10006, owned 26% of such
Portfolio's total outstanding Class A shares.
The Trustees of Columbia University in the City of New York, 475 Riverside
Drive, Suite 401, New York, NY 10115, owned 15% of such Portfolio's total
outstanding Class A shares.
Oglebay Norton Company, 1100 Superior Avenue, Cleveland, OH 44114-2598, owned
11% of such Portfolio's total outstanding Class A shares.
Boatmen's Trust Co., Pension Plan, P.O. Box 14737, St. Louis, MO 63178-4737
owned 7% of such Portfolio's total outstanding Class A shares.
The Flinn Foundation, Northern Trust Co., Master Trust Dept., 7th Floor,
P.O. Box 92984, Chicago, IL 60675, owned 6% of such Portfolio's total
outstanding Class A shares.
Sahara Enterprises, Inc., 3 First National Plaza, Suite 2000, Chicago, IL 60602-
4260, owned 7% of such Portfolio's total outstanding Class A shares.
The Chase Manhattan Bank, N.A., Trustee Chubb Capital Accumulation Plan, 770
Broadway, New York, NY 10003, owned 7% of such Portfolio's total outstanding
Class A shares.
Fredric W. & Stephanie C. Harman, 21 Hillbrook, Portola Valley, CA 94028,
owned 54% of such Portfolio's total outstanding Class B shares.
David M. & Sharon M. Platter, 9 Palmer Lane, Riverside, CT 06878, owned 46% of
such Portfolio's total outstanding Class B shares.
AGGRESSIVE EQUITY PORTFOLIO: Ministers and Missionaries Benefit Board of the
American Baptist Churches, Attn: Morgan Stanley Asset Management, 1221 Avenue
of the Americas, New York, NY 10020, owned 11% of such Portfolio's total
outstanding Class A shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O.
Box 92956, Chicago, IL 60675-2956, owned 9% of such Portfolio's total
outstanding Class A shares.
Valassis Enterprises - Equity C/O Franklin Enterprises, 520 Lake Cook Road,
Suite 380, Deerfield, IL 60015, owned 6% of such Portfolio's total
outstanding Class A shares.
Kinghugh S.A., C/O Morgan Stanley Asset Management, 1221 Avenue of the Americas,
New York, NY 10020, owned 6% of such Portfolio's total outstanding Class A
shares.
Bank Morgan Stanley AG, Bahnogstrasse 92, Zurich CH-8023, Switzerland owned
6% of such Portfolio's total outstanding Class A shares.
20
<PAGE>
ASIAN EQUITY PORTFOLIO: Association De Biensfaissance Et De Retraite Des
Pollciers De La Communaute Urbaine De Montreal, 480 Gilford Street, Montreal,
Quebec H2J1N3, owned 9% of such Portfolio's total outstanding Class A shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O.
Box 92956, Chicago, IL 60675-2956, owned 6% of such Portfolio's total
outstanding Class A shares.
James L. & Sarah M. Barksdale, Trustees of Jim & Sally Barksdale, 800
Woodlands Parkway, Suite 118, Ridgeland, MS 39157-5216 owned 6% of such
Portfolio's total outstanding Class B shares.
BALANCED PORTFOLIO: Kinney Printing Co-Employees, 4801 So. Lawndale, Chicago,
IL 60632-3018, owned 16% of such Portfolio's total outstanding Class A shares.
H. Conrad & Sarah Meyer, One Woodland Avenue, Bronxville, NY 10708, owned 12%
of such Portfolio's total outstanding Class A shares.
Joan M. Hunt Trust, 8627 Madison Drive, Niles, IL 60648, owned 8% of such
Portfolio's total outstanding Class A shares.
Guarantee & Trust Company, IRA Rollover, One Woodland Avenue, Bronxville, NY
10708, owned 7% of such Portfolio's total outstanding Class A shares.
William Guthrie, IRA Rollover, 435 Sheridan Road, Winnetka, IL 60093-2626,
owned 32% of such Portfolio's total outstanding Class B shares.
Ramakrishna Kothalanka M.D., Profit Sharing Plan, MSTC Custodian, 126 Bentley
Avenue, Jersey City, NJ 07304-1702, owned 16% of such Portfolio's total
outstanding Class B shares.
Sam G. Pitroda Custodian for Rajal Pitroda, 1480 Goldenbell Court, Downers
Grove, IL 60515-1301, owned 8% of such Portfolio's total outstanding Class B
shares.
Sam G. Pitroda Custodian for Salil Pitroda, 1480 Goldenbell Court, Downers
Grove, IL 60515-1301, owned 8% of such Portfolio's total outstanding Class B
shares.
Phyllis M. Mott IRA, MSTC Custodian, 120 West State Street, Suite 400,
Rockford, IL 61101, owned 8% of such Portfolio's total outstanding
Class B shares.
EMERGING GROWTH PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 47% of such
Portfolio's total outstanding Class A shares.
Allendale Mutual Insurance Co., P.O. Box 7500, Johnston, RI 02919-0750, owned
17% of such Portfolio's total outstanding Class A shares.
NOAM/A/EC, C/O Philip Winters, Morgan Stanley Asset Management, 1221 6th Avenue,
New York, NY 10020, owned 8% of such Portfolio's total outstanding Class A
shares.
South Trust Estate & Trust Company of Georgia, Trustee U/A Southern Engineering
Company Retirement Plan, P.O. Box 1001, Atlanta, GA 30301, owned 7% of such
Portfolio's total outstanding Class A shares.
HVA Limited Partnership, C/O H L Van Arnem, 1301 W. Newport Center Drive,
Deerfield Beach, FL 33442-7734, owned 11% of such Portfolio's total outstanding
Class B shares.
Anne W. Rohrbach, C/O Gleacher Avenue, 660 Madison Avenue, 19th Floor, New
York, NY 10021, owned 11% of such Portfolio's total outstanding Class B
shares.
Lawrence M. Howell, Howell Capital, One Maritime Plaza, Suite 1700,
San Francisco, CA 94101, owned 7% of such Portfolio's total outstanding
Class B shares.
Julian Eisner, 871 Oak Lane, North Woodmere, NY 11581, owned 7% of such
Portfolio's total outstanding Class B shares.
H. Conrad & Sarah Meyer, One Woodland Avenue, Bronxville, NY 10708, owned 6% of
such Portfolio's total outstanding Class B shares.
Bruce S. Ives, 163 Gallows Hill Road, West Redding, CT 06896, owned 6% of
such Portfolio's total outstanding Class B shares.
William B. O'Connor, 18 Montfort Road, Port Washington, NY 11050, owned 6% of
such Portfolio's total outstanding Class B shares.
James F. & Marlene Connors, 205 E. Joppa Road, Towson, MD 21286, owned 5% of
such Portfolio's total outstanding Class B shares.
EMERGING MARKETS DEBT PORTFOLIO: Northwestern University, 633 Clark Street,
Evanston, IL 60208-1122, owned 20% of such Portfolio's total outstanding Class A
shares.
Valassis Enterprises - Equity, C/O Franklin Enterprises, 520 Lake Cook Road,
Deerfield, IL 60015, owned 6% of such Portfolio's total outstanding Class A
shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O. Box
92956, Chicago, IL 60675-2956, owned 6% of such Portfolio's total outstanding
Class A shares.
Swarthmore College, 500 College Avenue, Swarthmore, PA 19081-1110, owned 7% of
such Portfolio's total outstanding Class A shares.
Morgan Stanley & Co. Pension Fund, C/O Northern Trust Co., 770 Broadway, New
York, NY 10003, owned 7% of such Portfolio's total outstanding Class A shares.
Michael J. Fuchs, 9 West 57th Street, New York, NY 10019, owned 11% of such
Portfolio's total outstanding Class B shares.
Alice H. & Paul D. Bartlett, 4800 Main Street, Kansas City, MO 64112, owned
11% of such Portfolio's total outstanding Class B shares.
Daniel E. Winters, 1319 Mirror Terrace NW, Winter Haven, FL 33881, owned 8% of
such Portfolio's total outstanding Class B shares.
Bruce A. Drummond, 1847 Onaway SE, Grand Rapids, MI 49506, owned 6% of such
Portfolio's total outstanding Class B shares.
Eleanor S. Herkert Trustee of the Eleanor S. Herkert Trust, 2000 Diana Drive,
Lakeview West, Hallandale, FL 33009, owned 6% of such Portfolio's total
outstanding Class B shares.
David Brooks Gendron, 2 Montpelier Place, London SW7 1HJ England, UK, owned
6% of such Portfolio's total outstanding Class B shares.
Paul D. Bartlett, Jr., 4800 Main Street, Suite 600, Kansas City, MO 64112,
owned 5% of such Portfolio's total outstanding Class B shares.
EMERGING MARKETS PORTFOLIO: Ministers & Missionaries Benefit Board of the
American Baptist Churches, 475 Riverside Drive, New York, NY 10115, owned 7% of
such Portfolio's total outstanding Class A shares.
Ewing Marion Kauffman Foundation, 4900 Oak Street, Kansas City, MO 64112, owned
7% of such Portfolio's total outstanding Class A shares.
EQUITY GROWTH PORTFOLIO: Fidelity Management Trust Company as Trustee for
GTE Master Savings Trust, 82 Devonshire Street, Boston, MA 02109, owned 25%
of such Portfolio's total outstanding Class A shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O.
Box 92956, Chicago, IL 60675, owned 17% of such Portfolio's total outstanding
Class A shares.
St. Raymonds Cemetery Reserve Fund, P.O. Box 92800, Rochester, NY 14692, owned
5% of such Portfolio's total outstanding Class A shares.
Fidelity Investments Institutional Operations Company, Agent for Certain
Employee Benefit Plans, 100 Magellan Way, Covington, KY 41015, owned 8% of such
Portfolio's total outstanding Class A shares.
Philip E. Asquith, 31 Lakeside Drive, Ramsey, NJ 07446, owned 5% of such
Portfolio's total outstanding Class B shares.
21
<PAGE>
EUROPEAN EQUITY PORTFOLIO: Marc Andreessen Trustees, FBO Marc Andreessen,
16615 Lark Avenue, Los Gatos, CA 95030, owned 12% of such Portfolio's total
outstanding Class B shares.
Wayne Gretzky Trustee of the Gretzky Trust of 1989, 9100 Wilshire Boulevard,
Beverly Hills, CA 90210, owned 6% of such Portfolio's total outstanding
Class B shares.
Paul M. and Shirley F. Mathews, 25 West 706 Jerome Avenue, Wheaton, IL 60187,
owned 6% of such Portfolio's total outstanding Class B shares.
William & Brenda Castonguay, 9101 Hometown Drive, Raleigh, NC 27615, owned 5%
of such Portfolio's total outstanding Class B shares.
FIXED INCOME PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 29% of such
Portfolio's total outstanding Class A shares.
Brooks School, C/O Mr. Frank Marino, North Andover, MA 01845, owned 7% of such
Portfolio's total outstanding Class A shares.
Trust for Descendents of David R. Jaffe, C/O David Jaffe, 45 Hemlock Ridge,
Weston, CT 06883, owned 8% of such Portfolio's total outstanding Class B
shares.
Laverne M. Brownsey Trust UA, 135 S. LaSalle Street, Chicago, IL 60603, owned
7% of such Portfolio's total outstanding Class B shares.
First United Methodist Church of Chicago - Endowment Fund, 77 West Washington,
Chicago, IL 60602, owned 7% of such Portfolio's total outstanding Class
B shares.
Cascino Investment Co.,820 Burgess Hill, Naperville, IL 60565, owned 16% of
such Portfolio's total outstanding Class B shares.
Marvin J. Schneider, MSTC Custodian, 12331 Ladue Road, St. Louis, MO 63141,
owned 8% of such Portfolio's total outstanding Class B shares.
Joan M. Hunt, MSTC Custodian, 8627 Madison Drive, Niles, IL 60648, owned 7%
of such Portfolio's total outstanding Class B shares.
Michael S. Virgil, FBO Mary Ann Young Brownsey Trust, 135 S. LaSalle Street,
Chicago, IL 60603, owned 7% of such Portfolio's total outstanding Class B
shares.
Joan O. Benjamin, 10 Saint Lukes Place, New York, NY 10014, owned 7% of such
Portfolio's total outstanding Class B shares.
John K. Howe, MSTC Custodian, 7274 East Las Palmaritas Drive, Scottsdale, AZ
85258, owned 7% of such Portfolio's total outstanding Class B shares.
GLOBAL EQUITY PORTFOLIO: Robert College of Istanbul Turkey C/O Morgan Stanley
Asset Management, 25 Cabot Square, London, England E144QA, owned 47% of such
Portfolio's total outstanding Class A shares.
JM Kaplan Fund, Inc., 880 Third Avenue, 3rd floor, New York, NY 10022, owned
13% of such Portfolio's total outstanding Class A shares.
22
<PAGE>
Kaplan, Choate Value Partners, L.P., 880 Third Avenue, New York, NY 10022-4730,
owned 9% of such Portfolio's total outstanding Class A shares.
Gooss & Company, C/O Chase Manhattan Bank, 1211 6th Avenue, New York, NY 10036,
owned 7% of such Portfolio's total outstanding Class A shares.
Divtex and Company FBO, Pritchard Hubble and Herr C/O Texas Commerce Bank, P.O.
Box 2558, Houston, TX 77252, owned 7% of such Portfolio's total outstanding
Class A shares.
Bank of Mississippi, P.O. Box 1605, Jackson, MS 39215, owned 13% of such
Portfolio's total outstanding Class B shares.
Fidelity Investments Institutional Operations as Agent for Certain Employee
Benefit Plans, 100 Magellan Way, Covington, KY 41015, owned 13% of such
Portfolio's total outstanding Class B shares.
Edward J. Prostic, 2225 Stratford Road, Mission Hills, KS 66208, owned 9% of
such Portfolio's total outstanding Class B shares.
V. Marc Droppert IRA, MSTC Custodian, 13106 184th NE, Redmond, WA 98052, owned
8% of such Portfolio's total outstanding Class B shares.
North American Trust Company, FBO Heller/Robert S. Venning, P.O. Box 84419, San
Diego, CA 92138, owned 7% of such Portfolio's total outstanding Class B
shares.
Leslie E. Tiffany IRA, MSTC, 14312 173rd Place NE, Redmond, WA 98052, owned 6%
of such Portfolio's total outstanding Class B shares.
GLOBAL FIXED INCOME PORTFOLIO: Farm Credit Bank Retirement Plan, Columbia
District American Industries Trust Company Trustee, 5700 NW Central Drive, 4th
Floor, Houston, TX 77092, owned 19% of such Portfolio's total outstanding Class
A shares.
Northern Trust Company as Custodian FBO The Lund Foundation, P.O. Box 92956,
Chicago, IL 60675, owned 15% of such Portfolio's total outstanding Class A
shares.
The Northern Trust Co. FBO Christel Dehaan Trust, P.O. Box
92956, Chicago, IL 60675-2956, owned 6% of such Portfolio's total outstanding
Class A shares.
Lakeview Holdings Ltd., Coutts & Co. (Bahamas) Ltd., P.O. Box N7788, West Bay
St., Nassau Bahamas, owned 5% of such Portfolio's total outstanding Class A
shares.
David Brooks Gendron, 2 Montpelier Place, London SW7 1HJ, England, UK, owned 34%
of such Portfolio's total outstanding Class B shares.
Joan M. Hunt, MSTC Custodian, 8627 Madison Drive, Niles, IL 60648, owned 17%
of such Portfolio's total outstanding Class B shares.
Laverne M. Brownsey Trust UA, 135 S. LaSalle Street, Chicago, IL 60603, owned
16% of such Portfolio's total outstanding Class B shares.
George & Claudine Boutros, 11007 Branbrook, Houston, TX 77042, owned 7% of
such Portfolio's total outstanding Class B shares.
George N. and Susan P. Fugelsang, 17 Calhoun Drive, Greenwich, CT 06831, owned
10% of such Portfolio's total outstanding Class B shares.
Paul E. & H. Anthony Hellmers, 4 Colonial Lane, Larchmont, NY 10538, owned 7%
of such Portfolio's total outstanding Class B shares.
Anthony F. & Colette H. Rowland, C/O Cambrian Management, 1114 Avenue of the
Americas, New York, NY 10036, owned 6% of such Portfolio's total outstanding
Class B shares.
GOLD PORTFOLIO: William H. Ellis Trustee, Living Trust, Attn: Julie J. Laux,
2519 N. Bosworth, Chicago, IL 60614, owned 6% of such Portfolio's total
outstanding Class A shares.
23
<PAGE>
Marshall & Ilsley Trust Company, C/F John Morey, 1000 N. Water Street,
Milwaukee, WI 53202, owned 26% of such Portfolio's total outstanding
Class B shares.
Barlett and Company, Profit Sharing Plan and Trust, 4800 Main Street, Kansas
City, MO 64112, owned 20% of such Portfolio's total outstanding Class B shares.
Chicago Methodist Episcopal Church Aid Society, C/O Gordon Worley, 4401 Gulf
Shore Boulevard North, Monaco Beach Club, Naples, FL 33940, owned 18% of such
Portfolio's total outstanding Class B shares.
Steven C. Olson, 505 Knollwood Road, Ridgewood, NJ 07450, owned 16% of such
Portfolio's total outstanding Class B shares.
Priscilla & John Privat, Community Property, 8852 N.E. 24th Street, Bellevue,
WA 98004, owned 6% of such Portfolio's total outstanding Class B shares.
HIGH YIELD PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley Profit
Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 21% of such
Portfolio's total outstanding Class A shares.
Valassis Enterprises - Equity, c/o Franklin Enterprises, 520 Lake Cook Road,
Suite 380, Deerfield, IL 60015, owned 12% of such Portfolio's total outstanding
Class A shares.
Adeliade L. Hinckley, C/O Jim Bell, Morgan Stanley/IIS Department, 1251 Avenue
of the Americas, New York, NY 10020, owned 7% of such Portfolio's total
outstanding Class B shares.
INTERNATIONAL EQUITY PORTFOLID: Ramakrishna Kothalanka M.D., IRA Rollover, MSTC
Custodian, 126 Bentley Avenue, Jersey City, NJ 07304, owned 5% of such
Portfolio's total outstanding Class B shares.
Fleet Bank, Trustee for Third Presbyterian Church, P.O. Box 92800, Rochester, NY
14692, owned 17% of such Portfolio's total outstanding Class B shares.
INTERNATIONAL MAGNUM PORTFOLIO: Bankers Trust Trustee, Harris Corporation
Retirement Plan & Harris Corporation Union Retirement Plan, 1025 W. Nasa
Boulevard, Melbourne, FL 32919, owned 47% of such Portfolio's total outstanding
Class A shares.
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Southwest Guaranty Trust Co., 2121 Sage Road, Suite 150, Houston TX 77056,
owned 6% of such Portfolio's total outstanding Class A shares.
Fidelity Investments Institutional Operations Company, Agent for Certain
Employee Benefit Plans, 100 Magellan Way, Covington, KY 41015, owned 83%
of such Portfolio's total outstanding Class B shares.
INTERNATIONAL SMALL CAP PORTFOLIO: The Short Brothers Pension Fund, P.O. Box
241, Airport Road, Belfast, N. Ireland, owned 11% of such Portfolio's total
outstanding Class A shares.
Trustees of Boston College Attn: Paul Haran Associate Treasurer, St. Thomas
More Hall 310, Chestnut Hill, MA 02167, owned 7% of such Portfolio's total
outstanding Class A shares.
General Mills, Inc. Master Trust: Pooled International Fund, One General Mills
Blvd., Minneapolis, MN 55426, owned 7% of such Portfolio's total outstanding
Class A shares.
JAPANESE EQUITY PORTFOLIO: United Carolina Bank Trust Operations,
P.O. Box 632, Whiteville, NC 28472, owned 23% of such Portfolio's
total outstanding Class B shares.
Barlett and Company, Profit Sharing Plan and Trust,
4800 Main Street, Kansas City, MO 64112, owned 14% of such Portfolio's total
outstanding Class B shares.
Paul M. & Shirley F. Mathews, 25 W. 706 Jerome Avenue, Wheaton, IL 60187,
owned 7% of such Portfolio's total outstanding Class B shares.
William & Brenda Castonguay, 9101 Hometown Drive, Raleigh, NC 27615, owned
7% of such Portfolio's total outstanding Class B shares.
Wayne Gretzky Trustee of the Gretzky Trust of 1989, 9100 Wilshire Boulevard,
Beverly Hills, CA 90210, owned 6% of such Portfolio's total outstanding
Class B shares.
Douglas E. Ebert, Trustee and Successor in Trust, 326 Vailwood Court,
Bloomfield Hills, MI 48302, owned 6% of such Portfolio's total outstanding
Class B shares.
LATIN AMERICAN PORTFOLIO: Investors Bank & Trust Co., Financial Product
Services, P.O. Box 1537, Boston, MA 02205, owned 10% of such Portfolio's total
outstanding Class A shares.
MUNICIPAL BOND PORTFOLIO: Daniel F. and Maria J. McDonald, 8550 Old
Dominion Drive, McLean, VA 22102, owned 11% of such Portfolio's total
outstanding Class A shares.
Donna Karan, C/O Stephan Weiss, The Donna Karan Company, 550 Seventh Avenue,
New York, NY 10018, owned 6% of such Portfolio's total outstanding
Class A shares.
Frank R. Mori, 935 Park Avenue, New York, NY 10028, owned 8% of such
Portfolio's total outstanding Class A shares.
Cushman Trust, C/O Cambrian Services, 1114 Avenue of the Americas, Suite 2702,
New York, NY 10036, owned 6% of such Portfolio's total outstanding Class A
shares.
Arnold E. and Jill I. Bellowe Trustees, 915 Park Lane, Montecito, CA 93108-
1421, owned 6% of such Portfolio's total outstanding Class A shares.
Sevenson Environmental Services, P.O. Box 396, 2749 Lockport Road, Niagra Falls,
NY 14305, owned 6% of such Portfolio's total outstanding Class A shares.
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SMALL CAP VALUE EQUITY PORTFOLIO: Valassis Enterprises - Equity, C/O Franklin
Enterprises, 520 Lake Cook Road, Deerfield, IL 60015, owned 8% of such
Portfolio's total outstanding Class A shares.
McMahan Furniture Company, Attn: Richard A. McMahan, P.O. Box 8000, Carlsbad, CA
92018, owned 7% of such Portfolio's total outstanding Class A shares.
William H. Ellis Trustee, William Ellis Living Trust, 2519 N. Bosworth,
Chicago, IL 60614, owned 5% of such Portfolio's total outstanding
Class A shares.
Barlett and Company, Profit Sharing Plan and Trust, 4800 Main Street, Kansas
City, MO 64112, owned 31% of such Portfolio's total outstanding Class B
shares.
David Brooks Gendron, 2 Montpelier Place, London SW7 1HJ England, UK,
owned 14% of such Portfolio's total outstanding Class B shares.
Robert R. Bennett IRA Rollover, MSTC Custodian, 18853 N. 88th Drive, Peoria,
AZ 85382, owned 10% of such Portfolio's total outstanding Class B shares.
Ramakrishna Kothalanka M.D., IRA Rollover, MSTC Custodian, 126 Bentley Avenue,
Jersey City, NJ 07304, owned 9% of such Portfolio's total outstanding
Class B shares.
Kinney Printing Co-Employees, Attn: Dolores M. Miklos, 4801 South Lawndale,
Chicago, IL 60632-3018, owned 9% of such Portfolio's total outstanding Class B
shares.
Frank E. Hunt Trust, 8627 Madison Drive, Niles, IL 60648, owned 5% of such
Portfolio's total outstanding Class B shares.
TECHNOLOGY PORTFOLIO: Goolock Associates, C/O Oppenheimer & Co. Inc., 200
Liberty Street, New York, NY 10281, owned 21% of such Portfolio's total
outstanding Class A shares.
Misty Investment Limited, N7776, Nassau, Bahamas, owned 10% of such
Portfolio's total outstanding Class A shares.
Peter Karmanos Jr., 4740 Dow Ridge, Orchard Lake, MI 48324, owned 10% of
such Portfolio's total outstanding Class A shares.
Robert F. Bernard, C/O Whittman-Hart, 311 S. Wacker Drive, Chicago, IL 60606,
owned 8% of such Portfolio's total outstanding Class A shares.
John Montelione, 619 Tremont Street, Sarasota, FL 34242, owned 6% of such
Portfolio's total outstanding Class A shares.
Trefoil Inc., 179 St. Paul Avenue, Brantford Ontario, Canada N3T4G5,
owned 5% of such Portfolio's total outstanding Class A shares.
William J. Connolly, 63 Blackhawk Club Court, Danville, CA 94506, owned 5%
of such Portfolio's total outstanding Class A shares.
Brian E. Bellows, 6133 Pasadena Point Boulevard, Gulfport, FL 33707,
owned 18% of such Portfolio's total outstanding Class B shares.
Robert J. Weinstein M.D., & Lois Weinstein, 875 N. Michigan Avenue, Chicago, IL
60611, owned 8% of such Portfolio's total outstanding Class B shares.
Paul Krieger, 23 Fairview Avenue, Great Neck, NY 11023, owned 7% of such
Portfolio's total outstanding Class B shares.
U.S. REAL ESTATE PORTFOLIO: European Patent Organization Pension Reserve Fund,
Erhardt Strasse 27, Munich, 80331 Germany, owned 7% of such Portfolio's total
outstanding Class A shares.
Morgan Stanley & Co. Pension Fund, C/O Northern Trust Company Cust, 770
Broadway, New York, NY 10003, owned 8% of such Portfolio's total outstanding
Class A shares.
Northwestern University, Attn: Investment Department, 633 Clark Street,
Evanston, IL 60208, owned 10% of such Portfolio's total outstanding Class A
shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O.
Box 92956, Chicago, IL 60675, owned 6% of such Portfolio's total outstanding
Class A shares.
Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA 94104,
owned 5% of such Portfolio's total outstanding Class A shares.
Kansas Children's Service League, P.O. Box 517, Wichita, KS 67201, owned 5%
of such Portfolio's total outstanding Class B shares.
VALUE EQUITY PORTFOLIO: McMahan Furniture Company, Attn: Richard A. McMahan,
P.O. Box 8000, Carlsbad, CA 92018, owned 8% of such Portfolio's total
outstanding Class A shares.
Alice H. & Paul D. Bartlett, Trustees, 4800 Main Street, Kansas City, MO 64112,
owned 19% of such Portfolio's total outstanding Class B shares.
Paul D. Bartlett Jr., 4800 Main Street, Kansas City, MO 64112, owned 13% of
such Portfolio's total outstanding Class B shares.
Cascino Investment Co., 820 Burgess Hill, Naperville, IL 60565, owned 11% of
such Portfolio's total outstanding Class B shares.
David Brooks Gendron, 2 Montpelier Place, London SW7 1HJ England, UK, owned
8% of such Portfolio's total outstanding Class B shares.
Delaware Charter Guarantee & Trust Company, C/F Nelaura O. Lewis, IRA Rollover,
78 Cedar Cliff Road, Riverside, CT 06878, owned 6% of such Portfolio's total
outstanding Class B shares.
First United Methodist Church of Chicago - Endowment Fund, 77 West Washington,
Chicago, IL 60602, owned 6% of such Portfolio's total outstanding Class B
shares.
George N. and Susan P. Fugelsang, 17 Calhoun Drive, Greenwich, CT 06831,
owned 6% of such Portfolio's total outstanding Class B shares.
Laverne M. Brownsey Trust, 135 S. LaSalle St., Chicago, IL 60603 owned 5% of
such Portfolio's total outstanding Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to
illustrate the Portfolio's past performance.
Performance quotations by investment companies are subject to rules adopted
by the Commission, which require the use of standardized performance quotations.
In the case of total return, non-standardized performance quotations may be
furnished by the Fund but must be accompanied by certain standardized
performance information computed as required by the Commission. Current yield
and average annual compounded total return quotations used by the Fund are based
on the standardized methods of computing performance mandated by the Commission.
An explanation of those and other methods used by the Fund to compute or express
performance follows.
TOTAL RETURN
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From time to time the Portfolio may advertise total return. Total return
figures are based on historical earnings and are not intended to indicate future
performance. The average annual total return is determined by finding the
average annual compounded rates of return over 1-, 5-, and 10-year periods (or
over the life of the Portfolio) that would equate an initial hypothetical $1,000
investment to its ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested when paid. The quotation assumes the
amount was completely redeemed at the end of each 1-, 5-, and 10-year period (or
over the life of the Portfolio) and the deduction of all applicable Fund
expenses on an annual basis.
The cumulative (unannualized) total return since inception (September
16, 1996) of the Portfolio is 7.10% for Class A and Class B shares.
Total return figures are calculated according to the following formula:
P(1 + T) to the power of n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of hypothetical $1,000 payment made at the
beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-,
or 10-year periods (or fractional portion thereof).
COMPARISONS
To help investors better evaluate how an investment in the Portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various financial
publications. Advertisements may also compare performance (as calculated above)
to performance as reported by other investments, indices and averages. The
following publications may be used:
(a) CDA Mutual Fund Report, published by CDA Investment
Technologies, Inc. -- analyzes price, current yield, risk, total
return and average rate of return (average annual compounded
growth rate) over specified time periods for the mutual fund
industry.
(b) Financial publications: Business Week, Changing Times, Financial
World, Forbes, Fortune, Money, Barron's, Consumer's Digest,
Financial Times, Global Investor, Investor's Daily, Lipper
Analytical Services, Inc., Morningstar, Inc., New York Times,
Personal Investor, Wall Street Journal and Weisenberger
Investment Companies Service -- publications that rate fund
performance over specified time periods.
(c) Historical data supplied by the research departments of First
Boston Corporation, the J.P. Morgan companies, Salomon Brothers,
Merrill Lynch, Pierce, Fenner & Smith, Lehman Brothers and
Bloomberg L.P.
(d) Lipper -- Mutual Fund Performance Analysis and Lipper -- Fixed
Income Fund Performance Analysis -- measures total return and
average current yield for the mutual fund industry. Ranks
individual mutual fund performance over specified time periods,
assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
(e) Mutual Fund Source Book, published by Morningstar, Inc. --
analyzes price, yield, risk and total return for equity funds.
(f) Savings and Loan Historical Interest Rates -- as published in the
U.S. Savings & Loan League Fact Book.
(g) Stocks, Bonds, Bills and Inflation, published by Hobson
Associates -- historical measure of yield, price and total return
for common and small company stock, long-term government bonds,
U.S. Treasury bills and inflation.
The following indices and averages may also be used:
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<PAGE>
(a) Composite Indices -- 70% Standard & Poor's 500 Stock Index and
30% NASDAQ Industrial Index; 35% Standard & Poor's 500 Stock
Index and 65% Salomon Brothers High Grade Bond Index; and 65%
Standard & Poor's 500 Stock Index and 35% Salomon Brothers High
Grade Bond Index.
(b) Consumer Price Index (or Cost of Living Index), published by the
U.S. Bureau of Labor Statistics -- a statistical measure of
change, over time, in the price of goods and services in major
expenditure groups.
(c) Dow Jones Composite Average or its component averages -- an
unmanaged index composed of 30 blue-chip industrial corporation
stocks (Dow Jones Industrial Average), 15 utilities company
stocks and 20 transportation stocks. Comparisons of performance
assume reinvestment of dividends.
(d) EMBI+ -- Expanding on the EMBI, which includes only Bradys, the
EMBI+ includes a broader group of Brady Bonds, loans, Eurobonds
and the U.S. Dollar local markets instruments. A more
comprehensive benchmark than the EMBI, the EMBI+ covers 49
instruments from 14 countries. At $96 billion, its market cap is
nearly 50% higher than the EMBI's. The EMBI+ is not, however,
intended to replace the EMBI but rather to complement it. The
EMBI continues to represent the most liquid, most easily traded
segment of the market, including more of the assets that
investors typically hold in their portfolios. Both of these
indices are published daily.
(e) IFC Global Total Return Composite Index -- an unmanaged index of
common stocks and includes 18 developing countries in Latin
America, East and South Asia, Europe, the Middle East and Africa
(net of dividends reinvested).
(e) Indata Equity-Median Stock Index -- an unmanaged index which
includes an average asset allocation of 7.4% cash and 92.6%
equity based on $___ billion in assets among ___ portfolios for
the year ended December 31, 1996.
(f) Lipper Capital Appreciation Index -- a composite of mutual funds
managed for maximum capital gains.
(g) Morgan Stanley Capital International Combined Far East Free ex-
Japan Index -- a market-capitalization weighted index comprising
stocks in Hong Kong, Indonesia, Korea, Malaysia, Philippines,
Singapore, Taiwan and Thailand. Korea is included in the MSCI
Combined Far East Free ex Japan Index at 20% of its market
capitalization.
(h) Morgan Stanley Capital International EAFE Index -- an arithmetic,
market value-weighted average of the performance of over 900
securities on the stock exchanges of countries in Europe,
Australia and the Far East.
(i) Morgan Stanley Capital International Emerging Markets Global
Latin America Index -- an unmanaged, arithmetic market value
weighted average of the performance of over 196 securities on the
stock exchanges of Argentina, Brazil, Chile, Colombia, Mexico,
Peru and Venezuela (assumes reinvestment of dividends).
(j) Morgan Stanley Capital International Europe Index -- an unmanaged
index of common stocks and includes 14 countries throughout
Europe.
(k) Morgan Stanley Capital International Japan Index -- an unmanaged
index of common stocks.
(l) Morgan Stanley Capital International Latin America Index -- a
broad-based market capitalization-weighted composite index
covering at least 60% of markets in Mexico, Argentina, Brazil,
Chile, Colombia, Peru and Venezuela (assumes dividends
reinvested).
(m) Morgan Stanley Capital International World Index -- an
arithmetic, market value-weighted average of the performance of
over 1,470 securities listed on the stock exchanges of countries
in Europe, Australia, the Far East, Canada and the United States.
(n) NASDAQ Composite Index -- an unmanaged index of common stocks.
(o) NASDAQ Industrial Index -- a capitalization-weighted index
composed of more than 3,000 domestic stocks taken from the
following industry sectors: agriculture, mining, construction,
manufacturing, electronic components, services and public
administration enterprises. It is a value-weighted index
calculated on price change only and does not include income.
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(p) The New York Stock Exchange composite or component indices --
unmanaged indices of all industrial, utilities, transportation
and finance company stocks listed on the New York Stock Exchange.
(q) Russell 2000 Growth Index -- comprised of those Russell 2000
Secruities with an above-average growth orientation. Here,
secruities tend to exhibit higher price-to-book and price-
earnings ratios, lower dividend yields and higher forecasted
growth than the Value Universe.
(r) Russell 2500 Index -- comprised of the bottom 500 stocks in the
Russell 1000 Index which represents the universe of stocks from
which most active money managers typically select; and all the
stocks in the Russell 2000 Index. The largest security in the
index has a market capitalization of approximately 1.3 billion.
(s) Standard & Poor's 500 Stock Index or its component indices --
unmanaged index composed of 400 industrial stocks, 40 financial
stocks, 40 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
(t) Standard & Poor's Small Cap 600 Index -- a capitalization-
weighted index of 600 domestic stocks having market
capitalizations which reside within the 50th and the 83rd
percentiles of the market capitalization of the entire stock
market, chosen for certain liquidity characteristics and for
industry representation.
(u) Wilshire 5000 Equity Index or its component indices -- represents
the return on the market value of all common equity securities
for which daily pricing is available. Comparisons of performance
assume reinvestment of dividends.
(v) Lipper Science and Technology Fund Index -- a composite index of
the mutual funds which invest at least 65% of their assets in
science and technology stocks.
(w) Hambrecht and Quist Technology Index is an index of computer and
chip makers, biotechnology concerns and other high-tech
companies.
(x) SoundView Technology Index is an unweighted index consisting of
more than 100 technology companies.
(y) Morgan Stanley High Tech 35 Index -- an index comprised of
thirty-five technology stocks chosen by Morgan Stanley.
(z) Pacific Stock Exchange Index -- an index consisting of
approximately 100 technology and healthcare technology concerns.
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in the Portfolio,
that the averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its futures. In addition, there can be no assurance that the
Fund will continue this performance as compared to such other averages.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund's Articles of Incorporation, as amended and restated, permit the
Directors to issue 35 billion shares of common stock, par value $.001 per share,
from an unlimited number of classes ("Portfolios") of shares. Currently the
Fund consists of shares of twenty-nine Portfolios (the China Growth, MicroCap
and Mortgage-Backed Securities Portfolios are not currently offering shares).
The shares of each Portfolio of the Fund are fully paid and nonassessable,
and have no preference as to conversion, exchange, dividends, retirement or
other features. The shares of each Portfolio of the Fund have no pre-emptive
rights. The shares of the Fund have non-cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they choose to do so. A
shareholder is entitled to one vote for each full share held (and a fractional
vote for each fractional share held), then standing in his name on the books of
the Fund.
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<PAGE>
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund's policy is to distribute substantially all of the Portfolio's net
investment income, if any. The Fund may also distribute any net realized
capital gains in the amount and at the times that will avoid both income
(including taxable gains) taxes on it and the imposition of the federal excise
tax on income and capital gains (see discussion under "Taxes" in this Statement
of Additional Information). However, the Fund may also choose to retain net
realized capital gains and pay taxes on such gains. The amounts of any income
dividends or capital gains distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares of
the Portfolio by an investor may have the effect of reducing the per share net
asset value of the Portfolio by the per share amount of the dividend or
distribution. Furthermore, such dividends or distributions, although in effect
a return of capital, are subject to income taxes for shareholders subject to tax
as set forth herein and in the Prospectus.
As set forth in the Prospectus, unless the shareholder elects otherwise in
writing, all dividends and capital gains distributions for a class of shares are
automatically received in additional shares of such class of the Portfolio at
net asset value (as of the business day following the record date). This
automatic reinvestment of dividends and distributions will remain in effect
until the Fund is notified by the shareholder in writing at least three days
prior to the record date that either the Income Option (income dividends in cash
and capital gains distributions in additional shares at net asset value) or the
Cash Option (both income dividends and capital gains distributions in cash) has
been elected.
CUSTODY ARRANGEMENTS
Chase is the Fund's custodian for domestic and certain foreign assets.
Chase is not affiliated with Morgan Stanley & Co. Incorporated. Morgan
Stanley Trust Company, Brooklyn, NY, acts as the Fund's custodian for foreign
assets held outside the United States and employs subcustodians who were
approved by the Directors of the Fund in accordance with Rule 17f-5 adopted
by the Commission under the 1940 Act. Morgan Stanley Trust Company is an
affiliate of Morgan Stanley & Co. Incorporated. In the selection of foreign
subcustodians, the Directors consider a number of factors, including, but not
limited to, the reliability and financial stability of the institution, the
ability of the institution to provide efficiently the custodial services
required for the Fund, and the reputation of the institution in the
particular country or region.
DESCRIPTION OF RATINGS
I. DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
EXCERPTS FROM MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") DESCRIPTION OF
BOND RATINGS: Aaa - Bonds which are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Aa -
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities. Moody's
applies numerical modifiers 1, 2 and 3 in the Aa and A rating categories. The
modifier 1 indicates that the security ranks at a higher end of the rating
category, modifier 2 indicates a mid-range rating and the modifier 3 indicates
that the issue ranks at the lower end of the rating category. A - Bonds which
are rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future. Baa - Bonds
which are rated Baa are considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. Ba - Bonds which are rated Ba are judged
to have speculative elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. B - Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance
of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small. Caa - Bonds which are rated
Caa are of poor standing. Such issues may be in default or there may be present
elements of danger with respect
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<PAGE>
to principal or interest. Ca - Bonds which are rated Ca represent obligations
which are speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
EXCERPTS FROM STANDARD & POOR'S RATINGS GROUP ("S&P") DESCRIPTION OF BOND
RATINGS: AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation and indicate an extremely strong capacity to pay
principal and interest. AA - Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only to a
small degree. A - Bonds rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories. BBB - Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher rated
categories. BB, B, CCC, CC - Debt rated BB, B, CCC and CC is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. C - The rating C is reserved for income bonds
on which no interest is being paid. D - Debt rated D is in default, and payment
of interest and/or repayment of principal is in arrears.
DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES: Moody's
ratings for state and municipal notes and other short-term obligations are
designated Moody's Investment Grade ("MIG"). Symbols used are as follows:
MIG-1 -- best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established broad-based access to the market
for refinancing, or both; MIG-2 -- high quality with margins of protection ample
although not so large as in the preceding group; MIG-3 - favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades.
DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING: Prime-1 ("P1") --
Judged to be of the best quality. Their short-term debt obligations carry the
smallest degree of investment risk.
EXCERPT FROM S&P'S RATING OF MUNICIPAL NOTE ISSUES: S-1+ -- very strong
capacity to pay principal and interest; SP-2 -- strong capacity to pay principal
and interest.
DESCRIPTION OF S&P'S HIGHEST COMMERCIAL PAPER RATINGS: A-1+ -- this
designation indicates the degree of safety regarding timely payment is
overwhelming. A-1 -- this designation indicates the degree of safety regarding
timely payment is very strong.
<PAGE>
FINANCIAL STATEMENTS
The Portfolio's audited financial statements for the fiscal period ended
December 31, 1996, including notes thereto and the report of
Price Waterhouse LLP are herein incorporated by reference from the Fund's
Annual Report. A copy of the Funds's Annual Report to Shareholders must
accompany the delivery of this Statement of Additional Information.
31
