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Previous: MORGAN STANLEY INSTITUTIONAL FUND INC, N-30B-2, 1997-06-04 |
Next: MORGAN STANLEY INSTITUTIONAL FUND INC, N-30B-2, 1997-06-04 |
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<TABLE>
<S> <C>
DIRECTORS OFFICERS
Barton M. Biggs James W. Grisham
CHAIRMAN OF THE BOARD VICE PRESIDENT
Chairman and Director, Morgan Stanley Asset Management Inc. and Michael F. Klein
Morgan Stanley Asset Management Limited; Managing Director, Morgan VICE PRESIDENT
Stanley & Co. Incorporated; Director, Morgan Stanley Group Inc. Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
DIRECTOR AND PRESIDENT Joseph P. Stadler
Principal, Morgan Stanley Asset Management Inc. and Morgan Stanley & VICE PRESIDENT
Co. Incorporated Valerie Y. Lewis
John D. Barrett II SECRETARY
Chairman and Director, Karl O. Hartmann
Barrett Associates, Inc. ASSISTANT SECRETARY
Gerard E. Jones James R. Rooney
Partner, Richards & O'Neil LLP TREASURER
Andrew McNally IV Joanna M. Haigney
Chairman and Chief Executive Officer, Rand McNally ASSISTANT TREASURER
Samuel T. Reeves
Chairman of the Board and CEO, Pinacle L.L.C.
Fergus Reid
Chairman and Chief Executive Officer, LumeLite Corporation
Frederick O. Robertshaw
Of Counsel, Bryan, Cave LLP
</TABLE>
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INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
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DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
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CUSTODIANS
The Chase Manhattan Bank
770 Broadway
New York, New York 10003
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
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LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
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INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
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For current performance, current net asset value, or for assistance with your
account, please contact the Fund at (800) 548-7786. This report is authorized
for distribution only when preceded or accompanied by prospectuses of the Morgan
Stanley Institutional Fund, Inc.
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. Box 2798
Boston, MA 02208-2798
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
SMALL CAP VALUE EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1997
<PAGE>
LETTER TO SHAREHOLDERS
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The Small Cap Value Equity Portfolio invests in equity securities of small- to
medium-sized companies that our research indicates are undervalued relative to
the stock market in general at the time of purchase. The Portfolio's disciplined
value approach seeks to outperform the Russell 2500 Small Company Index in the
longer term. We believe our emphasis on high quality companies will help the
Portfolio perform particularly well in difficult markets.
The Small Cap Value Equity Portfolio selects companies that can be purchased at
bargain prices. Bargains mostly arise as a result of public overreactions to
temporary problems associated with an otherwise healthy company, or because a
company is neglected and currently out-of-the limelight of investors' interest.
Often, these companies operate as major players in very focused markets and are
not widely followed by the investment community.
PERFORMANCE COMPARED TO THE RUSSELL 2500
INDEX AND S&P 500 INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
--------- ----------- -----------------
<S> <C> <C> <C>
PORTFOLIO--CLASS A............ 1.01% 18.75% 13.71%
PORTFOLIO--CLASS B(3)......... 1.01 18.51 18.55
RUSSELL 2500.................. -3.35 8.68 14.76
S&P 500....................... 2.69 19.84 16.74
</TABLE>
1. The Russell 2500 Index and the S&P 500 Index are unmanaged indices of common
stock.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
The Portfolio invests in all economic sectors of the market, and our strategy of
maintaining a well-diversified portfolio is intended to produce consistent and
reliable results over time. Our investment approach combines quantitative and
fundamental research, and is based on the premise that the prices of stocks move
more frequently, and in greater magnitude, than do the fundamentals of the
underlying companies. This discrepancy creates an opportunity for disciplined,
value-oriented investors. Our value approach importantly includes quality and
growth standards which are carefully designed to help avoid "value-traps", where
cheap stocks sometimes remain cheap (or become cheaper) because the company is
run by bad managers or is mired in a hopelessly difficult business environment.
The end result should be a portfolio with below-market valuation and an overall
growth rate as similar as possible to the Russell 2500 benchmark.
For the three months ended March 31, 1997, the Portfolio had a total return of
1.01% for the Class A shares and 1.01% for the Class B shares, as compared to a
total return of -3.35% and 2.69% for the Russell 2500 Index and S&P 500 Index,
respectively. The average annual total return for the one year ended March 31,
1997 and for the period from inception on December 17, 1992 through March 31,
1997 was 18.75% and 13.71%, respectively, for the Class A shares, as compared to
8.68% and 14.76%, respectively, for the Russell 2500 Index and 19.84% and
16.74%, respectively, for the S&P 500 Index.
The first quarter was tumultuous for the market, rising strongly in January and
February before declining sharply in March. The Portfolio performed well in both
environments. The positive results stemmed from both stock and sector selection.
Stock selection added to performance in virtually all economic sectors,
especially technology, financial services, heavy industry, consumer services and
healthcare. The underweighting of technology and the overweighting of financial
stocks contributed to the good performance in the quarter.
2
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In the quarter we added to our weightings in technology, healthcare, heavy
industry and retail, while reducing weightings in consumer services, basic
resources, utilities and energy.
Our cautious outlook on inflation was confirmed by the recent Federal Reserve
decision to raise the Federal Funds interest rate. Against a backdrop of rising
wages, strong job creation and sustained economic growth, we believe that the
Fed is now behind the curve and will need to tighten at least 2 more times in
the next six months. Consequently, we have reduced holdings in financial stocks,
while modestly increasing our weighting in defensive issues, such as food and
tobacco, and sectors which are benefiting from a combination of strong demand
and consolidation, like health care, retail and business services. We are also
raising cash to approximately 5% of the Portfolio.
While our investment process is driven chiefly by bottom-up considerations, we
also take into account broad macroeconomic trends that influence the outlook for
certain industries. As long as we are not required to pay a premium price in the
stock market, we prefer to invest in industries which are beneficiaries of
favorable secular economic trends or positive changes in competitive conditions.
The two areas we have found most interesting recently are technology and
aerospace manufacturing.
The Portfolio is designed to outperform small cap indices over the long-term,
and to do so with lower volatility. In times of strong market advances such as
the ebullient bull market of 1996, the Portfolio should provide good absolute
returns but may not participate fully in speculative rallies. In times of
difficult market environments, as we experienced in the first quarter of 1997,
we expect the Portfolio to perform very well. Overall, the total, long-term
result should be measurably better than that of the Russell 2500 Index.
The Portfolio offers the consistent application of a disciplined value-oriented
investment process to its shareholders. As such, we will diligently search for
small- to mid-sized companies that our research indicates are undervalued, have
strong balance sheets and possess reasonably good growth prospects. We believe
that selective investments in companies such as this should provide superior
long-term returns for our shareholders.
Gary G. Schlarbaum
PORTFOLIO MANAGER
William Gerlach
PORTFOLIO MANAGER
April 1997
3
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INVESTMENTS (UNAUDITED)
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MARCH 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
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<C> <S> <C>
COMMON STOCKS (99.8%)
AEROSPACE (1.9%)
11,000 Doncasters plc ADR $ 213
1,200 Penn Engineering & Manufacturing Corp. 23
5,500 Thiokol Corp. 304
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540
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BANKING (9.5%)
7,800 Astoria Financial Corp. 281
7,400 Community First Bankshares, Inc. 229
6,475 First Security Corp. (Delaware) 208
7,400 Onbancorp, Inc. 346
3,337 Peoples Heritage Financial Group, Inc. 103
5,700 Southtrust Corp. 206
800 Southwest Bancorp of Texas, Inc. 15
8,500 Susquehanna Bancshares, Inc. 280
15,100 Trustmark Corp. 370
8,500 Union Planters Corp. 345
6,400 Washington Mutual, Inc. 309
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2,692
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BUILDING (3.6%)
5,600 Ameron International Corp. (Delaware) 279
2,100 Duke Realty Investments, Inc. REIT 85
22,900 Gilbert Associates, Inc., Class A 389
2,300 Hughes Supply, Inc. 75
4,400 Kilroy Realty Corp. REIT 117
1,900 Post Properties, Inc. REIT 73
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1,018
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CAPITAL GOODS (4.2%)
7,203 Binks Manufacturing Co. 284
17,300 Cascade Corp. 266
12,500 Starret (L.S.) Co., Class A 358
5,200 Tecumseh Products Co., Class A 296
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1,204
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CHEMICALS (4.3%)
26,192 Aceto Corp. 350
12,000 Crompton & Knowles, Corp. 234
8,200 Dexter Corp. 247
10,400 Quaker Chemical Corp. 167
6,300 Witco Corp. 214
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1,212
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COMPUTERS (5.5%)
4,000 Applied Magnetics Corp. 113
<CAPTION>
VALUE
SHARES (000)
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<C> <S> <C>
4,100 Cadence Design Systems, Inc. $ 141
4,600 Ceridian Corp. 165
8,700 Fiserv, Inc. 324
5,700 HMT Technology Corp. 70
15,900 Overland Data, Inc. 80
2,900 Solectron Corp. 145
10,000 Watts Industries, Inc., Class A 232
5,100 Western Digital Corp. 289
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1,559
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CONSUMER-DURABLES (3.5%)
15,900 Arvin Industries, Inc. 372
10,498 Knape & Vogt Manufacturing Co. 172
10,500 Oneida Ltd. 207
7,300 Smith (A.O.) Corp., Class B 254
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1,005
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CONSUMER-RETAIL (7.4%)
3,600 Brylane, Inc. 85
14,500 Crane Co. 455
3,700 Designer Holdings Ltd. 29
8,000 Family Dollar Stores, Inc. 187
8,800 Guilford Mills, Inc. 265
6,700 Interface, Inc. 168
11,100 Lillian Vernon Corp. 155
4,300 Saks Holdings, Inc. 124
5,200 Springs Industries, Inc., Class A 233
8,400 Stanhome, Inc. 209
11,000 Zale Corp. 202
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2,112
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CONSUMER-STAPLES (2.8%)
5,918 Block Drug Co., Inc., Class A 260
1,600 Dean Foods Co. 56
6,600 International Multifoods Corp. 135
17,600 Nash Finch Co. 337
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788
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ELECTRIC (0.9%)
3,200 Computer Products, Inc. 47
2,900 ESS Technology, Inc. 70
2,800 SCI Systems, Inc. 142
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259
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ENERGY (4.6%)
7,700 Ashland Coal, Inc. 189
4,600 National Fuel Gas Co. 197
9,700 Noble Drilling Corp. 167
</TABLE>
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<TABLE>
<CAPTION>
VALUE
SHARES (000)
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<C> <S> <C>
ENERGY (CONTINUED)
7,100 Pacific Enterprises $ 215
5,500 Parker & Parsley Petroleum Co. 162
8,302 Ultramar Diamond Shamrock Corp. 264
5,800 Union Texas Petro Holdings, Inc. 106
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1,300
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ENTERTAINMENT (1.3%)
3,000 First Hawaiian, Inc. 93
9,100 Universal Corp. 263
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356
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FINANCIAL-DIVERSIFIED (7.0%)
26,800 EVEREN Capital Corp. 543
5,200 GATX Corp. 254
12,800 Hambrecht & Quist Group 214
11,500 Manufactured Home Communities, Inc. REIT 252
21,300 United Asset Management, Inc. 546
5,900 Wellsford Residential Property Trust REIT 171
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1,980
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HEALTH CARE (6.6%)
10,400 Analogic Corp. 312
6,100 Beckman Instruments, Inc. 256
8,200 Bergen Brunswig Corp., Class A 244
11,800 Bindley Western Industries, Inc. 221
3,100 Biogen, Inc. 116
15,100 Kinetic Concepts, Inc. 215
4,200 Marquette Medical Systems, Class A 85
8,000 United Wisconsin Services, Inc. 206
4,500 Universal Health Services, Inc., Class B 148
2,100 Wellpoint Health Networks, Inc. 87
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1,890
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INDUSTRIAL (3.5%)
4,200 Barnes Group, Inc. 302
7,000 CDI Corp. 260
3,000 Franklin Resources, Inc. 153
3,100 JLG Industries, Inc. 60
10,000 Kaman Corp., Class A 135
5,000 Renters Choice, Inc. 72
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982
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INSURANCE (5.2%)
9,200 Argonaut Group, Inc. 258
6,200 Enhance Financial Services Group, Inc. 245
11,400 Nationwide Financial Services, Inc., Class A 293
5,600 Provident Companies, Inc. 307
<CAPTION>
VALUE
SHARES (000)
- --------------- -------------
<C> <S> <C>
9,400 Selective Insurance Group, Inc. $ 390
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1,493
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METALS (3.0%)
13,800 Birmingham Steel Corp. 242
4,400 Cleveland-Cliffs, Inc. 186
5,900 Precision Castparts Corp. 301
4,700 Sinter Metals, Inc., Class A 129
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858
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PAPER & PACKAGING (2.6%)
6,700 Ball Corp. 178
12,700 P.H. Glatfelter Co. 210
5,800 Potlatch Corp. 238
4,000 Schweitzer-Mauduit International, Inc. 121
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747
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RESTAURANTS (1.8%)
25,500 Piccadilly Cafeterias, Inc. 230
2,600 ProSource, Inc. 29
8,600 Sbarro, Inc. 243
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502
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SERVICES (5.5%)
11,000 AccuStaff, Inc. 184
11,600 Angelica Corp. 213
3,000 Data Processing Resources Corp. 56
16,600 Jackpot Enterprises, Inc. 166
10,900 New England Business Services, Inc. 281
6,800 Ogden Corp. 144
12,400 Russ Berrie & Co., Inc. 290
7,700 True North Communications, Inc. 144
2,700 Wallace Computer Services, Inc. 89
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1,567
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TECHNOLOGY (6.2%)
14,900 Core Industries, Inc. 216
11,900 Cubic Corp. 286
12,100 Dallas Semiconductor Corp. 321
17,500 MTS Systems Corp. 385
9,500 National Computer Systems, Inc. 240
6,600 Park Electrochemical Corp. 151
5,300 Tracor, Inc. 123
7,500 Transcrypt International, Inc. 54
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1,776
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TOBACCO (0.9%)
11,600 DIMON, Inc. 267
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TRANSPORTATION (2.2%)
8,800 Airborne Freight Corp. 264
5,800 Hvide Marine, Inc. 132
1,600 Overseas Shipholding Group, Inc. 27
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- -------------
<C> <S> <C>
TRANSPORTATION (CONTINUED)
15,600 SkyWest, Inc. $ 203
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626
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UTILITIES (5.8%)
6,400 Central Hudson Gas & Electric 211
8,100 Commonwealth Energy Systems Cos. 169
5,200 Eastern Enterprises 161
6,200 Nevada Power Co. 123
10,500 Oneok, Inc. 273
5,000 Reading & Bates Corp. 113
2,900 SJW Corp. 144
10,000 Washington Gas Light Co. 225
13,300 Washington Water Power Co. 231
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1,650
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TOTAL COMMON STOCKS (Cost $24,676) 28,383
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OTHER ASSETS AND LIABILITIES (0.2%)
Other Assets 725
Liabilities (675)
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50
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NET ASSETS (100%) $ 28,433
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CLASS A:
NET ASSETS $27,273
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,478,636 outstanding $0.001 par value shares
(authorized 500,000,000 shares) $11.00
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CLASS B:
NET ASSETS $1,160
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 105,569 outstanding $0.001 par value shares
(authorized 500,000,000 shares) $10.99
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</TABLE>
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ADR -- American Depositary Receipt
REIT -- Real Estate Investment Trust
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