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DIRECTORS OFFICERS
Barton M. Biggs James W. Grisham
CHAIRMAN OF THE BOARD VICE PRESIDENT
Chairman and Director, Morgan Stanley Asset Michael F. Klein
Management Inc. and Morgan Stanley Asset Management VICE PRESIDENT
Limited; Managing Director, Morgan Stanley & Co. Harold J. Schaaff, Jr.
Incorporated; Director, Morgan Stanley Group Inc. VICE PRESIDENT
Warren J. Olsen Joseph P. Stadler
DIRECTOR AND PRESIDENT VICE PRESIDENT
Principal, Morgan Stanley Asset Management Inc. and Valerie Y. Lewis
Morgan Stanley & Co. Incorporated SECRETARY
John D. Barrett II Karl O. Hartmann
Chairman and Director, ASSISTANT SECRETARY
Barrett Associates, Inc. James R. Rooney
Gerard E. Jones TREASURER
Partner, Richards & O'Neil LLP Joanna M. Haigney
Andrew McNally IV ASSISTANT TREASURER
Chairman and Chief Executive Officer, Rand McNally
Samuel T. Reeves
Chairman of the Board and CEO, Pinacle L.L.C.
Fergus Reid
Chairman and Chief Executive Officer, LumeLite
Corporation
Frederick O. Robertshaw
Of Counsel, Bryan, Cave LLP
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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.
MUNICIPAL BOND PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1997
<PAGE>
LETTER TO SHAREHOLDERS
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The Municipal Bond Portfolio seeks high current income consistent with
preservation of principal through investment in a portfolio consisting primarily
of intermediate and long-term investment grade municipal obligations, the
interest on which is exempt from Federal income tax.
For the three months ended March 31, 1997, the Portfolio had a total return of
- -0.15% for the Class A shares as compared to a total return of -0.12% for the
Lehman 7-Year Municipal Bond Index. The average annual total return for the one
year ended March 31, 1997 and for the period from inception on January 18, 1995
through March 31, 1997 was 4.03% and 5.55%, respectively, for the Class A shares
as compared to 4.62% and 7.31%, respectively, for the Index. As of March 31,
1997, the Portfolio had an SEC 30-day yield of 4.36% for the Class A shares.
PERFORMANCE COMPARED TO THE LEHMAN 7-YEAR MUNICIPAL BOND INDEX(1)
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<TABLE>
<CAPTION>
TOTAL RETURNS(2)
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ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
--------- ----------- -----------------
<S> <C> <C> <C>
PORTFOLIO--CLASS A.......... -0.15% 4.03% 5.55%
INDEX....................... -0.12 4.62 7.31
</TABLE>
1. The Lehman 7-Year Municipal Bond Index consists of investment grade bonds
with maturities between 6-8 years, rated BAA or better. All bonds have been
taken from issues of at least $50 million in size sold within the last five
years.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The U.S. fixed income markets started off 1997 with a cautionary tone. While the
U.S. equity market continued to race to new highs, the fixed income markets were
preoccupied with thinking about if, and when, the Federal Reserve might decide a
tightening of monetary policy would be necessary. Federal Reserve Chairman
Greenspan set the mood that prevailed during the quarter in February when his
public comments appeared to lead the way to an imminent Fed tightening. Fear
became reality at the March 25th FOMC meeting when the Fed voted to increase the
Federal Funds rate by 25 basis points to 5 1/2%. A string of strong economic
releases both preceding and following the FOMC meeting have continued to put
upward pressure on interest rates, especially in the short and intermediate
sectors of the yield curve. A strong housing market, robust employment picture
and hints of inflationary pressure beginning to creep into the economy seem to
point toward further Federal Reserve tightenings over the next few quarters.
The municipal bond market outperformed the U.S. Treasury market, ending the
quarter basically unchanged in the intermediate sector and slightly lower on the
long end. Municipals exhibited the same degree of volatility during the quarter
as the Treasury market, staging a brief rally the beginning of February followed
by a sharp correction that has continued through the beginning of April.
Municipal bonds, which were trading at very expensive levels relative to U.S.
Treasuries, started to adjust to less expensive levels as the quarter came to a
close. Demand for tax-exempt securities remained consistent with what transpired
during 1996. Individuals remained active in the 1-5 year range and insurance
companies supported the 10-15 year area. The long end of the yield curve
continues to have limited support as long term municipal bond funds have not
seen any new subscription activity. Long term funds have been actively selling
less desirable structures (shorter calls or lower coupon bonds) in order to
raise money for new issue purchases.
The U.S. fixed income market has the potential for further weakening, with real
Gross Domestic Product ("GDP") growth likely to be approaching 4% for the first
quarter and inflationary signs becoming more evident. At quarter end, the
average maturity of the Portfolio was 6.21 years, slightly shorter than the 7
year benchmark. Going forward, we will focus on high credit quality bonds that
provide a high level of current income and are structured to provide a cushion
during adverse market conditions.
Lori A. Cohane
PORTFOLIO MANAGER
April 1997
2
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INVESTMENTS (UNAUDITED)
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MARCH 31, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
TAX-EXEMPT INSTRUMENTS (98.7%)
DAILY VARIABLE RATE BONDS (13.1%)
$ 100 Hapeville, Georgia, Industrial
Development Authority, Series 85,
4.00%, 11/01/15 $ 100
1,400 New York City, New York, Municipal
Water Finance Authority, Water &
Sewer Systems, Revenue Bonds,
Series A, FGIC, 3.70%, 6/15/25 1,400
300 New York City, New York, General
Obligation Bonds, Series A-4,
3.85%, 8/01/23 300
600 New York City, New York, General
Obligation Bonds, Subseries A-10,
3.70%, 8/01/16 600
600 New York City, New York, General
Obligation Bonds, Series B, FGIC,
3.70%, 10/01/22 600
1,000 New York City, New York, General
Obligation Bonds, Series B,
Subseries B-4, MBIA, 4.00%,
8/15/23 1,000
1,000 New York City, New York, General
Obligation Bonds, Series B,
Subseries B-7, AMBAC, 4.00%,
8/15/18 1,000
100 New York City, New York, General
Obligation Bonds, Series B-2,
3.70%, 8/15/18 100
1,100 Ohio State Air Quality Development
Authority Revenue Bonds, Series
85-B, 3.80%, 12/01/15 1,100
300 Saint Lucie County, Florida,
Pollution Control Revenue Bonds,
Florida Power & Light Co., 3.80%,
1/01/26 300
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TOTAL DAILY VARIABLE RATE BONDS (Cost $6,500) 6,500
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FIXED RATE INSTRUMENTS (83.4%)
825 Albuquerque, New Mexico, General
Obligation Bonds, Series B,
4.70%, 7/01/98 832
1,500 Baltimore County, Maryland,
Consolidated Public Improvement,
General Obligation Bonds, 6.00%,
7/01/05 1,594
1,000 California State, Department of
Water Revenue Bonds, Series Q,
6.00%, 12/01/10 1,063
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
$ 1,500 Connecticut State, General
Obligation Bonds, Series E,
6.00%, 3/15/12 $ 1,582
1,000 Connecticut State, Special
Obligation, Tax Revenue Bonds,
Transportation, 6.50%, 7/01/09,
Prerefunded 7/01/99 at 102 1,064
1,000 De Kalb County, Georgia, Water &
Sewer Revenue Bonds, 7.00%,
10/01/06 1,035
1,000 Delaware Transportation Authority,
Transportation System Revenue
Bonds, 6.50%, 7/01/11,
Prerefunded 7/01/01 at 102 1,085
1,000 Fairfax County, Virginia, Water
Authority Revenue Bonds, 6.00%,
4/01/22 1,011
1,500 Florida State Board of Education,
Capital Outlay, Public Education,
General Obligation Bonds, 6.40%,
6/01/19 1,578
1,325 Fort Worth, Texas, Water & Sewer
Revenue Bonds, Series B, 5.88%,
2/15/00 1,369
1,000 Georgia State, General Obligation
Bonds, Series A, 5.80%, 3/01/02 1,048
500 Georgia State, General Obligation
Bonds, Series F, 6.50%, 12/01/06 554
1,000 Hawaii State, General Obligation
Bonds, Series CJ, 6.20%, 1/01/12,
Prerefunded 1/01/05 at 100 1,039
1,500 Intermountain Power Agency, Utah,
Power Supply Revenue Bonds,
Series D, 8.375%, 7/01/12,
Prerefunded 7/01/97 at 102 1,546
1,000 Kentucky State Housing Corp.,
Revenue Bonds, Series A, 6.00%,
7/01/10 1,015
1,000 Maryland State Department of
Transportation, Construction
Revenue Bonds, Second Issue,
6.60%, 11/01/00 1,060
1,155 Maryland State Department of
Transportation, Construction
Revenue Bonds, Second Issue,
6.80%, 11/01/05, Prerefunded
11/01/99 at 102 1,243
1,000 Massachusetts State Consolidated
Loan, Series A, 7.50%, 3/01/03,
Prerefunded at 3/01/00 at 102 1,096
500 Massachusetts State Consolidated
Loan, Series A, 7.625%, 6/01/08,
Prerefunded 6/01/01 at 102 562
1,625 Michigan State Housing Development
Authority, Revenue Bonds, Series
A, 6.75%, 12/01/14 1,698
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
FIXED RATE INSTRUMENTS (CONTINUED)
$ 1,590 Minnesota State Infrastructure
Development, General Obligation
Bonds, 6.80%, 8/01/03,
Prerefunded at 8/01/00 at 100 $ 1,698
1,400 Mississippi State, General
Obligation Bonds, 6.00%, 2/01/09,
Prerefunded 2/01/05 at 100 1,487
1,475 Montana State, General Obligation
Bonds, Long Range Building
Program, Series C, 6.00%, 8/01/13 1,526
1,000 New Castle County, Delaware,
General Obligation Bonds, 6.25%,
10/15/01 1,063
1,000 New Jersey State, General
Obligation Bonds, Series E,
5.50%, 7/15/02 1,035
1,475 Ohio State, General Obligation
Bonds, 6.65%, 8/01/05 1,635
1,000 Ohio State, Housing Finance
Agency, Residential Mortgage
Revenue Bonds, Series A-1, 6.20%,
9/01/14 1,026
1,000 Orlando, Florida, Utilities
Commission Water & Electric,
Revenue Bonds, Series D, 6.75%,
10/01/17 1,132
1,000 Reedy Creek Improvement District,
Florida, Utility, Revenue Bonds,
Series 91-1, 6.50%, 10/01/16,
Prerefunded 10/01/01 at 101 1,080
1,350 San Antonio, Texas, General
Obligation Bonds, 6.50%, 8/01/14,
Prerefunded 8/01/04 at 100 1,476
1,000 Shelby County, Tennesse, General
Obligation Bonds, Series A,
5.50%, 3/01/08 1,020
1,000 Virginia Beach, Virginia, General
Obligation Bonds, 6.00%, 9/01/10 1,042
500 Virginia State Housing Development
Authority, Commonwealth Mortgage
Revenue Bonds, Series B, 6.60%,
1/01/12 529
1,000 Virginia State Housing Development
Authority, Commonwealth Mortgage
Revenue Bonds, Series B, 6.65%,
1/01/13 1,057
1,000 Washington State, General
Obligation Bonds, Series B,
6.40%, 6/01/17 1,077
500 Washington Suburban Sanitary
District, General Obligation
Revenue Bonds, 6.50%, 11/01/05,
Prerefunded 11/01/01 at 102 545
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TOTAL FIXED RATE INSTRUMENTS (Cost $41,093) 41,502
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
COMMERCIAL PAPER (2.2%)
$ 1,100 Goverment Development, Bank of
Puerto Rico, 3.60%, 4/01/97 (Cost
$1,100) $ 1,100
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TOTAL TAX-EXEMPT INSTRUMENTS (98.7%) (Cost $48,693) 49,102
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TOTAL INVESTMENTS (98.7%) (Cost $48,693) 49,102
---------
OTHER ASSETS AND LIABILITIES (1.3%)
Other Assets 713
Liabilities (67)
---------
646
---------
NET ASSETS (100%) $ 49,748
---------
---------
CLASS A:
NET ASSETS $49,748
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 4,895,139 outstanding $0.001 par
value shares (authorized 500,000,000 shares) $10.16
---------
---------
</TABLE>
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Variable/Floating Rate Instruments. The interest rate changes on these
instruments are based upon a designated base rate. These instruments are payable
on demand and are secured by a letter of credit or other support agreements.
Maturity dates disclosed for Variable/Floating Rate Instruments are the ultimate
maturity dates. The effective maturity dates for such securities are the next
interest reset dates which are seven days or less.
Prerefunded Bonds. Outstanding bonds have been refunded to the first call date
(prerefunded date) by the issuance of new bonds. Principal and interest are paid
from monies escrowed in U.S. Treasury securities. Prerefunded bonds are
generally re-rated AAA due to the Treasury escrow.
4
