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<TABLE>
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DIRECTORS OFFICERS
Barton M. Biggs James W. Grisham
CHAIRMAN OF THE BOARD VICE PRESIDENT
Chairman and Director, Morgan Stanley Michael F. Klein
Asset Management Inc. and Morgan Stanley VICE PRESIDENT
Asset Management Limited; Managing Harold J. Schaaff,
Director, Morgan Stanley & Co. Jr.
Incorporated; Director, Morgan Stanley VICE PRESIDENT
Group Inc. Joseph P. Stadler
Warren J. Olsen VICE PRESIDENT
DIRECTOR AND PRESIDENT Valerie Y. Lewis
Principal, Morgan Stanley Asset SECRETARY
Management Inc. and Morgan Stanley & Co. Karl O. Hartmann
Incorporated ASSISTANT SECRETARY
John D. Barrett II James R. Rooney
Chairman and Director, TREASURER
Barrett Associates, Inc. Joanna M. Haigney
Gerard E. Jones ASSISTANT TREASURER
Partner, Richards & O'Neil LLP
Andrew McNally IV
Chairman and Chief Executive Officer, Rand
McNally
Samuel T. Reeves
Chairman of the Board and 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.
BALANCED PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1997
<PAGE>
LETTER TO SHAREHOLDERS
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The Balanced Portfolio's value investment philosophy is based on the premise
that a diversified portfolio of undervalued equity securities and fixed income
securities will outperform the market over the long-term and can be expected to
preserve principal in a difficult market environment.
The Balanced Portfolio's asset allocation strategy between equities, fixed
income and cash is based upon our estimate of the portfolio's risk. Since
equities are the highest risk asset class, we have maintained a below average
equity exposure during past periods of high market valuation. Typically, our
equity exposure will range between 35% and 65% with an expected long term
average of 55%.
PERFORMANCE COMPARED TO INDATA BALANCED-MEDIAN INDEX(1)
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<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------------------------------
AVERAGE
ONE ANNUAL AVERAGE ANNUAL
YTD YEAR FIVE YEARS SINCE INCEPTION
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<S> <C> <C> <C> <C>
PORTFOLIO--CLASS A.......... 1.34% 9.78% 10.82% 10.22%
PORTFOLIO--CLASS B(3)....... 1.22 9.51 NA 9.22
INDEX....................... 0.83 12.07 11.42 11.32
</TABLE>
1. The Indata Balanced-Median Index is an unmanaged index and includes an asset
allocation of 2% cash, 39% bonds and 59% equity based on $43 billion in
assets among 552 portfolios for the period ended March 31, 1997 (includes
dividends). The index returns are gross of management fees; the Portfolio
returns are net of management fees and other expenses.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. The Portfolio began offering Class B shares on January 2, 1996.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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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.
For the three months ended March 31, 1997, the Portfolio had a total return of
1.34% for the Class A shares and 1.22% for the Class B shares, as compared to a
total return of 0.83% for the Indata Balanced-Median Index. The average annual
total return for the one year and five-year periods ended March 31, 1997, and
for the period from inception on February 20, 1990 through March 31, 1997 for
the Class A shares was 9.78%, 10.82% and 10.22%, respectively, as compared to
12.07%, 11.42% and 11.32%, respectively, for the Index.
Our asset allocation, based on market value at March 31, 1997, is as follows:
<TABLE>
<S> <C>
EQUITIES............................................. 47.3%
FIXED INCOME......................................... 50.4
CASH................................................. 2.3
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100%
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---
</TABLE>
EQUITIES
For the three months ended March 31, 1997, the equity component of the Balanced
Portfolio had a gross return of 3.00% compared to the S&P 500 Index return of
2.69%.
After having a very strong January, driven by favorable earnings reports, solid
mutual fund inflows, and benign interest rates, the market weakened considerably
in February and March. The broad-based S&P 500 and the Dow Jones Industrial
Average peaked in mid-February and mid-March, respectively, both finishing the
quarter down 7% from their first quarter highs. The Nasdaq Composite, dominated
by technology stocks, began to weaken earlier than the broader market, and ended
the quarter down 12% from its January high. As the economy continued its advance
from the fourth quarter of 1996, investors focused on the possibility of
interest rate increases. Public comments made by the Fed Chairman added to these
fears, which were confirmed by the .25% increase in the federal funds rate made
in late March.
Within this environment, large-cap stocks continued to outperform small-cap
stocks and growth stocks outperformed value stocks. The larger-cap S&P 500
returned
2
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2.6% while the S&P small-cap index returned -5.57%. The S&P/Barron Growth Index
returned 3.5% while the S&P/Barron Value Index returned 1.7%.
The equity component of the Balanced Portfolio holds the same undervalued
companies that are held in the Value Equity Portfolio. The equity portion of the
Portfolio has a wide valuation gap as compared to the characteristics of the S&P
500 Index.
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<CAPTION>
PRICE EARNINGS PRICE-TO-BOOK
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<S> <C> <C>
PORTFOLIO-EQUITY PORTION............. 15.1X 2.6X
S&P 500.............................. 19.7X 4.9X
</TABLE>
During the quarter, the best performing sectors in the Portfolio were health
care, up 12%, services and growth, up 10%, and technology, also up 10%.
Underperforming sectors for the quarter included transportation, down 6%, paper
and forest products, down 5%, and utilities and consumer durables, both down 4%.
The best performing stocks in the quarter were Texas Instruments, up 18%,
Sprint, up 14%, Bausch & Lomb, also up 14%, Harris Corp., up 13%, and Ogden,
also up 13%. Stocks providing the biggest disappointment included Texas
Utilities, down 15%, AT&T, also down 15%, Apple Computer, down 13%, and
Willamette Industries, down 10%.
Changes made to the Portfolio during the quarter included decreasing the
exposure to consumer staples by selling the final position in American Brands.
We added to the energy sector with Occidental Petroleum. Occidental, one of the
more efficient oil and gas exploration and production companies, is in the
process of transforming its business mix, has reduced debt and cut costs, and is
attractive on a valuation basis. We established a partial position in Olin, a
chemical company that is also restructuring its businesses, selling assets,
paying down debt and generating cash for additional value-added actions.
Finally, we increased exposure to the retail sector by purchasing Wal-Mart.
Wal-Mart began generating positive free cash flow in 1996 and recently announced
a 30% dividend increase and a stock buyback program. Compared to the S&P 500
Index, we continue to overweight financial services and utilities, and
underweight technology and health care.
FIXED INCOME
The fixed income component of the Balanced Portfolio continues to maintain 100%
exposure to intermediate-term U.S. Government securities. For the three months
ended March 31, 1997, the fixed income portion of the Portfolio had total return
of .08% compared to a decline of -11% for the Lehman Intermediate-Government/
Corporate Index (MSAM/Chicago's fixed-income benchmark).
The fixed income portion of the Portfolio began the year at a weighted average
maturity of 3.3 years. During the quarter, interest rates rose across all
maturity spectrums, with the largest increase occurring in the two, three and
five year maturities. This upward shift in the yield curve hurt the performance
of the Portfolio. With the continued strength in the economy, the increase in
short-term Fed funds rate, and the potential for further rate increases, we have
allowed the weighted average maturity and average duration of the Portfolio to
shorten. We are comfortable with our current position, which is less than the
benchmark.
Stephen C. Sexauer
PORTFOLIO MANAGER
Alford E. Zick, Jr.
PORTFOLIO MANAGER
April 1997
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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 (46.7%)
AEROSPACE (0.5%)
450 United Technologies Corp. $ 34
---------
BANKING (6.9%)
900 Bank of Boston Corp. 60
650 BankAmerica Corp. 66
750 Bankers Trust (New York) Corp. 61
750 Chase Manhattan Corp. 70
1,300 First of America Bank Corp. 78
900 Mellon Bank Corp. 66
1,750 PNC Bank Corp. 70
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471
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CAPITAL GOODS (1.0%)
1,500 Deere & Co. 65
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CHEMICALS (1.0%)
1,025 Eastman Chemical Co. 55
400 Olin Corp. 16
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71
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COMMUNICATIONS (3.1%)
2,700 AT&T Corp. 94
1,150 Sprint Corp. 52
2,000 U.S. West, Inc. 68
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214
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CONSUMER-DURABLES (1.7%)
1,750 Chrysler Corp. 52
1,150 General Motors Corp. 64
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116
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CONSUMER-RETAIL (3.1%)
1,750 J.C. Penney Co., Inc. 83
1,400 Wal-Mart Stores, Inc. 39
3,900 Woolworth Corp. 91
---------
213
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CONSUMER-SERVICE & GROWTH (1.5%)
400 Eastman Kodak Co. 30
3,400 Ogden Corp. 72
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102
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CONSUMER-STAPLES (3.5%)
4,200 Fleming Cos., Inc. 74
675 Philip Morris Cos., Inc. 77
2,700 RJR Nabisco Holdings Corp. 87
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238
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<CAPTION>
VALUE
SHARES (000)
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<C> <S> <C>
ELECTRIC (0.3%)
556 Energy Group plc ADR $ 18
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ENERGY (5.1%)
1,700 Ashland, Inc. 69
750 Atlantic Richfield Co. 101
575 Exxon Corp. 62
600 Mobil Corp. 78
1,500 Occidental Petroleum Corp. 37
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347
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FINANCIAL-DIVERSIFIED (1.5%)
1,050 Student Loan Marketing Association 100
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HEALTH CARE (1.6%)
1,950 Bausch & Lomb, Inc. 77
700 Baxter International, Inc. 30
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107
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INDUSTRIAL (1.7%)
556 Hanson plc ADR 13
1,650 Rockwell International Corp. 107
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120
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INSURANCE (2.4%)
1,250 American General Corp. 51
1,050 Lincoln National Corp. 56
900 St. Paul Cos., Inc. 58
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165
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METALS (1.1%)
1,050 Phelps Dodge Corp. 77
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PAPER & PACKAGING (1.8%)
3,100 Louisiana-Pacific Corp. 64
1,000 Willamette Industries, Inc. 62
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126
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SERVICES (0.7%)
900 McGraw-Hill Cos., Inc. 46
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TECHNOLOGY (2.6%)
800 Apple Computer, Inc. 15
1,325 Harris Corp. 102
800 Texas Instruments, Inc. 60
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177
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TRANSPORTATION (1.2%)
500 AMR Corp. 41
1,350 Ryder System, Inc. 40
---------
81
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</TABLE>
4
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<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
UTILITIES (4.4%)
2,450 GPU, Inc. $ 79
1,900 NIPSCO Industries, Inc. 75
2,500 Pinnacle West Capital Corp. 75
2,150 Texas Utilities Co. 74
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303
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TOTAL COMMON STOCKS (Cost $2,618) 3,191
---------
<CAPTION>
FACE
AMOUNT
(000)
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<C> <S> <C>
FIXED INCOME SECURITY (49.7%)
U.S. TREASURY NOTE (49.7%)
$ 3,503 5.50%, 4/15/00 (Cost $3,415) 3,399
---------
SHORT-TERM INVESTMENT (2.7%)
REPURCHASE AGREEMENT (2.7%)
185 Chase Securities, Inc. 6.00%,
dated 3/31/97, due 4/01/97, to be
repurchased at $185
collateralized by U.S. Treasury
Bonds, 7.5%, due 11/15/16, valued
at $190 (Cost $185) 185
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TOTAL INVESTMENTS (99.1%) (Cost $6,218) 6,775
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OTHER ASSETS AND LIABILITIES (0.9%)
Other Assets 125
Liabilities (65)
---------
60
---------
NET ASSETS (100%) $ 6,835
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CLASS A:
NET ASSETS $5,637
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 678,907 outstanding $0.001 par value
shares (authorized 500,000,000 shares) $8.30
---------
---------
CLASS B:
NET ASSETS $1,198
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 144,806 outstanding $0.001 par value
shares (authorized 500,000,000 shares) $8.28
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ADR -- American Depositary Receipt
5
