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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 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.
EMERGING GROWTH PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1997
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Emerging Growth Portfolio invests primarily in growth-oriented equity
securities of small-to-medium sized domestic corporations and, to a limited
extent, foreign corporations. Such companies generally have annual gross
revenues ranging from $10 million to $750 million.
For the three months ended March 31, 1997, the Portfolio had a total return of
- -11.63% for the Class A shares and -11.75% for the Class B shares, as compared
to a total return of -5.37% for the NASDAQ Composite 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 November 1, 1989 through March 31, 1997 was
- -11.60%, 3.33% and 9.69%, respectively, for the Class A shares, as compared to
10.93%, 15.14% and 14.23%, respectively, for the Index.
PERFORMANCE COMPARED TO THE NASDAQ COMPOSITE INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEARS INCEPTION
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PORTFOLIO CLASS A....... -11.63% -11.60% 3.33% 9.69%
PORTFOLIO CLASS B(3).... -11.75 -11.91 NA -6.96
INDEX................... -5.37 10.93 15.14 14.23
</TABLE>
1. The NASDAQ Composite Index is an unmanaged index of common stocks.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
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 first quarter of 1997 was a difficult period for U.S. small capitalization
stocks and for the Portfolio. The market was extremely volatile through the
quarter due to heightened concerns about inflation and the interest rate
outlook. In addition, over the last six months we have witnessed a continued
rotation from high growth, smaller capitalization stocks which had in some
cases, garnered excessive valuations, to more stable, larger capitalization
companies with lower perceived risk characteristics. Looking forward, the good
news is that the average P/E ratio for emerging growth companies is nearing a
historic low relative to the larger capitalization S&P 500 Index. When the
relative P/E has attained these levels, small capitalization stocks have
typically entered a period of outperformance.
Our relatively light weighting in technology-related stocks, while impeding our
performance in January, proved to be a prudent strategy through February and
March. The technology-laden NASDAQ Index posted strong returns in January of
+6.9%, but turned downward during February and March with respective returns of
- -5.1% and -6.7% to end the period with a return of -5.4%. The Russell 2000 Index
showed a similar yet less volatile trend rising +1.9% in January then declining
- -2.5% in February and -4.9% in March to end the period with a return of -5.5%.
Notably, larger capitalization indices ended the period recording positive
returns, with the S&P 500 Index up +2.2% for the quarter, illustrating the
disparity between large cap and small cap performance.
Looking forward, we see substantial investment opportunities in small
capitalization stocks that have been oversold to a large extent by investors
adjusting to the changing interest rate environment. We believe the rotation to
large capitalization stocks has presented us with a timely opportunity for
investment in high quality emerging growth companies trading at historically
attractive valuation levels. Our approach is to seek companies that generate
surprisingly strong earnings growth. We have tended to find this growth in three
2
<PAGE>
types of stocks: classic, long term emerging growth situations (Paychex,
Healthsouth, Linear Technology); less well known companies with a strong
likelihood of positive earnings surprise (CRA Managed Care, Boston Market,
Petsmart), and stocks driven down on fear, where the fundamentals are still
intact (this final category could be viewed as a subset of either of the
previous two). We try to have an "information edge" with our companies, and are
willing to take substantial positions (up to 10%) when we have extremely high
conviction in a company.
At quarter end the Portfolio was broadly diversified across sectors with a 11%
weighting in technology, 17% in health care, 22% in consumer-related stocks, and
40% in a wide range of business and financial service companies. At the end of
the period, the Portfolio held 60 stocks with the top ten holdings representing
approximately 30% of net assets.
Kurt A. Feuerman
PORTFOLIO MANAGER
Daniel R. Lascano
PORTFOLIO MANAGER
Christopher R. Blair
PORTFOLIO MANAGER
April 1997
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- -------
<C> <S> <C>
COMMON STOCKS (98.4%)
CAPITAL GOODS-CONSTRUCTION (1.4%)
ENVIRONMENTAL CONTROLS (1.4%)
20,000 United Waste Systems, Inc. $ 745
-------
CONSUMER-CYCLICAL (22.1%)
FOOD SERVICE & LODGING (11.9%)
30,000 Boston Chicken, Inc. 911
13,500 Einstein/Noah Bagel Corp. 338
20,000 HFS, Inc. 1,178
60,000 La Quinta Inns, Inc. 1,230
13,700 Papa John's International, Inc. 361
45,000 Promus Hotel Corp. 1,496
75,000 Sonic Corp. 1,022
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6,536
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PUBLISHING (0.5%)
10,000 Scholastic Corp. 281
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RETAIL-GENERAL (9.7%)
60,000 Bed, Bath & Beyond, Inc. 1,448
27,500 Cost Plus, Inc. 419
35,000 General Nutrition Cos., Inc. 709
25,000 Kohl's Corp. 1,059
25,200 Petco Animal Supplies, Inc. 580
55,000 PetSmart, Inc. 1,107
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5,322
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TOTAL CONSUMER-CYCLICAL 12,139
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CONSUMER-STAPLES (21.3%)
BEVERAGES & TOBACCO (0.6%)
20,700 Swisher International Group, Inc.,
Class A 303
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DRUGS (3.5%)
30,000 Forest Laboratories, Inc. 1,128
35,000 Genzyme Corp.-General Division 779
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1,907
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HEALTH CARE SUPPLIES & SERVICES (13.4%)
75,000 American Oncology Resources, Inc. 656
50,000 Ballard Medical Products 1,044
20,000 Boston Scientific Corp. 1,235
31,000 Cohr, Inc. 705
60,000 HEALTHSOUTH Rehabilitation Corp. 1,148
39,200 OccuSystems, Inc. 882
5,100 Ventana Medical Systems, Inc. 71
60,000 Vivra, Inc. 1,620
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7,361
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<CAPTION>
VALUE
SHARES (000)
- --------------- -------
<C> <S> <C>
MISCELLANEOUS (3.8%)
36,500 Mail Boxes Etc. $ 748
70,000 Viking Office Products, Inc. 1,356
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2,104
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TOTAL CONSUMER-STAPLES 11,675
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FINANCE (1.9%)
FINANCIAL SERVICES (0.3%)
10,900 BA Merchant Services, Inc., Class
A 150
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INSURANCE (1.6%)
25,000 Mutual Risk Management Ltd. 906
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TOTAL FINANCE 1,056
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SERVICES (40.3%)
BUSINESS SERVICES (20.3%)
11,700 Acxiom Corp. 168
45,000 BISYS Group, Inc. 1,406
36,100 Black Box Corp. 970
60,000 Concord EFS, Inc. 1,125
32,100 First Data Corp. 1,088
39,300 First USA Paymentech, Inc. 1,027
81,000 May & Speh, Inc. 678
20,000 Paychex, Inc. 815
70,000 SunGard Data Systems, Inc. 3,045
38,000 Whittman-Hart, Inc. 798
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11,120
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PROFESSIONAL SERVICES (20.0%)
20,100 Catalina Marketing Corp. 817
35,000 Cintas Corp. 1,846
18,500 Corrections Corp. of America 449
35,000 CRA Managed Care, Inc. 1,295
40,000 CUC International, Inc. 900
75,000 G & K Services, Inc., Class A 2,250
17,000 NFO Research, Inc. 289
35,000 Robert Half International, Inc. 1,221
27,100 Romac International, Inc. 474
50,000 Sitel Corp. 669
49,500 Wilmar Industries, Inc. 767
-------
10,977
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TOTAL SERVICES 22,097
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</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- -------
<C> <S> <C>
TECHNOLOGY (11.4%)
ELECTRONICS (3.0%)
21,800 Linear Technology Corp. $ 965
20,000 Molex, Inc., Class A 695
-------
1,660
-------
OFFICE EQUIPMENT (0.4%)
15,400 ONTRACK Data International, Inc. 225
-------
SOFTWARE SERVICES (5.8%)
3,200 HCIA, Inc. 52
45,000 Sterling Commerce, Inc. 1,305
15,000 Transaction Systems Architects,
Inc., Class A 407
58,800 USCS International, Inc. 1,058
17,900 Vantive Corp. 354
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3,176
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TELECOMMUNICATIONS (2.2%)
45,000 ADC Telecommunications, Inc. 1,209
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TOTAL TECHNOLOGY 6,270
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TOTAL COMMON STOCKS (Cost $42,120) 53,982
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<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENT (1.7%)
REPURCHASE AGREEMENT (1.7%)
$ 912 Chase Securities, Inc. 6.00%,
dated 3/31/97, due 4/01/97, to be
repurchased at $912,
collateralized by U.S. Treasury
Bonds, 7.5%, due 11/15/16, valued
at $936 (Cost $912) 912
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TOTAL INVESTMENTS (100.1%) (Cost $43,032) 54,894
-------
<CAPTION>
VALUE
(000)
-------
<C> <S> <C>
OTHER ASSETS AND LIABILITIES (-0.1%)
Other Assets $ 808
Liabilities (839)
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(31)
-------
NET ASSETS (100%) $54,863
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CLASS A:
NET ASSETS $53,995
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 4,526,623 outstanding $0.001 par
value shares (authorized 500,000,000 shares) $11.93
-------
-------
CLASS B:
NET ASSETS $868
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 73,097 outstanding $0.001 par value
shares (authorized 500,000,000 shares) $11.87
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</TABLE>
5
