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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.
GLOBAL EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1997
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Global Equity Portfolio is managed with the objective of obtaining long-term
capital appreciation by investing in equity securities of issuers throughout the
world, including U.S. issuers. Investments may also be made with discretion in
issuers located in emerging markets.
For the three months ended March 31, 1997, the Portfolio had a total return of
2.34% for the Class A shares and 2.28% for the Class B shares, as compared to a
total return of 0.29% for the Morgan Stanley Capital International (MSCI) World
Index. The average annual total return for the one year ended March 31, 1997 and
for the period from inception on July 15, 1992 through March 31, 1997 was 16.58%
and 18.71%, respectively, for the Class A shares, as compared to 9.36% and
12.56%, respectively, for the Index.
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD
INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
ONE AVERAGE ANNUAL
YTD YEAR SINCE INCEPTION
----- ----------- -----------------
<S> <C> <C> <C>
PORTFOLIO-CLASS A............... 2.34% 16.58% 18.71%
PORTFOLIO-CLASS B(3)............ 2.28 16.32 19.51
INDEX........................... 0.29 9.36 12.56
</TABLE>
1. The MSCI World Index is an unmanaged index of common stocks and includes
securities representative of the market structure of 22 developed market
countries in North America, Europe, and the Asia/Pacific region (assumes
dividends are reinvested).
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 COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW 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. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
The Portfolio's outperformance over the quarter was due to a strong performance
in Japan where our underweight position combined positively with our stock
selection, particularly Sony and TDK, as well as contributions from stock
selection in the Netherlands, Ireland and France. Throughout Europe the banking
sector had a strong quarter with ABN Amro, ING, Anglo Irish Bank and Banque
Nationale de Paris all putting in strong performances. Other noteworthy names in
the region include Philips Electronics, Green Property and Volkswagen.
Countering this was the performance of our stock selections in the United States
where AT&T (after announcing a 50% increase in capital expenditure), Worldcorp
(delayed sale of its airline subsidiary), Genrad and Egghead were all weak.
During the quarter the Dutch Guilder versus U.S. dollar hedge was rolled over
for a further six months to August 1997. The French Franc versus U.S. dollar 12
month hedge remains in place to September 1997.
In the United States economic news remained on the strong side throughout the
quarter, although core inflation, helped by a strong dollar and falling
commodity prices, remained subdued. The Federal Reserve Board's decision to
raise interest rates by 0.25% at the end of March was hardly surprising in light
of Mr. Greenspan's speech in February to the Senate Banking Committee when he
again drew attention to his concerns over inflated asset prices and reiterated
that monetary policy would be viewed as pre-emptive. Until the economy indicates
a clear slowdown, stocks are likely to remain under pressure. Of more immediate
concern to corporate margins is the continued rise in wage inflation and,
although we do not believe the recent rate hike heralds a long series of similar
rises (real interest rates are currently 2.5% versus zero in 1994), the evidence
suggests there might be a further 50 basis point tightening this year. Strong
fourth quarter earnings growth and mutual fund inflows helped push the Dow
through 7000 for the first time in February, however, the realization that the
continued strength of the dollar would impact revenue growth for exporters, and
the strengthening tone to the
2
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economy which led to the Fed's interest rate rise, helped to push share prices
lower as the quarter drew to a close leaving the MSCI World Index up 2.7% over
the quarter.
The Japanese equity market was the weakest performer in U.S. dollar terms during
the quarter with the MSCI Japan Index falling 11.8% in dollar terms, 5.9% in
local currency terms, where it was second only to Hong Kong which fell 8.6% in
local currency. Investors remained concerned about the financial system and the
likely efficacy of proposed reforms, earnings pressure from deregulation and a
weak consumer spending environment post the April consumption tax hike. Wide
discrepancies remain between the performance of different sectors, with the
March Tankan survey highlighting the strength of the export manufacturers while
business confidence in the non-manufacturing sector continues to decline.
In continental Europe, continued recovery among the exporters was a key feature
of the quarter boosted by the relative strength of the dollar despite continuing
soft domestic economics and record unemployment. The MSCI Europe Index ended the
quarter up 12.4% in local currency terms (4.9% in U.S. dollars). Germany, the
Netherlands and the Nordic countries were again the strongest against the still
benign background of slow growth, low inflation, and little immediate need for
interest rate rises. Despite the inevitable linkage with Wall Street, investors
remain encouraged by the increasing transparency with which European managements
are embracing shareholder value. This was most recently apparent in a previously
unheard of hostile takeover attempt in the German steel sector.
In the United Kingdom the MSCI Index rose 5.4% in sterling terms, and 1.2% in
dollar terms with the benefit of sterling strength keeping inflation relatively
in check although, as in the United States, this will also impact export
earnings. Confidence remains high in the run-up to the general election as
households continue to benefit from low interest rates and solid wage and
employment growth.
Our overall position in the United States remains slightly underweight versus
the benchmark and we remain at about half-weighting in Japan despite recent
visits from three of our analysts which reinforced our belief that it is
currently hard to find value in this market. We are overweight in Europe and
despite the recent outperformance in the region, we continue to find relative
value there primarily in the Netherlands, Germany and Switzerland, and in
peripheral markets such as Spain and Ireland.
Frances Campion
PORTFOLIO MANAGER
April 1997
3
<PAGE>
INVESTMENTS (UNAUDITED)
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MARCH 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- -------
<C> <S> <C>
COMMON STOCKS (96.3%)
AUSTRALIA (1.4%)
163,407 Coles Myer Ltd. $ 769
105,100 CSR Ltd. 402
-------
1,171
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CANADA (0.5%)
5,350 Potash Corp. of Saskatchewan, Inc. 408
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FRANCE (4.3%)
19,303 Banque Nationale de Paris 860
2,010 Bongrain S.A. 800
9,266 Elf Aquitaine S.A. 952
11,000 Scor S.A. 450
10,365 Valeo S.A. 698
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3,760
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GERMANY (7.4%)
25,900 BASF AG 992
32,920 Bayer AG 1,385
3,470 Karstadt AG 1,201
3,000 Mannesmann AG 1,147
2,364 Sinn AG 418
2,225 Varta AG 384
800 Viag AG 379
1,000 Volkswagen AG 552
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6,458
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HONG KONG (0.8%)
189,600 Jardine Strategic Holdings, Inc. 656
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IRELAND (5.9%)
690,253 Anglo Irish Bank Corp. plc 875
69,200 Clondalkin Group plc 650
264,836 Green Property plc 1,217
450,500 Irish Life plc 2,364
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5,106
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ITALY (3.5%)
624,000 Olivetti S.p.A. 224
53,800 Seat S.p.A. 12
431,000 Stet Di Risp (NCS) 1,530
603,400 Telecom Italia S.p.A. Di Risp
(NCS) 1,287
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3,053
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JAPAN (9.8%)
140 East Japan Railway Co. 572
66,000 Fuji Photo Film Ltd. 2,173
<CAPTION>
VALUE
SHARES (000)
- --------------- -------
<C> <S> <C>
21,000 Hitachi Ltd. $ 187
122,000 Kao Corp. 1,332
47,000 Matsushita Electric Industries
Ltd. 734
140,000 Nichido Fire & Marine Insurance
Co., Ltd. 756
9,000 Sony Corp. 629
86,000 Sumitomo Rubber Industries 542
13,000 TDK Corp. 894
37,400 Toyo Seikan Kaisha Ltd. 696
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8,515
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NETHERLANDS (4.6%)
20,753 ABN Amro Holdings N.V. 1,427
1,888 Hollandsche Beton Groep N.V. 431
34,797 ING Groep N.V. 1,371
17,200 Philips Electronics N.V. 803
-------
4,032
-------
SPAIN (3.7%)
51,300 Iberdrola S.A. 567
20,400 Repsol S.A. 852
74,800 Telefonica de Espana S.A. 1,808
-------
3,227
-------
SWEDEN (0.5%)
14,300 Skandia Forsakrings AB 451
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SWITZERLAND (6.1%)
400 Ascom Holdings AG (Bearer) 428
370 Bobst AG (Bearer) 546
917 Ciba Specialty Chemicals AG 76
1,200 Forbo Holding AG (Registered) 494
835 Holderbank Financiere Glarus AG,
Class B (Bearer) 641
1,200 Magazine Globus (Participating
Certificates) 525
917 Novartis AG (Registered) 1,138
780 Schweizerische Industrie-
Gesellschaft Holdings AG
(Registered) 965
680 Sulzer AG (Registered) 447
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5,260
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UNITED KINGDOM (9.5%)
26,500 Burmah Castrol plc 443
228,888 Christian Salvesen plc 1,079
6,900 HSBC Holdings plc 170
103,413 John Mowlem & Co. plc 196
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- -------
<C> <S> <C>
UNITED KINGDOM (CONTINUED)
30,500 Kwik Save Group plc $ 155
241,400 Matthews (Bernard) plc 508
61,700 Railtrack Group plc PP 459
138,491 Reckitt & Colman plc 1,858
63,702 Rolls-Royce plc 239
15,500 Scottish Hydro-Electric plc 92
126,553 Southern Electric plc 809
101,577 Tate & Lyle plc 725
40,000 Unilever plc 1,063
113,800 WPP Group plc 474
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8,270
-------
UNITED STATES (38.3%)
17,750 Aluminum Company of America 1,207
13,300 AMR Corp. 1,097
16,200 AT&T Corp. 563
23,800 Albertson's, Inc. 809
55,300 Bank of New York Co., Inc. 2,032
26,300 Beazer Homes USA, Inc. 388
21,800 Borg-Warner Automotive, Inc. 929
33,300 Browning-Ferris Industries, Inc. 962
129,300 Cadiz Land Co., Inc. 645
75,500 Comsat Corp. 1,840
69,000 Data General Corp. 1,173
109,000 Egghead, Inc. 491
43,100 Enhance Financial Services Group,
Inc. 1,703
23,500 Finova Group, Inc. 1,589
90,600 GenRad, Inc. 1,404
13,800 Georgia Pacific Corp. 1,001
37,900 Greenfield Industries, Inc. 829
10,000 Greenpoint Financial Corp. 515
30,300 Houghton Mifflin Co. 1,636
8,900 IBP, Inc. 219
83,000 InteliData Technologies Corp. 415
20,900 Lukens, Inc. 353
11,200 MBIA, Inc. 1,074
61,400 MCI Communications Corp. 2,187
12,300 Mellon Bank Corp. 895
1,012 NCR Corp. 36
34,700 Penncorp Financial Group, Inc. 1,110
2,200 Pennzoil Co. 114
16,000 Philip Morris Cos., Inc. 1,826
12,000 Prime Retail, Inc. 156
14,050 Tandy Corp. 704
11,300 Tecumseh Products Co., Class A 644
<CAPTION>
VALUE
SHARES (000)
- --------------- -------
<C> <S> <C>
16,800 Toys R Us, Inc. $ 470
28,800 UST Corp. 580
47,400 Waban, Inc. 1,321
135,400 WorldCorp, Inc. 389
-------
33,306
-------
TOTAL COMMON STOCKS (Cost $67,294) 83,673
-------
PREFERRED STOCKS (1.5%)
GERMANY (1.5%)
3,000 Volkswagen AG (Cost $647) 1,302
-------
CONVERTIBLE PREFERRED STOCKS (0.0%)
HONG KONG (0.0%)
21,000 Jardine Strategic Holdings, Inc.,
IDR, 7.50%, 5/07/97 (Cost $22) 24
-------
TOTAL FOREIGN & U.S. SECURITIES (97.8%) (Cost
$67,963) 84,999
-------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENT (0.5%)
REPURCHASE AGREEMENT (0.5%)
$ 477 Chase Securities, Inc. 6.00%,
dated 3/31/97, due 4/01/97, to be
repurchased at $477,
collateralized by U.S. Treasury
Bonds, 11.25%, due 2/15/15,
valued at $490
(Cost $477) 477
-------
FOREIGN CURRENCY (1.0%)
GBP 288 British Pound 475
CAD 260 Canadian Dollar 188
IEP 60 Irish Punt 95
ITL 109,471 Italian Lira 66
JPY 2,168 Japanese Yen 17
ESP 727 Spanish Peseta 5
CHF 13 Swiss Franc 9
-------
TOTAL FOREIGN CURRENCY (Cost $851) 855
-------
TOTAL INVESTMENTS (99.3%) (Cost $69,291) 86,331
-------
OTHER ASSETS AND LIABILITIES (0.7%)
Other Assets 7,990
Liabilities (7,371)
-------
619
-------
NET ASSETS (100%) $86,950
-------
-------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
(000)
-------
<C> <S> <C>
CLASS A:
NET ASSETS $83,296
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 5,011,012 outstanding $0.001 par
value shares (authorized 500,000,000 shares) $16.62
-------
-------
CLASS B:
NET ASSETS $3,654
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 220,417 outstanding $0.001 par value
shares (authorized 500,000,000 shares) $16.58
-------
-------
</TABLE>
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IDR -- International Depositary Receipt
NCS -- Non Convertible Shares
PP -- Partially Paid
6
