<PAGE>
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DIRECTORS OFFICERS
Barton M. Biggs Stefanie V. Chang
CHAIRMAN OF THE BOARD VICE PRESIDENT
Chairman and Director, Morgan Stanley Asset Management Harold J. Schaaff, Jr.
Inc. and Morgan Stanley VICE PRESIDENT
Asset Management Limited; Managing Joseph P. Stadler
Director, Morgan Stanley & Co. Incorporated VICE PRESIDENT
Michael F. Klein Valerie Y. Lewis
DIRECTOR AND PRESIDENT SECRETARY
Principal, Morgan Stanley Asset Management Inc. and Karl O. Hartmann
Morgan Stanley & Co. Incorporated ASSISTANT SECRETARY
John D. Barrett II Joanna M. Haigney
Chairman and Director, TREASURER
Barrett Associates, Inc. Rene J. Feuerman
Gerard E. Jones ASSISTANT TREASURER
Partner, Richards & O'Neil LLP
Andrew McNally IV
River Road Partners
Samuel T. Reeves
Chairman of the Board and Chief Executive Officer,
Pinacle L.L.C.
Fergus Reid
Chairman and Chief Executive Officer, LumeLite
Plastics Corporation
Frederick O. Robertshaw
Of Counsel, Copple, Chamberlin &
Boehm, P.C.
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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
1221 Avenue of the Americas
New York, New York 10020
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CUSTODIANS
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
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.
ASIAN REAL ESTATE PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
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The investment objective of the Asian Real Estate Portfolio is to provide
long-term capital appreciation by investing primarily in equity securities of
companies in the Asian real estate industry whose shares trade on a recognized
stock exchange in Asia and in equity securities of companies organized under the
laws of an Asian country whose business is conducted principally in Asia.
For the three months ended March 31, 1998, the Portfolio had a total return of
1.39% for Class A shares and 0.13% for Class B shares compared to 0.35% for the
GPR Life Far East Asia Real Estate T.R. Index (the "Index"). For the period from
October 1, 1997 (commencement of operations) through March 31, 1998, the
Portfolio had a total return of -18.81% for Class A shares and -19.60% for Class
B shares compared to -33.68% for the Index.
The Portfolio's outperformance for the first quarter of 1998 reflects our
underweight position in Japan and strong Hong Kong stock selection.
Asian equity markets continued to experience extreme volatility during the past
quarter. Despite relative calm
PERFORMANCE COMPARED TO THE GPR LIFE
FAR EAST ASIA REAL ESTATE T.R. INDEX(1)
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<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------
YTD SINCE INCEPTION
---------- ---------------
<S> <C> <C>
PORTFOLIO -- CLASS A(3)........... 1.39% - 18.81%
PORTFOLIO -- CLASS B(3)........... 0.13 - 19.60
INDEX............................. 0.35 - 33.68
</TABLE>
1. The GPR Life Far East Asia Real Estate T.R. Index is a Far East market
capitalization weighted index of listed property/real estate securities
measuring total return.
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 commenced operations on October 1, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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THE COUNTRY SPECIFIC 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.
PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.
in Thailand and Korea, rapidly deteriorating economic conditions and political
uncertainties in Indonesia caused a panic sell off across Asia in January.
Bargain hunting emerged by early February on the first signs of stabilization,
and the powerful rally that ensued more than erased the January declines. The
deep-rooted problems in Japan became the focus of global investors in March and
this quickly became another destabilization factor affecting Asia and the world
at large.
The effects of the financial crisis have begun to spread to the real economy and
the property markets. Higher interest costs and tight bank credit have
negatively affected property demand and developers' cash flow, although in
certain markets such as Hong Kong and Singapore rates have come back to close to
the pre-crisis level. The office market in Japan remains stable with a modest
rise in rents as a result of tight supply. The residential market, however,
remains weak and further deterioration seems likely. Severe economic downturn
will further aggravate the existing over-supply situation in Malaysia, Indonesia
and Thailand.
We remain overweight in the Hong Kong residential sector and significantly
underweight the office sector. We are stepping up our overweight position in the
mass residential market in China where secular growth potential is enormous and
where the Government's recent focus on reforming the housing sector has enhanced
the sector's attraction. Despite current cyclical weakness in the physical
market, we continue to believe real estate stocks in Singapore represent good
values. We expect to remain underweight in Japan until signs of a sustained
recovery in rental and capital values emerge. Australian property trusts remain
defensive and provide yield enhancement to the overall portfolio. We remain
cautious toward property companies in Malaysia and Indonesia despite the sharp
fall in equity values. The threat of insolvency and potential hidden liabilities
continues to be a major concern. Finally, we like the office sector in Taipei
where recovery in occupancy and capital values is gaining momentum.
Kiat Seng Seah
PORTFOLIO MANAGER
April 1998
2
<PAGE>
INVESTMENTS (UNAUDITED)
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MARCH 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ------
<C> <S> <C>
COMMON STOCKS (85.6%)
AUSTRALIA (11.9%)
39,000 Austrailian Growth Properties Ltd. $ 23
23,000 Australand Holdings Ltd. 23
79,000 BT Office Trust 81
28,000 BT Sydney Development Trust 42
91,000 Capital Property Trust 136
34,000 Centro Properties Group 59
100,000 IPOH Ltd. 133
137,000 Mirvac Property Trust 136
61,000 Westfield Trust 128
171,000 Westpac Property Trust 200
------
961
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HONG KONG (37.0%)
300,000 Asia Securities International 40
77,000 Cheung Kong Holdings Ltd. 547
699,000 China Overseas Land & Investment 187
548,000 China Resources Beijing Land 293
329,000 HKR International Ltd. 227
52,000 Henderson Land Development Co.,
Ltd. 264
37,000 Hongkong Land Holdings, Ltd. 64
170,000 Lai Sun Development Co., Ltd. 72
118,000 New World Development Co., Ltd. 416
87,000 Sun Hung Kai Properties Ltd. 592
117,000 Wheelock & Co., Ltd. 121
1,470,000 Winsan (China) Investment Group
Co., Ltd. 152
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2,975
------
JAPAN (9.8%)
19,000 Daibiru Corp. 139
33,000 Mitsubishi Estate Co., Ltd. 322
23,000 Mitsui Fudosan Co., Ltd. 219
18,000 Sumitomo Realty & Development Co.,
Ltd. 106
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786
------
PHILIPPINES (2.1%)
357,000 Ayala Land, Inc., Class B 171
------
<CAPTION>
VALUE
SHARES (000)
- --------------- ------
<C> <S> <C>
SINGAPORE (24.8%)
69,000 City Developments Ltd. $ 340
218,000 DBS Land Ltd. 369
278,000 Keppel Land Ltd. 384
50,000 Singapore Land Ltd. 161
758,000 Wing Tai Holdings Ltd. 742
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1,996
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TOTAL COMMON STOCKS (Cost $6,372) 6,889
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<CAPTION>
FACE
AMOUNT
(000)
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<C> <S> <C>
CONVERTIBLE DEBENTURE (0.1%)
NEW ZEALAND (0.1%)
NZD 18 AMP NZ Office Trust 7.50%,
6/30/03 (Cost $11) 11
------
TOTAL FOREIGN SECURITIES (85.7%) (Cost $6,383) 6,900
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SHORT-TERM INVESTMENT (12.1%)
REPURCHASE AGREEMENT (12.1%)
$ 976 Chase Securities, Inc. 5.60%,
dated 3/31/98, due 4/01/98, to be
repurchased at $976,
collateralized by U.S. Treasury
Bills, due 6/11/98, valued at
$1,010 (Cost $976) 976
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FOREIGN CURRENCY (0.5%)
AUD 12 Australian Dollar 8
HKD 113 Hong Kong Dollar 15
PHP 3 Philippine Peso --
TWD 516 Taiwan Dollar 16
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TOTAL FOREIGN CURRENCY (Cost $39) 39
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TOTAL INVESTMENTS (98.3%) (Cost $7,398) 7,915
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</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
AMOUNT
(000)
------
<C> <S> <C>
OTHER ASSETS AND LIABILITIES (1.7%)
Other Assets $5,308
Liabilities (5,175)
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133
------
NET ASSETS (100%) $8,048
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CLASS A:
NET ASSETS $7,512
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 932,839 outstanding $0.001 par value
shares (authorized 500,000,000 shares)
$8.05
------
------
CLASS B:
NET ASSETS $536
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 66,610 outstanding $0.001 par
value shares (authorized 500,000,000 shares)
$8.04
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------
</TABLE>
4
